Borrowers need reality check

SINGAPORE - The key element determining a person's ability to pay his mortgage is income, whether it is from employment or from rent ("One in 10 borrowers overstretched, warns MAS"; Wednesday).

Rising interest rates can be managed if there is sufficient income, and if it grows in tandem with the rate increases.

Trouble begins if this does not happen. All it takes is for one spouse to be retrenched, or go through a period of unemployment, to spark a financial crisis in the household.

The same happens if properties are unoccupied or if rents do not cover mortgage payments.

There has not been much discussion on expected rental trends. This is an important element in determining debt-paying ability, as many people have bought additional properties on the assumption that the promised rental yields are better than the returns from alternative investments.

In many cases, they will be totally reliant on rental income for mortgage payments.

But we know that there is a huge supply of completed units coming on-stream in the next couple of years. Many are in the outlying areas, and several are shoebox units or tiny apartments.

These new locations and designs are, so far, untested in the rental market. There is the real possibility, particularly with slower growth in the labour force, that these new units will go unoccupied when they are completed.

Owners will be hard-pressed to meet their payments if this happens.

Property owners need to do a reality check and evaluate their vulnerabilities in the face of such uncertainties. They need to assess their employment and job security.

Nothing is worse than being unemployed and having outstanding mortgage loans.

They need to think of alternative scenarios, such as whether they can rent out their properties, the expected interest rate increases and how these will affect their cash flow.

Lastly, they must look at what cash reserves and resources they have available to ride out a rough patch that can last several years.

If necessary, they should lighten their debts, perhaps even taking a manageable loss now as a preventive step.

Kuo How Nam


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