Things You Should Be Aware of in Commercial Property Purchases

by SUSAN TEO and PAUL HO

With the host of cooling measures rolled out in the residential market by the Singapore's government to avert a property price bubble, investors are gleaning more investment potential in commercial properties. This segment of properties is exempted from Additional Buyer's Stamp Duty (ABSD), Seller's Stamp Duty (SSD) and restrictions on foreigners' ownership – all of which affect the residential market.

In Singapore, there are two ways to buy a commercial property:

• As an individual or;
• As a corporation [via private limited or limited liability partnership (LLP)]

The subsequent sections proceed to highlight key points a budding investor in the commercial property landscape should take note of.

No utilisation of Central Provident Fund (CPF)

If you are making the purchase as an individual, do bear in mind that you cannot dip into the savings in your Ordinary Account of the Central Provident Fund to settle the downpayment or monthly loan instalment for the commercial property.

This means the downpayment has to be wholly funded by cash.

For the loan repayment, you will have to be prepared to incur cash outlay if the rental yields are inadequate (assuming that you are planning to lease out the property).

Property tax

Same as for a second residential property, or an only residential property that is wholly rented out or left vacant, the tax is a flat 10% of the annual value of the property.

But if you fail to lease out the commercial space, you may apply for a vacancy refund of the property tax. This vacancy refund also applies to a residential property.

Goods and services tax (GST)

Unlike for residential properties, the buying of commercial spaces from a GST-registered company is subjected to a 7% GST. An individual making the purchase will have to bear the GST himself.

However, if you are a GST-registered company - all companies with a turnover exceeding S$1million have to register for GST – you can make claims for the GST incurred on your purchases. Thus shrewd individual investors may set up companies expressly for a financial transaction, termed as Special Purpose Vehicles (SPVs), to circumvent the GST payment.

For companies with turnovers below S$1million, GST-registration is on a voluntary basis, subjected to certain requirements. Do note that being GST-registered comes with responsibilities. Check out what these are at IRAS.

Notably, the GST cannot be financed by the property loan. Buyers will have to stump up cash for this.

Rental yield and capital gains opportunities

It is estimated by Colliers Internationals that the yearly average gross yield of commercial spaces approximates 5%, compared to 2-3% for residential property. However, this higher gains can be offset by the steeper maintenance cost and renovation works generally required by tenants.

Generally, the maintenance charge for a commercial unit is expected to be higher than for a residential property. Also, more may need to be splurged on basic setup, particularly for shop units leased out for business.

An exception are HDB shops with their lower maintenance fees of S$170 to S$250. But these properties tend to come with more restrictions such as the type of businesses permitted. Applications must also be made for renovation.

Still, small supply and strong demand can drive up the asset value of strata commercial property, making them worthwhile buys.

In land-scarce Singapore, strata-titled shops/offices are in limited quantity because most of the commercial spaces are owned by real estate investment trusts (REITs), and many of these REITs are in turn owned by the Government through proxies. As of 4Q2011, the supply of strata-titled offices in Singapore is estimated to be of 11.05 million sq ft, making up 14.2% of the total office stock (Bright Spot in Singapore Property Market: Strata-titled Office, Colliers International,pg 2). The stock of strata-titled shops also faces a similar small supply.

In addition, the slew of regulations in the residential market has diverted investors' attention to the commercial sector. Together with today's low interest rate environment, the two have fuelled demand.

Thus investors can make capital gains through direct sales.

Some investors are also looking toward en-bloc sales to make profit. In April 2012, in collective sales, strata office units at Parkway Centre and Burlington Square sold for $1,043 per sq ft and $1,318 per sq ft, respectively.

Besides capital gains, investors maybe hoping to profit from rental yields. However, official statistics on the occupancy rates for strata-titled shops and offices are not available. This makes reliable estimation of rental demand in the past, present and future difficult. Hence investors should be cautious if they are looking to profit from this avenue.

All in all, with more supplies coming on-board - either from strata or non strata developments - downward pressure on property values and rental is possible. Hence, only selective buys are recommended.

Tenure

Commercial/shop spaces in Singapore usually comes with 30-, 60-, 99-, or 999-year lease. Some may be freehold. For 99-year and shorter leasehold units, buyers should be mindful that financing institutions may quote a lower loan quantum for units running low on their lease.

