Pay-interest-only deal for cash-short home owners

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January 13, 2009 Tuesday

Pay-interest-only deal for cash-short home owners

DBS scheme eases borrowers' burden for six to 18 months

By Goh Eng Yeow


HOME owners with mortgages at DBS Bank can ease some of their financial burden by opting to pay only the interest on their loans for periods of up to 18 months.

The bank sees the scheme as a way of helping cash-strapped borrowers who are worried about their ability to repay their mortgages amid the deepening economic gloom.

The scheme could potentially benefit 'tens of thousands' of borrowers with home loans at DBS.

It can mean an immediate reduction in the monthly amount a borrower must fork out as a key portion of the payment - the loan principal - can be set aside.

Take a 25-year home loan of $500,000 pegged at an interest rate of 3.5 per cent.

A borrower will have to pay $2,504 a month - covering both interest and principal.

But by opting to pay the interest only, his monthly payment drops to $1,439, putting an extra $1,065 into his pocket.

So even if a working couple loses one income, which is a growing threat in the downturn, they can likely keep paying their mortgage - and keep their home.

They can also pay the monthly instalment using Central Provident Fund cash if they are only servicing the interest on the loan.

They can resume monthly payments on the principal portion of their loan when their cash flow situation improves.

The periods for paying interest only can extend from a minimum of six months to 18 months.

'The last thing we want to do is to foreclose on people's homes. Come and talk to us early if you have any financial problems,' said Mr Koh Kar Siong, head of consumer deposits and secured lending at the bank, yesterday.

Homeowner Rose Tan, 40, who has a DBS mortgage on her condominium flat, welcomed the move: 'This is a friendly gesture from DBS. At least, I know they won't treat me like a leper if I approach them for help in lowering my housing instalment.'

The flip side is that paying interest-only means you are not paying off any of the loan itself so you will have fallen behind.

DBS is the largest bank here and a key player in the private housing loans market. It is also a big lender to HDB flat-owners through its POSB network.

It has 'tens of thousands' of mortgage borrowers.

To get the go-ahead, a borrower must give the bank an update of details such as employment and other financial commitments.

The scheme is applicable to cash-strapped borrowers as well as those in the pink of financial health.

DBS will advise them within a week if their applications to pay interest-only on their loans has been approved.

Mr Koh said the updates are needed to enable DBS to fulfil its fiduciary duty and ensure that borrowers have the means to repay their loans eventually.

Besides offering interest-only instalments, DBS is extending an option to allow home owners to extend the tenure of their loans, which will lower their monthly instalments.

Mr Koh said there has not been any sharp rise in the number of borrowers asking DBS to alter their loan repayment terms but banks are unlikely to be immune to the economic slowdown.

'About 90 per cent of our home loans are taken up by borrowers who occupy their properties. We want to help them to tide over this difficult period,' he said.

DBS' move has stirred hopes among traders and home owners that by acting in such a pro-active manner, there will be fewer foreclosures and this will help the wobbly property market to get back on its feet eventually.

Banks such as MayBank and OCBC Bank told The Straits Times that they preferred to take a case-by-case approach to assist home owners who have taken up loans with them.

Mr Gregory Chan, OCBC's head of secured lending, said: 'In the event that our customers' needs change during the duration of their loans, we are open to reviewing their financial positions and borrowing limits, and advising them accordingly.'

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Can someone explain financially on this deal?

So the home-owner only pay interest on the covered months.. what happens to the overall loan?

Eg;
Principal 500,000
Interest 200,000
Period 25 yrs
Total loan = 700,000

with this deal, does the home owner still end up paying 700K at the full 25 yrs? or something more??

SImply put, monthly you will pay your principal loan + interest

For example you took a loan for x months and at the point of payment for your property of a particular month, should you fall into any financial difficulty, you can choose to pay ONLY your interest amount, and by doing so, you did not lower your principal loaned amount.
This means your loan period would be extended by 1 month (for the sake of discussion). Your new loan period would be x + 1 month and an additional month for which you did not make the normal payment of principal loan + interest.

Quote:

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Originally Posted by jazz_wish

SImply put, monthly you will pay your principal loan + interest

For example you took a loan for x months and at the point of payment for your property of a particular month, should you fall into any financial difficulty, you can choose to pay ONLY your interest amount, and by doing so, you did not lower your principal loaned amount.
This means your loan period would be extended by 1 month (for the sake of discussion). Your new loan period would be x + 1 month and an additional month for which you did not make the normal payment of principal loan + interest.

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It works both ways. But this strategy of interest-only does help the owner to keep the property and hopefully, market will turn better and he is able to resume servicing the principal + interest. So, even if he lose out in interest payments during the scheme tenure, he might be able to regain all thru capital appreciation of the property maybe 5-10yrs down the road. It's better than him selling out now and taking the loss.

This interest only scheme is not a new method. It has been used by many banks for a long time. Even the HDB has a variant of this scheme. The main purpose of this scheme is to lower the monthly repayment sum and you will have to take note that the outstanding balance will keep increasing. That is for as long as you maintain the interest only payment scheme. The best is to revert back to a normal traditional home loan when you are financially strong again or to refinance when valuation goes up.




Another variant of the interest only scheme is the interest only mortgage. The mechanism is basically the same, just that it differs in the offering. An interest only scheme is taken up by a financially disrupted individual, hoping to reduce the monthly installment. An interest only mortgage is offered to a property investor who wants to use as little of his cash to buy a property. Best scenario is when he sells it for a profit. Which was what focus has said. The thing to take note of is to sell the property when it's value is much higher than the loan itself.

For HDB owners, their scheme is more flexible. No application needs to be done. They just have to take note of their interest paid per month and keep to that sum and viola, that is your interest only.

For a private home loan with a commercial bank, you will have to apply for it. Remember that ALL banks can offer these interest only scheme and All of it is on a case by case basis. Some home owners wait until they have missed out on payments for two to three months before requesting for help. If you feel that your income might turn unstable in the coming months, apply for this scheme, do not wait for it.

It is also possible to seek out seasoned property investors who will buy over your property so that you can rent elsewhere (which is much cheaper) or you might want to rent the property that you have sold.