what will happen if interest rate is 4%?

[wind30]

I am wondering what will happen if interest rate goes back to normal at around 4%?

Based on todays prices, it would seem that prices needs to drop like 40% if we want to keep the monthly payments the same based on a 40 year loan.

I find it really scary that a lot of singaporeans are buying houses based on the assumption that interest rate will keep at 1%. People were taking out huge loans at 1% interest rates with a 40 year tenure so the monthly payments are small. This is like REALLY super risky and the governent knows it and thus they have cut the tenure.

The governemnt HAS to do something now to avoid a similar fate like Spain. Do we want to bet the economy of our country on that the interest rate will stay low?

I mean we have no control over external interest rates.... why are we exposing ourselves to such a risk?

you ask anyone why they are buying at todays prices. The only reason is that they believe the interest rates will stay at 1%. All the maths only makes sense if the interest rates stay low.

[Cyberknight]

When the bank calculates how much to lend you, it is based on an interest rate of 3.75%. So that should take care of e 40year loans.

[wind30]

When the bank calculates how much to lend you, it is based on an interest rate of 3.75%. So that should take care of e 40year loans.

no it does not actually. If the interest rates rises from 1% to 4%, the monthly repayment will go up like 66%, with most of the money going to repay INTEREST in the first few years.

A 40 year loan DOES NOT make sense at a normal interest rate of 4%. This is maths....

Example a 1million 40 year loan at 4% means your monthly payment is $4178 compared to $2528.

But that is not all. After FIVE LONG years payment at 4% interest, your principal has dropped by less than 4% total.... which is plainly ridiculous as almost all your payments is just paying interest. So if you are to sell after FIVE years, you lose basically lost almost all your money spend servicing the loan (they are all interest payments)

It is just maths... if interest rates are low, the penalty for stretching your loans longer is much less.

Perhaps, you can repay for 40 years until you are 75 but is that what you want to be doing?? As it will mean that spending the rest of your life servicing the interest payments. Now at 1% interest rate, the story is so different as the loans are serviced by the rental and you get "free" monthly income.

[auroraborealis]

ideally, the grand plan is (but of course, talk is cheap):

1st start only @ 60% LTV (for all properties if own > 2 properties)
2nd every 50bp above 4%, target to prepay 5% of outstanding loan until LTV (based on mkt valuation) fall to < 50%

the direction of property prices also matter;
above is contingency for either no change in property prices (i.e. 2012 current values) or a fall of 25% in property prices
if property prices up > 25% by then, just have to sell 1 property to bring down LTV for the rest to < 50%

the ability to prepay depends on cash/liquid asset holdings; how much % of cash/liquid asset do we hold for every $1mio property we own?

I am wondering what will happen if interest rate goes back to normal at around 4%?

Based on todays prices, it would seem that prices needs to drop like 40% if we want to keep the monthly payments the same based on a 40 year loan.

I find it really scary that a lot of singaporeans are buying houses based on the assumption that interest rate will keep at 1%. People were taking out huge loans at 1% interest rates with a 40 year tenure so the monthly payments are small. This is like REALLY super risky and the governent knows it and thus they have cut the tenure.

The governemnt HAS to do something now to avoid a similar fate like Spain. Do we want to bet the economy of our country on that the interest rate will stay low?

I mean we have no control over external interest rates.... why are we exposing ourselves to such a risk?

you ask anyone why they are buying at todays prices. The only reason is that they believe the interest rates will stay at 1%. All the maths only makes sense if the interest rates stay low.

[ekl2ekl2]

High interest rate can also mean that the US and world economies are good. So prices may not necessarily fall but yield will be very challenging

[wind30]

the direction of property prices also matter;
above is contingency for either no change in property prices (i.e. 2012 current values) or a fall of 25% in property prices
if property prices up > 25% by then, just have to sell 1 property to bring down LTV for the rest to < 50%

the ability to prepay depends on cash/liquid asset holdings; how much % of cash/liquid asset do we hold for every $1mio property we own?

If the interest rates are rising to 4%, do you think the prices will go up or down? Actually it doesn't really matter how much assets you hold. If there interest rates goes up so much, the rental yield will be wiped out and everyone will be rushing to sell as it is POINTLESS to hold on to property with heavy loans. you just bleed money every month.