Loans

Borrowers for commercial properties are allowed to take a loan-to-value ratio (LTV) of up to 80%, even with outstanding residential mortgages. The maximum loan tenor typically stands at 30 years. However, loans for commercial property tend to command a higher interest rate relative to residential property loans. Like the latter, these loans come in

• Fixed Rate Package
• Variable (Floating) Rate Package

The requirements for a commercial loan, however, are more stringent. For example, the LTV ratio is contingent on whether the property is for owner-occupation or investment, with the latter subjected to stricter criteria by some banks. The next section explains the approval conditions in greater detail.

Credit worthiness and approval for commercial loans in Singapore

For purchases made under your name only your income, outstanding debts and credit history will be assessed. The maximum LTV ratio for a commercial mortgage is set at 80%, even with existing housing mortgages. But financing institutions will take a holistic approach in deciding whether to grant you a 80% loan.

For purchases made under a private limited or LLP company, the financiers will evaluate if the company has a cash flow record over the past few years that is sufficient to fund this investment. For instance, a company earning a monthly profit of S$15,000 deposits it into the company's account in a timely manner, the lenders can, thus, lend up to 60 to 80% (typically) of this S$15,000. In other words, you can obtain a loan up to 60 to 80% of the debt servicing ratio (DSR). This is much higher than the DSR for residential property bought by an individual.

Conversely, buying under a private limited or LLP company without adequate cash flow or profit (or if the companies are special purpose vehicles), may result in the banks requiring that the directors guarantee any loans taken by the company under their individual capacity. The directors may also need to be Permanent Residents or Singaporeans. In many cases, these directors will need to furnish documentary proof that most of their incomes are derived from that company. If they earn their income from elsewhere, some banks will not grant the loan even with them as guarantors. While others may.

From time to time, credit officers of the financiers will impose new rules and conduct additional documentation checks. Often, credit officers may ask for more supporting documents if they want to do tighter cross checks.  

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References
Michelle Tee and Koh Siok Hui, Bright Spot in Singapore Property Market: Strata-titled Office, Colliers International White Paper March 2012, Web

Housing Loan Pitfalls that You Should Watch Out For

by SUSAN TEO

Take a minute to peruse this article and it may save you from financial woes and disappointments later.

Lower-than-expected valuation

Before you put down the booking fee, also known as option fee, to obtain the option to purchase for a residential property, you might want to secure an approval-in-principle loan first. This is to ensure that you have the financial resources to close the deal as part or all of the booking fee can be forfeited if the option to purchase is not exercised within the validity period. For a resale private house and a resale HDB flat, the booking fee are 1% of the purchase price and S$1000, respectively. All of it will be forfeited if the option to purchase is not exercised. For a new completed or under-construction private residential property, the fee is 5% to 10%, 25% of it will be forfeited shall the deal fall through.

In addition, the valuation of the property may fall unexpected between the time the option is obtained and a loan is found. For example, the purchase price you agreed on is $1.5m, but when you have obtained the loan the valuation of the property has dropped to $1.2m (this can happen during a financial crisis). Assuming that you are eligible for a 80% LTV, you thought you could obtain financing up to $1.2m, but because of the lower valuation you can only secure $960,000. If you do not have the means to make up for the $240,000 difference, you cannot seal the transaction.

Do note that you are allowed to change financiers even after obtaining an approval-in-principle loan from a financier. You do not want to be caught flat-footed, so try securing an in-principle approval before laying down the booking fee, you can still shop around for a better loan if property valuation has not fallen.

Lawyers or bankers recommended by property agents

You should exercise caution with regard to lawyers or bankers recommended by an agent. Sometimes the agents get a commission from such recommendation.

As a result, the lawyer may charge you a higher than normal fee to make up for the referral fee paid to the agent. Or the banker may not offer the best loan that fits your financial risk profile.

Conveyancing lawyers

You are only allowed to use a conveyancing law firm that sits on your financing institution's list of firms. However, some conveyancing law firms sit on some banks' lists but not others, so if you select these firms you may have to incur extra legal costs if you switch to another bank later. This is because if the conveyancing lawyer is not on the panel of the new financing institution, you will have to change the lawyer and the new lawyer will charge additional fees for taking over the legal work.

So always try to opt for a conveyancing lawyer that sits on the panel of all the banks in Singapore.

Extra loans before disbursement of mortgage loan

Avoid taking any new loan before applying for a home loan. Banks assess applicants' debt-to-service ratio (DSR) before granting a loan. This is to make sure that borrowers have the financial means to service all their debts.

