Are you thinking of buying a property in Singapore? Or are you someone who has made that first foray in real estate some years back and is now sitting comfortably on a property that has appreciated? You pride yourself on that smart decision; regardless if the property you bought was for investment or if it is still your residential address. With the current repressed property market, as a savvy and sophisticated investor, you have the stamina to hold on to your current property/properties but you do not want to lose out on the opportunity to ‘buy low' as they say at this point. You want to get your hands on your next property.
Why not? Home values dropped for a ninth quarter in the last three months of 2015, posting the longest losing streak in 17 years, and last year's sales are set to be the lowest in seven years. The view forward doesn't look like prices are going to rebound as well. According to investment management firm JLL, residential property prices in Singapore could fall by 4% to 6% a quarter, going by past correlation studies with the stock market. As property prices typically lag the stock market by one or two quarters, a further correction in property prices in the next few months is not unexpected. To top it all, cooling measures seem to be here to stay for a while.
New & Refinance Home Loans in Singapore
Things To Consider When Purchasing A Property
What is important for you is that prices look affordable and attractive to make an entry into the property market. However, although you are familiar with the theoretical aspect of the cooling measures, you may not truly understand how far reaching they are. Thus you may face obstacles in getting that loan approved or lack adequate collaterals and securitisation.
The worst-case scenario is to be caught in a situation where you have the financial means but you are still face with problems buying another property as you have difficulty getting a loan.
Let us take a deeper dive.
1. ABSD (Additional Buyer's Stamp Duty)
Image source: Inland Revenue Authority Of Singapore
This tax was was first introduced in Singapore in 2011 and then it was revised on 12 Jan, 2013. The ABSD was introduced in Singapore as a measure to slow property investment and speculation.
When you purchase a residential property (HDB flats or Private Properties) you will need to pay this tax on top of the Buyer's Stamp Duty .
This has significantly increased the initial capital outlay when you are purchasing your 2nd and subsequent properties. One important point to note is that if a Singaporean purchases the property with a PR or a foreigner, the higher rate will apply.
2. LTV (Loan To Value)
Otherwise known as the housing loan quantum a bank or financial institution is willing to offer as a percentage to 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.
Here is what it looks like before and after the cooling measures:
Image source: Monetary Authority of Singapore
- All residential property loans will only allow a maximum loan tenor of 35 years.
- If you take up a loan of more than 30 years or one that extends past the age of 65, you can either borrow up to 60% of property value if you do not have an existing housing loan, or borrow up to 30% of property value if you have an existing housing loan.
- The same rulings will be applied to refinancing residential properties.
- Non-individual borrowers will have a cap of 20% 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 does not meet the purchase price, adding to the burden of an already reduced LTV.
ABSD and LTV are only 2 of the suite of cooling measures the government has introduced to curb property prices and speculation. Some may argue that it has worked too well.
The other 2 components of the cooling measures are:
TDSR – Total Debt Servicing Ratio
MSR – Mortgage Servicing Ratio
3. TDSR (Total Debt Servicing Ratio)
It is not easy to understand the working of the TDSR first time around, especially for first time applicants of home 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 buying a property that is above your means. Translating this measure into facts and figures, we just have to remember this magic formula:
Total commitment / Total income
Capped at 60% of the applicant's gross monthly income, this is the maximum percentage of your total monthly debt obligations to gross monthly income.
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 came 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 fulfill the TDSR assessment of 60% where all commitments will be included.
Can You Afford Your Dream Property?
The logic of these measures is simple but the impact to you as a property investor is greater than a straightforward mathematical question.
For those of you considering buying your first HDB flat, you can read about how much money you need for your first HDB flat here.
For those who are thinking of buying a condo, you can read more about how much money you need for a $1.5 million condo in Singapore.