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4 Risks That Can Cripple Your Ability To Service Your Mortgage Debt
Nobody like to talk about a scenario where they defaults on their mortgage and has to face foreclosure. But as an investor, you have to take a look at it to prevent yourself from walking down that road. Not only is foreclosure a disaster for your bottom line, a lot of people see it as an embarrassing situation.
The 4 scenarios that put your ability to repay your mortgage are:
- Loss of personal income
- Spike in interest rates
- Loss of rental income
- Permanent disability or death
Loss of personal income
With world events threatening the global economy with catastrophic meltdowns every few years, business collapses and mass retrenchments are becoming more and more widely accepted as part and parcel of the employment market. You might think that it is near impossible that you could one day walk into the office and find your workstation barricaded by security who insists on escorting you out of the workplace. Well, those who have these real life experiences thought the same way as well.
If you have just bought a million dollar condominium and really feel that this is a possible scenario to plan for, you can sign up for loan protection insurance. These are insurance plans that can cover short term mortgage payments when you are involuntarily unemployed. You will of course have to demonstrate that you being out of a job is not voluntary.
Spike in interest rates
The current mortgage rates in Singapore are so low that property buyers and homes owners are taking it for granted. Buyers are gearing up to the maximum to own as much properties as possible even though prices are starting to make no sense. They might be able to afford the mortgage payment now. But if interest rates spike to historical levels of 5 to 10 times the current levels, a lot of home owners will really feel the strain on their bank accounts.
On a side note, home owners are also haggling over a minute 0.05% with banks when they are already saving over 1 full percentage point from refinancing. By the time the banks makes a firm refusal to negotiate, the interest rates have gone up and the home owner will have missed out on good deals. You cannot really predict how rates will be in future. So if you are making good savings from refinancing your mortgage, take it up or you are paying more money than you have to for your property.
To protect yourself from fast rising mortgage rates, the best straight forward solution is to take up fixed rate home loans. In foreign countries, you can find 30 years fixed rate mortgages available. But there is no such thing in Singapore. Currently, the longest period of fixed rates is 5 years. When you take up such a package, your mortgage will be converted to a variable or floating rate from the . This is when you will be exposed to volatile interest rates. At this point in time, you will have the option to refinance to a fixed rate mortgage again.
Loss of rental income
This is another taboo issue that no property investor wants to talk about. The prospect of vacant apartments is the biggest nightmare of landlords. It is bad enough that you are not generating rental income. The double whammy sinks in when you have to service your mortgage as well. A vacant property is not the only thing to fear, a property with a negative rental yield is as scary as well.
The best way to prevent this is to do your research on the rental prospects of the property before you purchase it. Population growth, job growth, infrastructure will play a long way to determining it’s prospects. If you have already got your feet wet, the avenue you should look into is landlord insurance. This compensates you for loss of rental income due to prolonged vacancies and damages.
Permanent disability or death
In the event where something happens to you, it compromises your ability to work for income, your family will come under great financial pressure to repay the mortgage. The stress multiplies if you are the sole bread winner.
The best way to manage this risk is from income protection insurance. Before signing up for one to protect your family, it is of utmost importance to find out and understand what is covered and what is not. As insurance packages can be customized to suit the individual needs, it is best to have a frank chat with your insurance agent on how to conceptualize a package that suits your needs. Always read the fine print of insurance terms and conditions. Ask your agent to explain points that you do not fully understand. It is much better to pay a premium for a comprehensive protection plan than a cheap plan that has minimal coverage. To supplement income protection insurance, consider reviewing your will on terms regarding the property.