Going a step further, this also applies to the interim period after obtaining an in-principle approval but before loan disbursement. This is because the financier still has the right to pull back the loan or change the conditions of the loan anytime before loan disbursement. A case in point:

A week after Person A had obtained an approved-in-principle home loan, he went to purchase a car and financed it with a car loan. Two weeks later, the financier who was to grant formal approval for the mortgage discovered Person A had taken a car loan too. Consequently, the financier substantially reduced the loan quantum. Because of the reduction, Person A could no longer afford the house so the deal fell through and he had to forfeit the 1% booking fee.

Therefore it is important to check with a home loans expert before taking on a new loan obligation.

Changing jobs

On a last note, avoid job changes before applying for a mortgage loan. Some banks want applicants to be in the same job for a minimum period of time before loan approval. This demonstrates to the bank that you have a stable job and income; hence the means to repay the loan.  

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What an Expatriate Need to Know About Home Ownership in Singapore

by SUSAN TEO

Singapore is a multi-racial island city that welcomes foreigners. Furthermore, the country's political stability, low crime rate, high efficiency and absence of natural disasters together have made Singapore an ideal workplace and investment haven for foreigners. Thus, they may contemplate buying a residential property here for investment or owner-occupation. However, due to the limited land in Singapore, the Government has to impose some rules to restrict foreigner's acquisition of residential property. This article will outline some regulations surrounding foreign home ownership in the country.

Additional Buyer’s Stamp Duty (ABSD)

Since 8 December 2011, foreigners who want to acquire a residential property here has to pay an additiona1 buyer's stamp duty (ABSD) on the higher of the total purchase price or market valuation. The ABSD rate has been revised from 10% to 15% from 12 January 2013.

Previously, foreigners only have to pay a Buyer’s Stamp Duty, on the higher of the total purchase price or market valuation, of

1% on first $180,000 

2% on next $180,000 

3% for the remainder

However, citizens and PRs (Permanent Residents) of a few countries that have signed free trade agreements (FTAs) with Singapore are exempted from ABSD. These are

Nationals and Permanent Residents of:- Iceland Liechtenstein Norway Switzerland Nationals of:- United States of America

Source: IRAS

In addition, married couples that have a Singapore citizen can enjoy a full or partial reduction in ABSD for their first property purchase. Refund of ABSD is also possible for the second property purchase if the first property is disposed of within 6 months from the date of purchase. For more details about remission and the application process, please visit Inland Revenue Authority of Singapore (IRAS) website (IRAS, “Remission/ Refund”).

To offset the cost of ABSD, some developers may offer a rebates of the ABSD.

Housing types

HDB
While about 80% of Singapore's population dwells in public housing, or what is commonly known as HDB (Housing Development Board) flats. Foreigners are not eligible to purchase this category of housing as these are subsidied flats. An exception applies if you have a Singapore citizen spouse. Under HDB's Non-Citizen Spouse Scheme, a SC-Foreigner couple can buy a HDB flat from the resale market. Please refer to HDB website for the details (HDB, “Eligibility To Buy: Non-Citizen Spouse Scheme”).  

Non-landed

Single foreigners or foreigners with non-Singapore citizen spouse have their choices limited to strata-titled private residential properties only. For this class of property, they can purchase non-landed ones without any special application. However, if a foreigner wants to acquire all the apartments within a building or all the units in an approved condominium development, he must first obtain the approval of the Minister for Law.

Landed

Landed properties fall under the purview of the Restricted Residential Property Act. Foreigners acquiring “detached house, semi-detached house, terrace house (including linked house or townhouse)” (SLA,“Foreign Ownership of Properties”) have to obtain prior approval from the Minister for Law. And the land area of the property cannot be more than 1,393.5 sq metres (15,000 sq ft). The application process usually takes 6 weeks and is subjected to approval.

For the full details of the restrictions governing foreign ownership of properties, visit the Singapore Land Authority (SLA) website (SLA,“Foreign Ownership of Properties”).

Sales of the landed property is allowed only after a minimum occupation period of three years [SLA, “FAQ on Foreign Ownership of Land under the Residential Property Act (The Act)”].

Landed: Sentosa Cove

Since August 2004, Singapore relaxed its foreign ownership rules to allow foreigners to purchase landed properties on Sentosa Cove with an express process of 2 days. Applications have to be made with the Land Dealings Unit. Further there is no minimum occupation period.

