Pros and Cons of UOB’s 50 Year Loan Tenure

Singaporeans suspect they will never die. CPF is stretched to 80 years, MediShield coverage might soon reach 90 years, and now UOB is extending 50 year loans. We have so much faith in medical science it’s practically a religion. But before you jump at UOB’s *ahem* affordable loan, you’d better think hard.

 

Clock twisted into an hourglass

And assuming you’re capable of time travel, there are no drawbacks to this loan.

 

UOB’s 50 Year Loan

If you head over to UOB, you’ll see their maximum loan tenure is now 50 years. This is a huge deviation from other banks, which usually offer 30 years as the maximum.

The 50 year loan tenure applies only to private residences and HDB flats. Also, leasehold properties need to have at least 35 years left on the lease, at the end of the loan tenure.

The 50 year loan has its pros and cons. Before you jump into it, you’d better have a good grasp of both:

 

Upsides of the 50 Year Loan

The upsides to a 50 year loan are:

  • It gives the borrower more liquidity
  • It gives the borrower a bigger loan quantum
  • It’s ideal for landlords seeking long term rental income

 

Old man staring

“How will you check? I outlived every witness who saw me sign that loan.”

 

It Gives the Borrower More Liquidity

A 50 year loan offers greater liquidity. Because the loan is stretched over 50 years instead of 30, monthly repayments are lower.

For example, say you take out a $1 million loan at 1.7% interest. With a 50 year loan, the monthly repayment would be about $2,475. With a regular 30 year loan, it would be about $3,548*

*Numbers in example are from the Straits Times, July 20, 2012

Do I need to explain the benefits of having more money every month? You can invest it in stocks, put it into a fund, buy a pool table…whatever. Ideally, you should invest the money in a way that appreciates faster than the house.

 

It Gives the Borrower a Bigger Loan Quantum

Ever wanted to buy a house you can’t afford? Try a hard blow to the head, it sometimes restores common sense. If that fails, I guess you can try a 50 year loan.

Your maximum loan quantum (the total amount you’re qualified to borrow)  is determined by your DSR (debt servicing ratio). It’s a ratio of your income to your overheads, and it needs to be roughly 50%. For example, if I make $5,000 a month, my DSR means my maximum overheads (including the loan repayment) can be about $2,500.

 

Singapore flats

“Don’t qualify? Cannot be lah. I make $1,000 a month okay.”

 

If I take a $1 million loan at 1.7% interest, for 30 years, I’d pay about $3,548 a month. That breaks the $2,500 limit, and the bank won’t extend me the loan.

But if I take a $1 million loan at 1.7% interest for 50 years, I’d pay about $2,475 a month. That’s within my DSR, and I now qualify for the loan.

Some young couples might see this as an opportunity. If they can get a higher loan quantum, they can bypass the HDB market and go straight for a private condo.

 

It’s Ideal for Landlords Seeking Long Term Rental Income

Let’s say you’re an investment banker out of an Ivy League school. At 30, you have a bank account bigger than Greece’s bailout package. Time to buy multiple properties and rent them out.

Because a 50 year loan reduces monthly repayments, it’s easy for your rental income to exceed your loan repayments. Going back to our example: A loan of $1 million suggests a private condo. It’s reasonable to expect rental income of around $4,000 a month.

If you’re on a 30 year loan, your monthly repayments are around $3,548. Your $4,000 rent generates a surplus of ($4,000 – $3,548) = $452 a month.

If you were on a 50 year loan, your repayments of $2,475 would generate a surplus of ($4,000 – $2,475) = $1,525.

Between the two, the 50 year loan results in a higher rental yield.

 

Landlord showing tenants around

“No, rent doesn’t include the TV. But you do get walls, a floor, and this incredible door.”

 

Downsides of the 50 Year Loan

The downsides to a 50 year loan are:

  • It reduces capital gains
  • It results in excessive interest payments
  • Something called “retirement”, and how you might not have one

 

It Reduces Capital Gains  

The capital gains (or capital appreciation) measures the growing value of a house. So if I buy a house for $1 million, then sell it 30 years later for $1.5 million, my capital gains would be $500,000. Right?

Yeah, when pigs fly. The interest from the loan repayments eat right into those capital gains.

At 1.7% interest, a $1 million loan would mean total interest payments of about $278k (after 30 years). So the actual gains would be ($500,000 – $278,000) = $222,000.

If you think that’s bad, bear in mind that longer loan tenure = more interest repayments. A 50 year loan might hit well over $430k in interest repayments alone. And that’s making some huge assumptions, such as the interest rates not rising for the next half a century.

 

Singapore dollars (very few)

“Yes, we have the proceeds from your sale, minus interest. I think it should about cover lunch.”

 

Something Called “Retirement”, and How You Might Not Have One

Assuming you’re 30 when you get a 50 year loan, your last repayment is at age 80.

Let that sink in: A 50 year loan means you can settle down, raise children, put them through school, send them to University, rear three pets that die of old age, quit your job…and still be repaying the same loan.

I can think of body parts you can sever that would cause less pain. If you take up a 50 year loan, you’d better have a solid plan to refinance at some point. Because it is financially unhealthy to owe money past your retirement age.

 

Champagne

“Happy retirement. Wow, that was nice of the ba…wait, this champagne has a late payment reminder.”

