Can you afford that second home loan?

Before you jump on the red-hot property-investing bandwagon, know what criteria banks look at when granting a second mortgage

When Mr Andrew Ang, a manager in his 40s, went around the banks last month scouting for a second home loan, for an investment property, he was surprised to discover that ‘everyone and his mother-in-law’ seemed to be doing the same.

‘I bumped into so many people - my army buddies, colleagues, even my own mother-in-law - who were all asking if they qualified for another home loan,’ he said, and laughed.

The reason is simple. The dazzling property market rebound has enticed growing numbers of buyers into snapping up a second or even third home for investment.

These investors had initially focused on the higher-end districts 9,10 and 11, but interest has spread to other areas, including East Coast, Newton, Meyer Road and Thomson in recent months, said Mr Tan Chia Seng, Citibank’s business director.

These buyers are seeking properties with a good rental yield as well as the potential for a collective sale - or one-off sale - at a tidy profit if the property boom is sustained.

Figures from Credit Bureau Singapore reflect this trend: The number of home owners with at least two home loans more than doubled to 41,078 as at March from 19,901 two years earlier.

Banks such as United Overseas Bank, DBS Bank and Standard Chartered Bank (Stanchart) have noticed more customers seeking second mortgages lately. Citibank has seen one in 10 mortgage customers apply for a second home loan, for a second property.

Most of these borrowers tend to be higher-income customers with comfortable six-figure annual salaries, say banks. So they can easily meet the requirements for a second or third home loan.

But those in the middle-income brackets, such as Mr Ang, have also been swept up in the investment property buzz, and are knocking on banks’ doors for a second home loan as well.

Financial advisers urge caution when making such a major financial commitment.

‘Overstretching your financial limits can be disastrous. A property correction can potentially lead to bankruptcy,’ warned Ms Tang Yin Fon of independent financial advisory firm Providend.

A borrower should ensure that his total loans do not exceed 50 per cent of his total assets, which include salary, savings and equities.

Ms Elaine Heng, Stanchart’s general manager for mortgage and car loans, advised customers to consider four factors before committing to a home loan.

They are: employment stability, current cash flow, long-term wealth management goals and view on the long-term interest rate environment.

Borrowers may also wish to ‘maintain a surplus or savings buffer in your Central Provident Fund account to service one to two years of monthly instalments’ in case of an unforeseen temporary financial crunch, said Mr Koh Kar Siong, DBS’ head of home loans.

And of course, having ensured that they have the financial muscle to handle a second or third home loan, borrowers need to cross another hurdle - getting approval from the banks.

What banks look for

Repayment ability

The key factor that banks look at is the customer’s debt servicing ratio, said Stanchart’s Ms Heng.

This refers to the customer’s ability to service all his loans, which include existing home loans, car and personal loans, as well as credit cards.

The ratio that banks accept normally ranges from 40 to 60 per cent, said DBS’ Mr Koh.

This represents the proportion of a borrower’s monthly income taken up by total monthly loan payments.

Income may include rental from investment property.

Loan amount

Banks also assess the loan amount that they can grant to customers by considering the valuation of the investment property.

They use a measure called a loan to valuation ratio: the home loan value divided by the property valuation.

Banks say they typically do not grant loans of more than 80 per cent of an investment property’s value.

Steps you can take

There are some steps that you, the borrower, can take to endear yourself to the bank to get your investment home loan approved without too much hassle. Here are some tips to boost your chances:

Keep debt servicing ratio at or below 50 per cent

If you have enough cash, you can choose to pay off your car loan, and wipe your slate clean in terms of personal loans and credit cards, said Mr Dennis Ng of mortgage consultancy portal www.HousingLoanSG.com.

This may boost your chances of getting approval for a higher loan value even if your income is relatively low.

Maintain a good credit history

Stanchart’s Ms Heng noted that banks assess customers’ credit reports over the previous 12 months or longer, to find out if customers pay their credit card bills and monthly mortgage instalments on time.

A good credit history over the previous 12 months is a plus factor when the bank is considering whether to grant a second loan, said Citibank’s Mr Tan.

Show a commitment to repay

One way to show your commitment to repaying your mortgage is to opt for a shorter loan tenure than you are entitled to, said Mr Koh.

This may signal that you are prepared to pay up the principal sum as well as the interest on your property, that you are not just servicing the interest until the market is hot enough to allow you to sell off your unit.

Also, if you feel comfortable doing so, tell the bank how much you have squirrelled away in your CPF accounts, unit trusts and bank savings accounts.

This may reassure the bank that you have enough funds to pay your instalments if rental income from your investment property dries up in a market downturn.

Cultivate a stronger and longer relationship with your bank

If you have several products such as savings accounts, home loans and unit trusts with the bank, this may boost the debt servicing ratio it grants to you - lifting your chances of getting a higher loan value.

And it also pays to be a loyal customer. The longer your relationship with the bank, the more leeway you may get.