Even if you can hold, would you want to hold if interest rates are rising?

[auroraborealis]

why not? if i/r goes up means economy likely to be doing much better than current... if current rental yield is 4-5%, there's also a possibility that rental rates go up in line...

defintiely hold in this scenario... unless i/r up but asian doom & gloom like in 98... but global dynamics are changing significantly

think 1 or 3 mth sibor was >9% back then... but then again, sibor-based loans didn't exist back then

If the interest rates are rising to 4%, do you think the prices will go up or down? Actually it doesn't really matter how much assets you hold. If there interest rates goes up so much, the rental yield will be wiped out and everyone will be rushing to sell as it is POINTLESS to hold on to property with heavy loans. you just bleed money every month.

Even if you can hold, would you want to hold if interest rates are rising?

[teddybear]

If interest rate rise to 4%, means world economy super good? Almost everyone earning much more than previously and have a lot of money so rental yield wipe out never mind, they are in no hurry to sell!
Singapore economy super good means need more manpower, in will come more foreigners, property prices up, rental up when interest rate up, why need to sell? Your logic doesn't stand up to scrutiny...

If the interest rates are rising to 4%, do you think the prices will go up or down? Actually it doesn't really matter how much assets you hold. If there interest rates goes up so much, the rental yield will be wiped out and everyone will be rushing to sell as it is POINTLESS to hold on to property with heavy loans. you just bleed money every month.

Even if you can hold, would you want to hold if interest rates are rising?

[Cyberknight]

no it does not actually. If the interest rates rises from 1% to 4%, the monthly repayment will go up like 66%, with most of the money going to repay INTEREST in the first few years.

A 40 year loan DOES NOT make sense at a normal interest rate of 4%. This is maths....

Example a 1million 40 year loan at 4% means your monthly payment is $4178 compared to $2528.

But that is not all. After FIVE LONG years payment at 4% interest, your principal has dropped by less than 4% total.... which is plainly ridiculous as almost all your payments is just paying interest. So if you are to sell after FIVE years, you lose basically lost almost all your money spend servicing the loan (they are all interest payments)

It is just maths... if interest rates are low, the penalty for stretching your loans longer is much less.

Perhaps, you can repay for 40 years until you are 75 but is that what you want to be doing?? As it will mean that spending the rest of your life servicing the interest payments. Now at 1% interest rate, the story is so different as the loans are serviced by the rental and you get "free" monthly income.

I mean when the bank assess your ability to pay, it is based on 3.75% interest generally speaking. On top of that. The current interest rate env is likely to stay low for the next 2-3 years.

Even when interest do rise. You will have already enjoyed 2-3 years of low interest that is enough to reduce e principal.

General rule of thumb to prevent over leveraging. 50% of the monthly installment should go into principal repayment, that will keep e
Loan repayment in check.

[wind30]

why not? if i/r goes up means economy likely to be doing much better than current... if current rental yield is 4-5%, there's also a possibility that rental rates go up in line...

defintiely hold in this scenario... unless i/r up but asian doom & gloom like in 98... but global dynamics are changing significantly

think 1 or 3 mth sibor was >9% back then... but then again, sibor-based loans didn't exist back then

I don't understand the coorelation. Using your arguement, since now interest rates are record low, it means economy is doing terrible and prices should fall right???

Interest rate low, housing price up. Interest rate up, housing price also up. What sort of logic is that. I don't think interest rates going up necessarily means economy is doing well as you also have mentioned.

If we want to analyse, we cannot change too many variables at one go right? Then how to analysis. You can say interest rates go up, but government bring in 10 more million FT so rental go up even higher....

[wind30]

I mean when the bank assess your ability to pay, it is based on 3.75% interest generally speaking. On top of that. The current interest rate env is likely to stay low for the next 2-3 years.

Even when interest do rise. You will have already enjoyed 2-3 years of low interest that is enough to reduce e principal.

General rule of thumb to prevent over leveraging. 50% of the monthly installment should go into principal repayment, that will keep e
Loan repayment in check.

yup the point was people was taking like 40 years loan so 2-3 years of super low interest rates does not really mean much to the principal...

