Friday, March 12, 2010

Property Purchase - Update

The latest property purchase is due to complete next week.

We have arranged financing for 50% of the purchase price. The key terms are:

1. interest rate: 1 month HIBOR + 0.65%
2. interest cap: Prime -2.75%
3. cash rebate: 0.6% of loan amount
4. early repayment penalty: partial during first two years
5. term: 20 years P+I

We have also found a tenant for the carpark. The carpark license will commence on completion so that there will be no break in rental income.

2 comments:

Andrew said...

Hi there,

You made your most recent purchase with a HIBOR mortgage.

Is there any downside to this type of mortgage given that it's capped?

Your thoughts would be appreciated.

Andrew

traineeinvestor said...

Hi Andrew

Historically, HIBOR mortgages have been much cheaper than prime based mortgages. This is hardly surprising when you consider that HIBOR is set by the market while the prime rate is set by the banks. While the spread between HIBOR and prime mortgages has narrowed, it is still more than 1%.

The downside is relatively limited to situations where the HIBOR rate spikes sharply and on a temporary basis - in which case the cap kicks in and the downside is limited to the difference between a prime based mortgage and the capped amount. Given that this is less than the current difference between HIBOR and prime rates, this sort of thing would have to happen a lot in order for the HIBOR product to end up being more expensive.

Cheers
traineeinvestor