Thursday, June 23, 2011

The one rule that many property investors may overlook

Monetary Authority of Singapore (MAS) proposes to the bank for a standard fact sheet for home loans. This includes how lenders will be affected when interest rates rise. There is one more the item that property buyers overlooked. What actually happens when the value of a home decline? A lender is supposed to top up the difference between the outstanding bank loan and the latest valuation of the house.

Here's an example.
An investor bought a house at $1 million. For the next few years, if the property value remains or goes up, both the banks and investors will be happy. What if the property value drops?

This investor took an 80% loan with a bank ($800,000). After a few years, a major crisis like the one in 2008/2009 surfaces (we never know when it will happen). The value of the house is not about $700,000 as there are more supplies and less demands. The investor's outstanding loan with the bank is $780,000. The investor is expected to pay the difference of $80,000 to the bank.

This payment is easily overlooked as people always think that property prices will just keep going up and will not come down.

1. Before buying any property, we must make sure that we have sufficient funds before making the commitment to buy.
2. Always buy properties at a discount of your valuation. This will protect you from having to pay the difference when there is a decline in the property value.
3. The best time to buy a property is during the 'perfect storm'. That is,
    a. when interest rates go up.
    b. when there is another crisis.
    c. when supply is more than demand.

Have fun investing.


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