[amk]

The governemnt HAS to do something now to avoid a similar fate

MAS has already done something. 60% LTV, max loan tenure etc.

On the other hand, if you know interest rate will be 0 until at least 2015, you should do something too.

[kane]

interest rate was at 4% in 2006, and what did that year feel like? good bonuses, good increments, buy any stock also make money.

[teddybear]

Now interest rate is low because economy is doing terrible, look at US, Europe, Japan and you will know.
When economy super up up up, interest rate sure up one! But economy up up up means property prices up up up!
Now economy super bad but housing prices up is an anomaly.......

I don't understand the coorelation. Using your arguement, since now interest rates are record low, it means economy is doing terrible and prices should fall right???

Interest rate low, housing price up. Interest rate up, housing price also up. What sort of logic is that. I don't think interest rates going up necessarily means economy is doing well as you also have mentioned.

If we want to analyse, we cannot change too many variables at one go right? Then how to analysis. You can say interest rates go up, but government bring in 10 more million FT so rental go up even higher....

[auroraborealis]

Current low rate is due to weak G3 economies but Asia is doing quite fine arent we? Which is exactly y our prices r going up... Ok SG economy + External liquidity boost from G3

I don't understand the coorelation. Using your arguement, since now interest rates are record low, it means economy is doing terrible and prices should fall right???

Interest rate low, housing price up. Interest rate up, housing price also up. What sort of logic is that. I don't think interest rates going up necessarily means economy is doing well as you also have mentioned.

If we want to analyse, we cannot change too many variables at one go right? Then how to analysis. You can say interest rates go up, but government bring in 10 more million FT so rental go up even higher....

[wind30]

MAS has already done something. 60% LTV, max loan tenure etc.

On the other hand, if you know interest rate will be 0 until at least 2015, you should do something too.

ok but until 2015.... that is the point. People are so short sighted. They believe that they can get out before the interest rates goes up.

Imagine if government does not do more, people will just buy more at todays prices.

I really don't think the prices will go up much more as almost everyone has factored in the low interest rates. The interest rates really cannot go any lower.

I think people buy mainly for the rental yield. it is their second property. The rental yield numbers do looks ok based on current interest rates. But how much can you earn based on rental for 2-3 years?

When the majority of the population is stuck with housing loans at todays prices and interest rates shoot up to a NORMAL 4%, everyone will suffer. The economy will probably crash. Granted that this is a hypthetical scenario but the risk is there and I feel that it is too great to be ignored. Just need to look at Spain or Ireland whose economical woes are brought about by the housing crash

[wind30]

Current low rate is due to weak G3 economies but Asia is doing quite fine arent we? Which is exactly y our prices r going up... Ok SG economy + External liquidity boost from G3

my point exactly. So how can you assume when G3 economies recover and interest rates goes up, Asia will not have economic downturn? So the arguement that when interest rates goes up, our economy sure good is just err....

[auroraborealis]

Possible but I can't think of a trigger? Perhaps u can suggest one

Our economy is not sure gd but even when it's bad it's not the worst, stability is of value to foreign investors in our properties

my point exactly. So how can you assume when G3 economies recover and interest rates goes up, Asia will not have economic downturn? So the arguement that when interest rates goes up, our economy sure good is just err....

[amk]

@wind30: our MAS is not bad already. Irish pty bubble. I know of ppl borrowing 100% buying multiple properties in Ireland. THAT is irresponsible central banking. Here with as low as 60 to 40% LTV, it already greatly reduced the risk.

[wind30]

Possible but I can't think of a trigger? Perhaps u can suggest one

Our economy is not sure gd but even when it's bad it's not the worst, stability is of value to foreign investors in our properties

??? Uncle, you think I PHD in economics. How do I know of a trigger for economic downturn in Asia 3 years down the road???

Does it mean if you and I don't know of a trigger that that it is unlikely to have economic downturn 3 years down the road?

One year before 2007 people was still laughly at peter Schiff

[kane]

the trigger will sneak in on the investors at the most unexpected moment. some call it the black swan. if one could describe the bearish scenario, it won't be called the black swan anymore.

