Do you need a mortgage broker?

November 24, 2014 3:44 PM SGT

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SINGAPORE: Back in 2007, Eugene Huang was on a plane almost every weekend for a property road show in Hong Kong, Jakarta or Surabaya.

Then 27, he was not a property agent but employed in the mortgage sales department at Standard Chartered Bank, where his portfolio involved providing mortgage financing for high-net-worth individuals.

At the height of the property boom seven years ago, many of the high-net-worth individuals snapping up luxury condos at these weekend roadshows were foreign investors.

“That’s where all the action was,” says Huang.

Home loan applications were processed within a day or two.

“When it came to highnet- worth individuals, you couldn’t take too long, ask too many questions or bother them with too much paperwork,” he explains.

Witnessing the gold rush first-hand, Huang decided to join in.

He bought a 1,119 sq ft unit at Sanctuary Green in October 2007 for $1.23 million ($1,100 psf).

The 522-unit, 99-year leasehold condo developed by GuocoLand had been completed just three years earlier and was still relatively new.

Given its location in Tanjong Rhu, Huang was able to rent out the threebedroom- plus-study unit for $4,300 a month.

Having bought his first investment property, Huang started to track real estate transactions closely.

During the global financial crisis in 2009, he shuddered when he saw the transaction price for a similar-sized unit at Sanctuary Green located just one floor above his own property.

The 10th-floor unit changed hands for $740,000 ($661 psf) in May 2009.

“That meant I lost $500,000 in two years,” he recalls vividly.

When it was time to renew the lease on the apartment a few months later that same year in 2009, Huang discovered that he could renew the lease for only $3,300 a month.

But he hung on to the property and sold the unit for $1.3 million ($1,151 psf) in 2011, after prices started to recover.

“I thought I didn’t make any money, but after analysing the numbers, I realised I had made a net profit of about $80,000,” he says.

The key difference was in the amount of leverage he took, he says.

“Real estate investment doesn’t make sense without some leverage.” Undeterred, he has since purchased half a dozen properties in the last three years.

Three are condominium units in Singapore: a three-bedroom unit in Simei; a one-bedroom unit on Upper East Coast; and a two-bedroom unit at Lorong Chuan, which is also his primary residence.

His most recent purchase was a condo in Kuala Lumpur, where construction is underway and expected to be completed by next year.

He also bought two-titled strata shop units in a commercial complex on Beach Road.

Property tracker He soon found that it was not easy to keep track of half a dozen properties compared with just one.

“Property agents would call to ask about the property, what the block and unit number was, when the tenancy was expiring, whether I still fell within the seller’s stamp duty period, and I realised I didn’t always have that information at my fingertips,” says Huang.

He decided he needed to create a portfolio tracker to help him manage his properties.

He even included a calendar feature that alerts him when the tenancy on his properties are due for renewal, or when the pre-payment penalty on his various mortgages expires and he can then shop for a new loan to refinance his properties.

The opportunity to turn that portfolio tracking system into a business came when the total debt servicing ratio (TDSR) loan framework was introduced in June last year, and it came on top of seven earlier property cooling measures that included hikes in stamp duty, increased cash payment and reduced borrowing limit for those buying their second, third or subsequent properties.

The TDSR had effectively changed the game as most property investors know it.

To illustrate how one is affected by the TDSR, Huang cites the example of a buyer in his 30s who is looking for a $2 million private condo and taking a 30-year loan at a loan-to-value ratio (LTV) of 80%.

That works out to a loan of $1.6 million.

Huang estimates that monthly mortgage payments will be $6,000.

As the TDSR limit is 60% of gross monthly income, the homebuyer has to be earning a monthly salary of $10,000.

And that is assuming there are no other outstanding financial obligations, such as credit card debt or car loans, says Huang.

If, for example, the homebuyer is still financing a car at $3,000 a month, his gross monthly salary has to be at least $15,000 to qualify for the $6,000 monthly mortgage payment under TDSR.

If it is an investment property, and there is no other source of income except the rent,the property will need to generate a monthly rent of $14,500 for the bank to consider it “self-sustaining”.

This is because rental income is considered variable income, and banks have to take a 30% haircut under TDSR regulation, explains Huang.

Alternatively, the property investor would have had to show that he has liquid assets in the form of cash or stocks of $1.6 million, or pledge $480,000 to the bank for four years, he adds.

