Cap Yourself Properly for Protection
By: Zeng Han Jun, CPCG, Singapore
Landlords are suffering from the lack of tenants right now. Lists and lists of property advertisements displaying “For Rent” sign bombards every property agencies right now. Faced with this kind of market, landlords with outstanding loans have started to fork out their own money for mortgage payments. Many more are arranging to refinance their home loans, reducing their monthly installments, hoping that it can ease away some of the pain.
Before you rush out and start to negotiate for a refinance right now, why not take a moment and think through a couple of things first?
Benchmark Rate
Many people are glad that packages that are pegged to Sibor are easily available. Sibor packages allow for greater transparency with regards to its movements and allow consumers to at least make a guess as to how is it going to shift in the future. Sibor is also at its historical low now and definitely looks very attractive as a benchmark rate. How about in the near future? Well, it is a question that is very difficult to answer. If you or I can answer such questions, we would not have to spend our time working anymore. No one is smart enough to guess how will the rates move, but during the last financial crisis, Sibor occasionally spiked up to 7% or even higher. What if your loan is a 12 month Sibor, and the rate spikes up to 12% on your rates adjustment date? That means you will be paying for interest rate that is more than 12% for the next one year!
Let’s say your home loan is structured at Sibor + 1%, that means that you will be forking out payments at interest rate of 8%, if Sibor turns 7. %. 3 months Sibor has been meandering at levels below 0.8%. How low can it get? How long can it sustain at that level? It is a question that will reveal itself in the near future.
What can I do?
As a real estate investor, the smart thing to do right now is not just to refinance but to refinance with the right kind of financing structure. Certain types of home loans are structured with a capping function. Example; Bank XYZ promotes a home loan with interest rate at Sibor + 1% for the three years, with a 3% cap on the Sibor rate. In the event that Sibor rise to 7%, you do not pay 8%. Instead you will service your mortgage at 4% because your Sibor is capped at 3%.
Stay capped. Have protected real estate investments.
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