[auroraborealis]

Well then it's for the ppl who buy to assess the risks... For me, it's low probability (< 25%) of that to happen

So y not take adv of the low rates now, I.e more of the ongoing mthly p+I payments actually goes into paying down the principal compared to when rates r higher

Y not take a stand on where I think Asia is heading... For me, stronger
Y not invest cautiously by not over leveraging... For me, LTV max 60%

Take a chance... If cannot, dun buy loh

??? Uncle, you think I PHD in economics. How do I know of a trigger for economic downturn in Asia 3 years down the road???

Does it mean if you and I don't know of a trigger that that it is unlikely to have economic downturn 3 years down the road?

One year before 2007 people was still laughly at peter Schiff

[Arcachon]

I am wondering what will happen if interest rate goes back to normal at around 4%?

George Soros- "The Man Who Broke the Bank of England" because of his US$1 billion in investment profits during the 1992 Black Wednesday UK currency crisis.

He will be very happy if interest rate goes back to normal at around 4%.

[sabian]

Some can stomach the increased loan burden. Some cannot.

Of those who cannot, some will sell and cut loss, some will tiao lao, some will borrow from tai ee long but still tiao lao eventually.

From some of the replies you get, you know you want whatever it is they are smoking because no matter how they toss the coin and regardless if it's head or tail, they still win.

But don't fight the trend. Mkt can remain irrational longer than you can tahan. So said a wise man, Keynes I think.

[wind30]

Some can stomach the increased loan burden. Some cannot.

Of those who cannot, some will sell and cut loss, some will tiao lao, some will borrow from tai ee long but still tiao lao eventually.

From some of the replies you get, you know you want whatever it is they are smoking because no matter how they toss the coin and regardless if it's head or tail, they still win.

But don't fight the trend. Mkt can remain irrational longer than you can tahan. So said a wise man, Keynes I think.

I agree. From the individual standpoint, perhaps a case can be made to buy now due to the low interest rate. Ultimately, even if you don't buy, if the housing market crash, you also die if the economy tanks. So might as well join in the crowd.

But from the GOVERNMENT standpoint, it does not make sense for them to let prices go up anymore. The CMs must come harder and stronger and faster. They should not let singapore be subjected to excessive risk of a property bubble.

[kane]

I agree. From the individual standpoint, perhaps a case can be made to buy now due to the low interest rate. Ultimately, even if you don't buy, if the housing market crash, you also die if the economy tanks. So might as well join in the crowd.

But from the GOVERNMENT standpoint, it does not make sense for them to let prices go up anymore. The CMs must come harder and stronger and faster. They should not let singapore be subjected to excessive risk of a property bubble.

Their hands are tied by macroeconomic factors outside of this island.

[heehee]

Don't think govt will want to crash the property market by doing CMs harder stronger faster because this is akin to doing suicide themselves, if not sooner, at least till next GE.

I agree. From the individual standpoint, perhaps a case can be made to buy now due to the low interest rate. Ultimately, even if you don't buy, if the housing market crash, you also die if the economy tanks. So might as well join in the crowd.

But from the GOVERNMENT standpoint, it does not make sense for them to let prices go up anymore. The CMs must come harder and stronger and faster. They should not let singapore be subjected to excessive risk of a property bubble.

[stl67]

When the bank calculates how much to lend you, it is based on an interest rate of 3.75%. So that should take care of e 40year loans.

Really? Means I should be safe.. Nvr thought abt it

[stl67]

MAS has already done something. 60% LTV, max loan tenure etc.

On the other hand, if you know interest rate will be 0 until at least 2015, you should do something too.

U know I was sharing with my armerican colleague in London about sg policies. He wished that US has not been so reckless that led to subprime. SG still good lah...

[wind30]

Don't think govt will want to crash the property market by doing CMs harder stronger faster because this is akin to doing suicide themselves, if not sooner, at least till next GE.

If they can crash the market by cm it just mean that there is a huge bubble. Else they can always reverse the cm then the market turns. If it is a bubble it is always better to deflate now rather than later. If the bubble is burst by external factors like rising interest rates, the results will be far worse.