By Eugene Huang (guest contributor)
So you made your first foray into real estate some years back and are now sitting pretty on a property that has appreciated. You pride yourself on that smart decision. With the current depressed property market, as a savvy and sophisticated investor, you have the stamina to hold on to your current property (or properties) but do not want to lose out on the opportunity to ‘buy low’ at this point.
So you want to buy another property, drawn in by what look like attractive prices. Why not? Home values have dropped for more than 3 years now, posting the longest losing streak in 17 years. The view going forward doesn’t look like prices are going to rebound. Also, cooling measures seem to be here to stay.
You should tread carefully. You may be familiar with the rules of the cooling measures, but may not truly understand how far reaching they are. You may face obstacles in getting a loan approved or lack adequate collateral backing. The worst case scenario is to be caught in a situation where you have the financial means but still face with problems buying another property as you have difficulty getting a loan.
Let’s look at the four considerations any buyer should take note of before buying another property.
Consideration #1 – Additional Buyer’s Stamp Duty (ABSD)
First announced in 2011 and revised on 12 Jan 2013, the ABSD was introduced to slow the growth of the property market. It is a tax payable on top of the normal Buyers Stamp Duty when you purchase or acquire a residential property, i.e. it is applicable to both HDB flats and Private Properties. This has significantly increased the initial capital outlay when you are purchasing your 2nd and subsequent properties. One important point to note that if a Singaporean purchases the property with a PR or foreigner, the higher rate will apply.
Consideration #2 – LTV (Loan To Value)
The LTV is the housing loan quantum a bank or financial institution is willing offer as a percentage of the valuation of the property in question. Again, this was not spared from the far reaching impact of the cooling measures to curb property speculation and prices.
The highlights of the current rules are:
- All residential property loans are now only allowed a maximum loan tenure of 35 years
- If you take up a loan of more than 30 years or if it extends past the age of 65, you can either:
- borrow up to 60% of property value if you do nothave an existing housing loan
- borrow up to 40% of property value if you have an existing housing loan
The same rules will be applied to refinancing residential properties. Non-individual borrowers will now have a cap of 40% LTV.
We have not taken property valuation into consideration. With a conservative approach adopted by property valuers these days, the cash portion to be paid upfront will also be significantly increased if the valuation do not meet the purchase price, adding to the burden of an already reduced LTV.
Consideration #3 – TDSR (Total Debt Servicing Ratio)
It is not easy to understand the workings of the TDSR, especially for first time applicants of mortgage loans. However, the objective of the TDSR is to prevent an individual from being overextended because of a property purchase. Whether the property is for investment purposes or for owner occupation, it is to safeguard you from purchasing a property that is above your means. Just remember this magic formula:
Total commitment / Total income <= 60%
Consideration #4 – MSR (Mortgage Servicing Ratio)
MSR caps the amount an individual can spend on mortgage repayments to 30% of a borrower’s gross monthly income (excluding other commitments) and it comes into effect on 12 Jan 2013. Unlike the TDSR, which is applicable to all housing loans, MSR applies to HDB flats and ECs (Executive Condominiums), including the refinancing of these loans. After which, they also have to fulfil the TDSR assessment of 60% where all commitments will be included.
The logic of these measures are simple but the impact to you as a property investor is greater than the sum of the parts put together.
By guest contributor Eugene Huang, who is a co-founder of Redbrick, an established mortgage advisory that assists investors and homeowners in sourcing for the best financing option catered for their needs. They partner with major local and international financial institutions and deal with the banks on the consumers’ behalf. Having come from the local banking industry, Eugene Huang possesses over a decade of proven track record in providing financing solutions for real estate owners. In addition, the team at Redbrick has handled over 2,000 properties and over SGD$2 billion in mortgages. More than just a local mortgage advisory, they also structure and source for both commercial and residential mortgages in Asia-pacific including Singapore, Malaysia, Thailand, Australia, as well as Japan, USA and the UK.