November 16, 2008 Sunday

Home loans harder to get as prices fall

Check if bank can meet unit's valuation to avoid overpaying for the property

By Joyce Teo, Property Correspondent

A couple of telling anecdotes illustrate the unexpected glitches that home buyers can face as property prices start to fall.

A Spring Grove condominium unit owner was denied the chance to take advantage of lower interest rates by refinancing his devalued property without coughing up more hard-earned cash.

The owner had to make up the shortfall because the reduced value of the Grange Road unit meant the bank could not extend a large enough loan.

Another buyer had to cancel his purchase recently after he learnt that banks' valuation of the property was less than what he was supposed to pay.

The banks could not offer him the loan he needed as the collateral was inadequate.

This is the brave new world of home loans as property values fall amid the global financial crisis and banks tighten lending.

Banks are still dishing out home loans but are much more selective these days, mortgage consultants said.

Banks can grant only up to 90 per cent of the purchase price or valuation, whichever is lower. So if the sale price of a property exceeds the valuation - which is determined by an independent professional - the buyer will have to make up the shortfall.

Amid poor demand and falling prices, banks are sticking to lower property valuations in anticipation of further price falls.

'OCBC Bank engages independent, third-party valuers to determine the open market value of properties and there has been evidence of a fairly strong downward trend in property valuation,' said its head of consumer secured lending Gregory Chan.

The buyer who cancelled his property deal realised that the yet-to-be-completed 1,000 sq ft condo unit was worth less than the $2 million he was going to pay.

'No bank can match the property's valuation as there was a recent sub-sale deal done at 15 per cent below the developers' price of $2,000 per sq ft,' said Mr Dennis Ng, spokesman for mortgage consultancy portal

Buyers can avoid overpaying for a property by checking to see if the banks can match the valuation to the property's purchase price, he said.

In today's market, those still keen on taking out a loan for a home they intend to live in should also know that most banks now prefer to offer up to only 80 per cent financing, said Ms Ally Yang, a chief mortgage consultant at

OCBC Bank said it continues to offer housing loan packages for 80 per cent financing. It also offers 90 per cent financing on a case-by-case basis if the applicant meets its credit assessment criteria.

HSBC Singapore's head of personal financial services, Mr Sebastian Arcuri, said: 'Customers can still obtain home loans of up to 90 per cent valuation or purchase price if their financial profile can support it and their application meets the bank's criteria.'

But there are signs that banks are starting to be more stringent in their credit criteria and they are very selective in granting a 90 per cent loan, said Mr Ng.

'A 90 per cent home loan is now more selectively granted to consumers with very good profile who are buying a property as their first home.'

Investors will find it tougher to get a bigger loan these days. Banks used to offer more than 85 per cent financing for investment properties but all of them, except DBS Bank, no longer do so, said Ms Yang.

This means buyers have to be prepared to cough up more cash for investment property buys.

Those looking at refinancing may be in for a surprise if they bought their properties in last year's booming market.

The Spring Grove unit in question was bought by a South Korean expatriate for $2.58 million or $1,442 per sq ft on a floating rate package.

He now pays 3.5 per cent interest on his 80 per cent loan and was looking to halve his interest payments by switching to a package pegged to the three- month Singapore Interbank Offered Rate, said Ms Yang.

But a check with two banks found that the valuation for his property was $2 million or $2.22 million. If he wants to refinance at these valuations, he would need to pay up to $180,000 to top up his loan, currently at $1.78 million.

Consumers seeking a loan for their property purchase should get prior approval or have more cash on hand. 'They should approach a mortgage specialist for a joint assessment if they are unsure whether they can afford the home purchase,' said OCBC's Mr Chan.

'Things are quite fluid these days so buyers should re-check their loan eligibility after one month,' said Mr Ng.

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