‘Two years and above is already quite telling for the quality of the relationship,’ said Mr Tan.

‘You don’t necessarily need to have had a loan relationship with the bank previously. Investments with the bank can also help it to gauge your repayment ability and creditworthiness better.’

Make sure your rental income more than covers your interest instalments

One common misconception among investors is that banks take into account the entire rental income from the property when granting a second or third home loan.

Banks actually look at a portion - possibly 50 to 70 per cent - of monthly rental as they also consider the fluctuations and sustainability of this cash flow in covering monthly loan payments, said Mr Ng.

Try not to opt for interest-servicing loans

Such loans allow customers to service only the interest but not pay up the principal amount borrowed. By paying interest only, you are ultimately paying more interest over the long run.

DBS said it offers this option only ‘to assist customers during a transition period in order to manage cash flow’. Thus, such loans will usually be offered only on a short-term basis.

Financial advisers also note that banks are unlikely to grant approval for such loans to customers unless they are high net-worth individuals who are savvy property investors.

What may crop up

Extra charges

You may need to set aside extra funds to pay for maintenance, income tax and stamp duty for your second property, said Mr Ng.

Investment properties, especially older condos, may also require refurbishment expenditure.

Unfavourable property cycles

Mr Tan cautioned: ‘If there is an economic downturn, the rental rates may fall faster than your mortgage interest rate, especially for fixed rates.

‘Be prepared with enough cash to top up the difference for the monthly instalment.’

Higher interest rates

Customers should also take note that investment property generally has a higher mortgage rate compared with residential property, said Prudential financial adviser Lim Szer Khee.

He explained: ‘Investment property generally has a shorter loan life span as there is a greater tendency to sell the property, so the banks may make less money from lending to finance investment properties.’

He sets aside 3 years’ worth of mortgage payments

MR S. Cai, 50, sleeps soundly every night even though he has taken on two mortgages totalling more than $1.3 million after snapping up two investment properties recently.

The businessman, who is ‘very bullish’ on the property market, has sold most of his share portfolio and is ploughing a considerable sum, including savings, into property.

But he breezily declares he ‘wouldn’t lose a wink of sleep even if the market crashed’. This is because he swears by what he calls the ‘first rule of property investing’ - ensure you do not overstretch yourself.

‘Generally, people should keep aside enough cash to cover one year’s worth of mortgage payments. But I set aside three years’ worth just to play it safe,’ says Mr Cai, who runs a construction firm and two bakeries.

Banks were still willing to grant him approval for his second home loan not just because he earns a six-digit annual salary, but also because he has more than enough cash stowed away for a rainy day.

Mr Cai, who lives in an HDB executive flat, took out a $350,000 loan to buy an apartment at Pearl Bank near Chinatown in September last year.

Two weeks ago, he zoomed in on an old apartment in Goodwill Mansions in Balestier requiring an extra home loan. He has applied for a loan that covers 80 per cent of the valuation of the unit, but declined to name the total amount.

These two investments may not have the speculative appeal of high-end units in Marina Bay, but they caught Mr Cai’s eye because of their ‘attractive rental yield and potential for collective sales’.

‘The rental yields are easily 4.5 per cent, even in bad times, so they will cover interest payments. For the Pearl Bank unit, which has a higher potential of going en bloc, I applied for a loan that has a one-year penalty, so that I would not have to pay as much interest.’

Only 35 and holding 2 home loans worth $1.2m

MR PETER Seow, 35, is convinced he is young enough to risk it all on the current property market boom - even if it means chalking up a debt of $1.2 million.

Last month, he took out a second loan of $600,000 to buy a freehold four-room condominium in East Coast, hoping to ‘make big bucks in a few years’.

His first loan is for a three-room condo in the Thomson area. The engineer, who works in a multinational firm, acknowledges he has a relatively modest annual income ‘in the high five digits’.

‘I was initially worried I would not get my second loan approved because I heard from my banker friends that banks usually grant loans only to those with six-figure incomes,’ he said. But he also had trump cards that convinced the bank to grant him the much-needed mortgage - his youth, clean bill of credit health and a handy stash of cash.

‘Since I am 35, I am able to stretch the loan over 30 years so that I can pay a smaller loan instalment each month,’ he said.

He had to fork out several thousand dollars to refurbish his condo unit, but hopes to use the monthly rental income of under $2,500 a month to cover his interest payments in future. He also paid up his car and personal loans, as well as all his credit card bills, before applying for the loan. This means his income is set aside to cover only living expenses and the home loans.

Mr Seow also has combined CPF and bank savings with his wife of $100,000. Part of this came from his 14-month bonus and unit trust investments.

‘I was pleasantly surprised I didn’t have any difficulty getting the loan. The economy is doing well so perhaps the banks are also more willing to lend even to middle-income people like me.’

Source: The Sunday Times, 27 May 2007