 

As we near the retirement age of 62, our earning capacity decreases. Even if you work past retirement, you will probably earn less. Remember the sugar-coated bill passed in January 2011? Re-hired employees can have their pay cut by 10%.

(HA HA! “…the number of companies which automatically cut the salaries of workers is very small“. And also, China’s food products are the safest.)

Also, should you have financial difficulties over 50, this loan gets you in serious trouble. If you’re in your 30′s, the bank might work out a settlement that doesn’t involve foreclosure. But when you’re over 50, there’s a higher chance of losing the house.

Overall, it’s inadvisable to take this loan without very specific reasons. And if you want more advice on home loans, don’t forget to follow us on Facebook. You might also want to shop around for more reasonable loan packages before taking this one; there are sites like Smartloans.sg, which aggregates and compares loan packages for free.

Would you be willing to take on a 50 year loan? Comment and tell us about it!

Image Credits:
gingertammycat, tinou bao, mattjlcaenertia, narin-flickr, Simon Cocks

Get more Personal Finance tips and tricks on www.MoneySmart.sg

Click to Compare Singapore Home Loans, Car Insurance and Credit Cards on our other sites.



More From MoneySmart
Loading...

Editor’s note:Yahoo Philippines encourages responsible comments that add dimension to the discussion. No bashing or hate speech, please. You can express your opinion without slamming others or making derogatory remarks.

  • Philippines seeks stronger commitment from U.S. in South China Sea dispute
    Philippines seeks stronger commitment from U.S. in South China Sea dispute

    The Philippines is seeking a "stronger commitment" from the United States to help its ally, the defence minister said on Monday, as China asserts its sovereignty over disputed areas of the South China Sea. China claims most of the South China Sea, through which $5 trillion in ship-borne trade passes every year, and the Philippines, Vietnam, Malaysia, Taiwan and Brunei have overlapping claims. China said on Monday it had lodged a complaint with the United States over a U.S. spy plane that flew …

  • Aquino: Philippines to fly usual routes over disputed reefs

    MANILA, Philippines (AP) — Philippine aircraft will continue to fly their usual routes over disputed reefs in the South China Sea, the country's president said Monday, defying China's challenges to its planes and those of the United States. …

  • Philippines to fly over disputed South China Sea: Aquino
    Philippines to fly over disputed South China Sea: Aquino

    Philippine military and commercial aircraft will keep flying over disputed areas in the South China Sea despite Chinese warnings over the airspace, President Benigno Aquino said on Monday. "We will still fly the routes that we fly based on the international law from the various conventions we entered into," Aquino told reporters when asked whether the Philippines accepted China's position. The Chinese military last week ordered a US Navy P-8 Poseidon surveillance plane away from airspace …

  • Mitsubishi reaches out to far-flung Batad community
    Mitsubishi reaches out to far-flung Batad community

    A “Dadbod” is a newly coined term now trending in media. It was introduced to the world by Clemson University sophomore Mackenzie Pearson as she refers to any man—father or bachelor—with a physique that’s a “nice balance between a beer gut and working out.” “It’s more human, natural, and attractive,” she adds. For this writer, […] The post Mitsubishi reaches out to far-flung Batad community appeared first on Carmudi Philippines. …

  • A weekend of premium cars
    A weekend of premium cars

    Good news to all luxury car fanatics as PGA Cars, the exclusive importer and distributor of Audi, Porsche, Lamborghini and Bentley cars in the country, will be holding the PGA Cars Premium Festival from May 29 to May 31 at the PGA Center in Global City in Taguig. The 3-day event will showcase PGA’s latest […] The post A weekend of premium cars appeared first on Carmudi Philippines. …

  • APEC ministers to endorse Boracay Action Agenda
    APEC ministers to endorse Boracay Action Agenda

    Trade ministers at the Asia-Pacific Economic Cooperation (APEC) meeting in Boracay, Aklan agreed yesterday to endorse the proposed Boracay Action Agenda to the member countries’ leaders, presenting opportunities for global trade for micro, small and medium enterprises (MSMEs). In a press conference following the conclusion of the APEC Ministers Responsible for Trade Meeting, Trade Secretary Gregory Domingo, who also served as chairman, said ministers agreed to recommend the adoption of the …

  • Talks with China over sea row urged
    Talks with China over sea row urged

    The Philippines should engage China in bilateral talks in its efforts to maintain peace and order at the disputed West Philippine Sea, Sen. Francis Escudero said yesterday. Escudero supports the government’s move to bring the issue before international arbitration but also stressed the need for the Philippines to pursue talks with China. Escudero made the statement after UN Secretary General Ban Ki-moon on Friday called for a peaceful solution to territorial disputes in the South China Sea. …

  • House panel tackles bill on regular disaster drills
    House panel tackles bill on regular disaster drills

    The House committee on national defense is deliberating on a measure mandating the regular conduct of disaster risk reduction drills in educational institutions nationwide. Authored by Camarines Sur Rep. Rolando Andaya Jr., the bill mandates that risk reduction drills be held annually in all educational institutions throughout the country in coordination with the schools’ respective local government units. “The Philippines’ location along the Pacific Ring of Fire and close to the equator …

POLL

Should Aquino be held accountable over the Mamasapano operations?

Loading...
Poll Choice Options