By: Zeng Han Jun, CPCG, Singapore

An interest only mortgage is definitely cheap from the consumerís point of view. Imagine: comparing to a mainstream housing loan, your monthly installment is slashed by more than 40%. With savings of more than 40%, you can use the cash for many other things. However, taking up an interest only housing loan can have nasty consequences that you may not have thought of. Even if you have planned well, things might not turn out as planned. Therefore you have to be extra careful with it.

How will your payment change along the loan tenure?

Knowing how your payment structure changes along the loan tenure is extremely important to your financial planning. It can change from fixed to floating, which may result in a hike for your monthly payments. It can also slowly evolve from a purely interest payment to a mixture of principle and interest. All these factors might cause a shock to the consumer if he or she is unaware of the evolving of the housing loan plan.

When do you have to pay the full lump sum?

Unless you are really cash rich or asset rich, then you will have to pay a lot of attention to this segment. By asset rich, this does not equate to having many properties, but rather havig substantial equities in your assets. Having neither of these, plus not knowing about when the lump sum is, can cause disastrous financial consequences.

Additional clauses

Some interest only housing loans have no expiry dates, meaning that you keep paying the interest and the bank never requires you to do a lump sum payment. Watch out for this. There will always be times that a bank may need to raise additional capital for whatever reasons. Even if they offer a non Ė expiry clause for you, they may also include a clause that enables them to take back the lump sum from you as and when they choose.

Do not always assume your property will appreciate in value

Interest only housing loan owners always falsely assume that a piece of property will always appreciate in value. They expect to sell off at a profit, use the proceeds to pay off the loan and pocket the remaining profit. Historically, properties have plunged below initial valuation and way below the bankís Loan to Valuation ratios. If that happens, you may have to fork out additional cash.

Do not always assume that you can refinance at end of term

Remember, a bank can refuse your refinancing request. It does not always mean that when you want to refinance, you can. Every refinancing application is subjected to approval and if a bank decides to shore up its credit criteria, they can jolly well refuse an application that is weak or risky.

Talk to your bank officer or mortgage advisor if you are unsure of the pros and cons of taking up an interest only housing loan. They can offer valuable advice on your different exit strategies and various pitfalls.

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