‘Bamboozled’ “Most investors are very shocked by these numbers,” Huang continues.

“So, it doesn’t mean that, if you have a portfolio of 10 properties that are all rental-yielding, you can get a mortgage.” Seeing so many people caught in a situation in which they could not buy a property or refinance their existing ones, Huang felt that he could better serve his clients as a mortgage broker.

In mid-2013, he left Standard Chartered Bank after eight years and where he was last head of mortgage sales, and co-founded Redbrick Mortgage in early 2014.

He says, “Every property owner or investor needs some form of financial support from banks — be it to keep interest costs low by refinancing or when they need to purchase a new property.

My new role is to bridge the gap between banks and borrowers.” He now gets referrals from real estate agents and fellow bankers who cannot provide the kind of financial solutions their clients need.

Most of the people Huang sees at Redbrick are property investors with multiple properties, typically ranging from three to six properties up to one who owns 82 properties in Singapore.

For example, Huang has a client who is a tailor by profession but a big-time investor who owns 40 properties jointly with a group of friends.

Many of these properties are strata- titled units in commercial and industrial buildings that are leased with rental yield of about 5%.

One of the loans on the industrial properties was approaching the third year of financing, where the interest rate would jump from 1.5% to 6%.

As the property was held in his name, and owing to the TDSR regulation, he could not refinance the property.

“I told him to pay the 3% stamp duty and switch it to his company name so that it wouldn’t be subject to TDSR, and he could save on his interest payments,” says Huang.

Many seasoned property investors in their 50s and 60s are also caught in such a situation.

Take, for example, a 60-year-old who has sold some of the assets in his portfolio and is now looking to purchase a residential property with a bank borrowing of $1 million.

He would be able to get only a five-year mortgage at best, as the age limit is 65 years.

Monthly mortgage repayment on the $1 million property will translate into $18,000 a month, which means he needs to show a monthly income of at least $30,000 under TDSR.

Most 60-year-olds are, however, probably either retired or planning to retire, reckons Huang.

If they are no longer earning a monthly income, they would need to show that they have liquid assets of at least $2 million in cash or foreign currency and stocks.

It is not much different for those in their 50s, who need to show cash of $1.5 million to $1.8 million.

“A lot of these investors say, ‘If I had $2 million, I wouldn’t need to borrow $1 million,’” he says.

That explains why transaction volume has shrunk in both the primary and secondary markets.

In the year before TDSR was imposed, quarterly newhome sales volume was 5,000 units on average, or three times the 1,596 units recorded in 3Q2014, according to JLL.

New private home sales in 3Q2014 were also the lowest since 4Q2008, adds JLL, which marked the onset of the global financial crisis.

Even the HDB market has not been spared, as curbs such as the reduction of the mortgage service ratio (MSR) capped at 30% was also introduced in January 2013.

This basically means that the monthly mortgage repayments on an HDB flat cannot exceed 30% of one’s gross monthly income.

“The measure has reduced financing available to HDB homebuyers, resulting in weaker home-buying,” says Nicholas Mak, executive director of research and consultancy at SLP International.

“With lower demand due to the cooling measures, resale prices of flats continue to decrease.” However, most sellers realise how weak the HDB resale market is only when they put their property up for sale.

Huang has a client who is looking to sell her five-room HDB flat in Bishan.

“She thinks it is worth $900,000,” he says.

Based on the MSR limit of 30%, to afford a $900,000 HDB resale flat, a couple would need a combined household income of $15,000 to $18,000 a month.

At this income level, the couple would be able to buy a $2 million private property, estimates Huang.

“This is because TDSR is 60% of gross monthly income, while MSR is half of that, at 30% of gross monthly income,” explains Huang.

Therefore, MSR has had a much bigger impact on demand for larger HDB flats, as buyers have to be “even more creditworthy” than those buying a private property, he adds.

While Huang started Redbrick with the intention of helping his clients grow their wealth, he finds more people coming to him to help them resolve such issues in their existing property portfolios.

“It’s a bit of a ‘Catch-22’, where people are looking to buy or refinance, but can’t because of the current framework,” he says.

Huang likens his role to someone who “tells you where to park your income and where to park your liquid assets so that you will look very creditworthy to the bank”.

He adds, “We will also help you structure your portfolio so that banks will continue to grant you leverage while being in line with regulations.”

This article appeared in the City & Country of Issue 649 (Oct 27) of The Edge Singapore.

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