New Version Of Deferred Payment Now On Offer

Source : The Straits Times, Mar 10, 2008

IN A bid to tempt home buyers back into the cooling property market, banks are teaming up with developers to bring back deferred payments - 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 payments. But it is now making a comeback after the Government pulled the plug on deferred payment plans in October, saying they encouraged speculation in the then red-hot property market.

Interest absorption works like this: a buyer makes a down payment, typically 20 per cent, and can then defer the rest of the payments until the property is completed.

It may sound like deferred payment, but here's the catch: The homebuyer 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.

This means that if the homebuyer wants to resell the property before completion, he will have to pay a penalty to redeem or cancel the loan.

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 a potential speculator could buy and resell many unbuilt homes without taking a single loan.

Loan aside, interest absorption plans offer two extra deal sweeteners. First, the project developer will absorb the interest payments on the home loan until completion - hence the name of the plan.

Depending on the loan amount and tenure, this could work out to a few tens of thousands of dollars.

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

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

Read the full report in Tuesday's edition of The Straits Times.