50-year home loan not advisable: Experts

WHILE a 50-year home loan helps ease the cash flow for young couples, the interest paid on it will eventually reduce the potential profit that can be made on a property, said most financial advisers yesterday.

Such long-term loans, with their lower monthly payments, may also lure couples to spend beyond their means in the meantime, they added.

What they should do when starting out is to buy a smaller flat within their means and upgrade later when they can afford it, said chief executive M. Salim of First Principal Financial, which advises on home loans and investments.

He was among 10 financial planning experts interviewed yesterday who unanimously advised against taking a 50-year home loan.

United Overseas Bank (UOB) introduced such a mortgage recently and on Sunday, National Development Minister Khaw Boon Wan cautioned would-be home buyers against it.

Calling such loans gimmicks, he urged especially fresh school- leavers eyeing a five-room flat not to fall for them. "It doesn't make sense," he said.

Financial adviser Damian Pang, however, argues that for people buying a property for investment rather than to reside in, a 50-year loan could be a boon.

The reason? "The cash burden is less heavy and should interest rates rise, the monthly payments would still be manageable," he said.

Home loans typically range between 20 and 40 years.

While longer-term loans are alluring for their lower monthly payments, the interest paid to the bank by the end of the loan period can be substantial, said director Timothy Kua of SmartLoans.sg, which advises home buyers on the suitable mortgages available.

"This will eat into your capital gains when you sell your property, and you would not have made as much profit," he added.

Say, at the current 2 per cent interest rate, the monthly payment for an $800,000 loan is about $2,100 for a 50-year loan, and about $3,000 for a 30-year loan.

At the end of the loan period, the interest paid will be about $466,000 and $264,000, respectively.

Mr Kua said that about 90 per cent of his company's 50,000 customers opt for loans of 30 to 35 years.

Mr Salim noted that part of the bait in coaxing people to buy pricier homes is the success stories in recent years of home owners making huge profits from buying and selling residential property.

"With this mindset, many young people look at resale value rather than their financial capability. They over-commit, thinking the market will always stay buoyant and never crash," he said.

UOB's head of secured loans, Ms Chia Siew Cheng, reiterated yesterday that its offer is aimed at young executives who are "serious about buying a home".

"As their careers progress, they have the flexibility to shorten the loan tenor and make partial capital repayments," she said, adding that UOB encourages its customers to assess their personal circumstances carefully before committing to a long-term loan.

Last month, the Monetary Authority of Singapore said it was monitoring the mortgage product.

Several young people interviewed share the view of civil servant Marco Low, who put his name down recently for a new four-room flat in Queenstown.

Said the 25-year-old who plans to marry next year: "It's a matter of preference. Some don't mind paying a loan till they are past 70 years old.

"I'd rather be debt-free by the time I retire."

Additional reporting by Ian Poh