Deferred or progressive?

Deferred or progressive?

Thursday, April 19th in Reports/Analysis, Loans/Rates | No comments

by Ang Kok Leong

While it is common knowledge what the differences between the 2 types of payments are, many may not be aware how this decision may impact them.

For property investors with the ability to hold and generally cash-rich, deferred payment seems a natural choice as they generally would be looking to sell if their target price is met before completion. In this instance, they save on the hazzle of getting the loan and any penalties associated with securing a loan.

In a rising market like now, paying slightly more for a property for a deferred payment scheme is worth the little premium in the core areas.

However, if you are buying into mass market and you intend to move in or you are buying into an investment property with the intention of leasing it out, it might be better to think carefully over your the choice of payment. The pitfalls are not commonly known but will hit you hard should the market head south.

For a deferred payment scheme, you do not need to finance the remaining 80% until completion which can be 2 or 3 years down the road. During this period, you have to hope that the property market continues it’s good run or at least maintain it’s prices.

Should the market falls, the bank do not grant you the loan based on your purchase price. The bank grants you the loan based on Valuation of your property or your purchase price, whichever is the lowest. That means, if the market drops by 10%, your loan quantum will drop accordingly and you have to top up the differences using cash. If you do not have enough cash for the difference, you cannot complete the transaction, and you are liable for compensation from the developer.

Eg. You purchased a 4-bedroom 1500sf for $1,000,000 on a deferred payment scheme.

You have already paid 20% downpayment of $200,000 and you need to finance 80% of the purchase price.

Upon TOP, the property market came down and the valuation of your purchase is now worth $850,000.

Bank will now grant you a loan of $680,000 or 80% of this new valuation. Bear in mind that you have already paid $200,000 as downpayment and you need to fulfill your obligation to purchase the property at $1m. Now, you have to top up $170,000 more.

Therefore, deferred payment is not for everyone. So if you are looking to stay in, it might be better to pay lower for progressive payment and start servicing your loan immediately.