New form of deferred payment - but with a catch

Straits Times - March 11, 2008
By Fiona Chan
New form of deferred payment - but with a catch

Property developers and banks revive old scheme that involves interest absorption

IN A bid to tempt home buyers back into the cooling property market, banks are teaming up with developers to bring back deferred payment - or something like it.

They are resurrecting an older scheme known as interest absorption, which also allows buyers to postpone the bulk of their payments on new homes.

This decade-old plan had been phased out over the last few years in favour of the more popular deferred payment. But it is now making a comeback after the Government pulled the plug on deferred payment plans last October, saying they encouraged speculation in the then red-hot property market.

Though interest absorption may sound like deferred payment, here's the catch: The home buyer has to take up a bank loan at the point of purchase, with a specific bank that has tied up with the developer to offer the scheme.

In contrast, the deferred payment scheme did not require a buyer to take a loan until the home was fully built. This was thought to encourage speculation, as one could buy and resell many unbuilt homes without taking a single loan.

Interest absorption plans offer two extra deal sweeteners. First, the developer absorbs interest payments on the loan until completion. Depending on the loan amount and tenure, this could work out to a few tens of thousands of dollars.

Another perk: Most units sold under interest absorption schemes do not cost more than those under normal payment plans. Developers used to charge slightly more for units sold with deferred payment.

Industry experts say interest absorption plans were introduced in the late 1990s to spur home-buying in the downturn. Then, not all plans had a deferred payment component - in some, developers just absorbed interest until completion.

Only United Overseas Bank (UOB) and OCBC Bank offer interest absorption plans with a deferred payment feature. They have tied up mainly with smaller developers and projects. One is Cosmo in Guillemard Crescent, which is almost fully sold. While final figures are not in yet, developer Fission Development expects about half to opt for interest absorption. 'It's a good arrangement for everyone as the bank does a credit assessment of the buyer...so that takes a lot of the risk out of the equation for the developer,' said Fission managing director Melvin Poh.

UOB is believed to have provided interest absorption with deferred payment for at least five projects launched in the last three months. A bank spokesman said the response 'has always been positive...even before the abolishment of deferred payment'.

OCBC is offering the plan at a few other developments, but declined to comment, citing competitive reasons.

On the whole, interest absorption schemes shift the risk of buyer default from the developer to the bank, said director of marketing and business development Ku Swee Yong, at Savills Singapore.

'I would expect the bank's interest rate to be marked up slightly to account for the extra risk,' he said, adding such plans would help genuine home buyers who may have needed the deferred payment scheme to buy a new home.

Meanwhile, boutique developer Roxy Homes will absorb stamp duty for buyers who pick up a unit at its Ambrosia project in East Coast Road this weekend.