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Always bear in mind that interest rates can fluctuate. For example, the three-month Sibor, which has a significant impact on mortgage rates, rose from 1.5% at the start of 2005 to 3.25% by year's end.

Prospective buyers should ask hard questions about their buying objective (eg, investment, rental yield, primary residence, etc), affordability (eg, loan quantum, cashflow situation, etc), and interest rate trends.

They might also benefit from speaking to experienced mortgage specialists who can objectively advise on an entire spectrum of pertinent issues, rather than push a particular mortgage package.

The first thing a potential buyer needs to determine is the purchase objective, as the considerations under different objectives can differ dramatically. A buyer acquiring a property as an investment or for income (rental yields) will have different considerations from a buyer using the property as a residence.

For example, the interest rate trend is more important for an investor, as it affects rental yields. Also, the possibility of an en bloc sale in the target property could be attractive to the buyer interested in capital gains, but not necessarily so to a buyer who wants to live in the property.

A word of caution: In the current environment where en bloc sales and a slight recovery in the property market are generating a lot of interest among property market participants, it is important not to simply follow the crowd and plunge headlong into acquiring properties.

Exercise prudence

If you are considering property as an investment, you may want to exercise prudence, since property investments are typically big-ticket items that may affect your financial situation significantly. Careful planning will help avoid 'cash-poor, asset-rich' situations. Remember, it is always good practice to diversify risks across different asset classes of equity, bonds, cash and alternatives (such as real estate, hedge funds, etc). If in doubt, you should consult a professional financial adviser.

The amount you borrow is a very important consideration, as many related factors could impact your ability to service the loans in future. Depending on your personal situation (eg, monthly cashflow, life stage, etc) there are various permutations as to how much leverage you should use in financing the property, using cash and/or CPF. In most cases, a mortgage specialist will be able to help you understand what the optimal level of leverage should be, based on how much you can afford to pay comfortably.

We urge property buyers to always bear in mind that interest rates can fluctuate. For example, the three-month Sibor (Singapore interbank offered rate), which has a significant impact on mortgage rates, rose from 1.5 per cent at the start of 2005 to 3.25 per cent by year's end. Some homeowners may find it difficult to make the increased interest or capital payments, especially if they have not made adequate allowances for any rise in rates.

Look beyond 'teaser' rates

This scenario is particularly important if you are considering variable rate packages. When computing monthly instalments, buyers should always assume a future mortgage interest rate (eg, the board rate) instead of looking at 'teaser' rates that apply for the first one or two years of the loan.

Our experience shows that buyers are either worried about the impact of future interest rate rises, or they are not concerned at all. The former would typically opt for fixed rate packages, while the latter will choose variable rate packages. In the light of the current interest rate volatility, we are beginning to see more buyers opting for fixed rate packages. In fact, since launching our five-year fixed rate package, our monthly sales volume has quadrupled.

Consumers can also consider some partial interest rate hedging mortgage products such as cash management home loans (typically a combination of a plain vanilla home loan, checking and deposit account). Funds in the deposit account earn interest at a rate that is pegged to the mortgage rate, which helps mitigate the impact of interest rate rises. Even in situations where there are no increases in rates, these funds will earn higher interest compared to ordinary deposit accounts, which will help to pay off the home loan faster.

With the availability of 90 per cent loan-to-value (LTV) mortgages, we have begun to see more younger, first-time entrants making forays into the property market. By taking the opportunity to establish and build equity in their first homes earlier, this group of buyers is also promoting more liquidity in the market.

A 90 per cent LTV mortgage usually comes with higher interest charges. Buyers may experience tight money outflows in the initial years due to the higher interest rates, but they will begin to feel less cash-strapped, and will even be able to make capital payments from the third year onwards, as their income levels increase over time.

The ideal tenor of the mortgage depends on your personal financial situation and cashflow needs. Generally, the longer the tenor, the more interest you pay, although the trade-off here is that you will have more cash to spare in the meantime.

Plan cashflow carefully

We advise customers to plan their cashflow carefully and ensure that, among other things, they maintain a debt service ratio (monthly installment divided by monthly income) of, say, not more than 30 per cent. This will help ensure they remain liquid and have sufficient cash left for retirement, their children's education and savings.

Buyers often overlook the predictability of their income streams, especially when consumer confidence is high, and market conditions are exuberant. Many buyers also tend to forecast increases in their income stream or earning power, rather than consider scenarios where their income may be reduced, and making forecasts of how they may make mortgage repayments in such circumstances. Doing the latter will give you the peace of mind that you will be able to service your loan repayments comfortably.

Buyers should consider other costs associated with acquiring and maintaining a property, to form an accurate cashflow budget, and minimise the surprises. These costs include stamp duty, insurance, legal fees, monthly maintenance fees, etc.

And if you face difficulty making repayments, it is good practice to maintain a dialogue with your bank manager, so that both parties can work together to find a solution.

The writer is business director, secured assets group, Citibank Singapore Ltd