United Overseas Bank recently introduced a 50-year term home loan. However, it is only available to borrowers younger than 30 and can only be used on a property with lease tenure of 85 years or more. While a spokesperson for the bank highlighted that the home loan product is tailored to young executives who wish to own their first home, the move nevertheless drew subtle criticisms from various government officials. For instance, the Minister for National Development called the 50-year home loan scheme a “gimmick”, urging potential homeowners to exercise prudence when considering the purchase of a home and advised against the loan.
With a mandate to maximise value for its shareholders, the bank certainly cannot be faulted for its latest offering. After all, the bank must always strive to stay ahead of its competitors. However, while freeing up more of one’s disposable income with lower mortgage payments may sound appealing, it is unlikely that a 50-year term home loan would really work well with genuine homebuyers. The total interest paid by a borrower over the 50-year timeframe would be significantly higher than that paid for a 30-year loan – which is currently the standard in the market. Furthermore, the thought of not being debt-free post-retirement and the lower loan-to-value limit on housing loans granted to individuals with outstanding housing loans are likely to dampen the interest of genuine homebuyers in the longer loan tenure.
Contrary to the creator’s original intentions, the longer loan tenure could draw more interest from investors. As investors focus on the income yield and potential capital gains on an asset, cheaper financing options – at least in the initial years – are bound to entice investors. But would we see an individual younger than 30 years old leveraging on the longer loan tenure for real estate investment? Unlikely, given that the majority of this age segment do not currently own homes yet. Could we however see cases of parents using their children as investment vehicles, offering to foot the initial down payment while the child takes out the extended home loan? Possible. Although the latter may sound far-fetched, the implications of longer loan tenures on capital values cannot be ignored. Individuals aged between 20 and 29 currently comprise only 13.7%* of the population, with the small demographic not expected to draw much intervention from the government. However, should the longer loan tenure see strong demand, more banks might be tempted to offer similar schemes, which would likely boost capital values. At that point, the government might be forced to intervene by potentially lowering the loan-to-value ratios further or reviewing the option to allow banks to offer loans with long tenures. Either way, the market must hope that any possible intervention would not adversely impact genuine homebuyers.
*Department of Statistics, July 2012 Monthly Digest of Statistics
About the author
Cedric Chng is a Research Analyst for Jones Lang LaSalle, based in Singapore.