Whether the landed residential property is on Sentosa Cove or elsewhere, it must be owner-occupied (ie. No renting out) and the foreign owner is only allowed to own one restricted residential property at any one time in Singapore.
  
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If Your Home Loan is Turned Down, ...

By SUSAN TEO

In this article, you will find some common problems that may cause financiers to reject your home mortgage application and suggestions to resolve these issues. But this is not an exhaustive guide of the factors for non-approval nor does it promise sure-work solutions that will improve your chances of getting a home loan. Thus you may prefer some professional advice from a mortgage consultant to assess your financial condition.

Reasons for rejection

1. Poor credit standing

Most financiers will suss out the credit history of borrowers before granting a home mortgage. Do note that the repayment history, like default and late repayment, on most of your credit facilities are recorded by the Credit Bureau (Singapore), and released to credit providers on the Bureau.

Even records for closed accounts are kept. Any closed account, with defaults in payment, that comes with the status of full or negotiated settlement will be shown in your credit report for 3 years from the date of settlement.

Financiers consider your past repayment history as an indicator of future behaviour. If you have a poor credit score, financiers will be more cautious in lending. Even if they do lend, the loan quantum may be smaller.

2. High DSR (debt-to-service ratio)

DSR = Monthly Debt Service / Monthly Gross Household Income

Before loan approval, the financing institution will study your total outstanding financial liabilities and income level, to see if you have the means to service all your debts.

An excessively high DSR will almost certainly lead to rejection.

With the latest cooling measures on 12 January 2013, the mortgage serving ratio (MSR) is capped at 30% of a borrower's gross monthly income for loans by private banks, and 35% for HDB concessionary loans. Previously for HDB concessionary loans, the MSR was 40%, and for private loans there were no cap.

3. Employment history

If you are a fresh graduate who has only started work for a short time, you can be rejected because you have not demonstrated stable income-generating ability. Financiers take long-term stable employment, usually two years, as proof of payment ability.

4. Short reminding lease

A mortgage loan is secured against the property. The property is the collateral, whereby in the event of a default, the financiers will foreclose the mortgage. If the property you wish to purchase has a short reminding lease, it cannot be sold for much hence the financing institutions may not be able to recover all the loan disbursed.

5. Low valuation

Any factors that will seriously depreciate the valuation of your property can result in loan rejection. The house could be sitting on an undesirable location, in a dilapidated building, or in a location affected by future planning.

How to obtain an approval?

1. Improve credit standing

Pay off any defaults and make prompt payments from now on. This will help to pull up your credit score. To read more about credit score, you can browse “Tips to Make Your Mortgage Financing a Breeze”.

2. Longer loan tenure and lower loan quantum

Stretch your loan tenure and reduce the borrowing amount, this will reduce the monthly installment repayments, and lower the DSR.

3. Use a different lender

Some lenders may have more lenient borrowing requirements.

4. Get a guarantor

In the event of a default, the financing institution can hold the guarantor accountable for the loan repayment.

5. Combine incomes

Apply for the loan with someone who is working and drawing a salary. For instance, your spouse or a close relative. The financier will have greater confidence of loan repayment as there is now a higher income.

Whatever the factors affecting loan approval, remember that at the end of the day, the financiers just want to ascertain that you have the ability to make prompt repayments.

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A Quick Guide to Being a Guarantor for a Home Loan

By SUSAN TEO

A guarantor or co-signer to a loan is a third party in a loan contract. In the event of a default by the borrower the co-signer is legally obliged to repay the loan. Thus, the decision to be a co-signer shall not be taken lightly.

Things to take note of

1. Why does the borrower need a co-signer?

More often than not, you might feel compelled to sign on the dotted line out of a sense of helpfulness or loyalty. However, when it comes to such a major financial undertaking, you will have to adopt an impersonal stance.

You must find out why the borrower needs a co-signer. If it is because he has a poor credit history, you should be wary about co-signing because if he is delinquent in his payment you will be liable for it.

2. Understand the responsibilities and terms of a co-signer as it is stated in the loan contract.

You should scrutinise the contract and understand the legal jargon.

As the person who asks you to co-sign is often a close friend or relative you trust, you may believe that he will make his repayment on time so you have no worries. Consequently, you gloss over difficult to understand terms in the contract, please do not run this risk. There are many home loan specialists, who will be happy to explain the terms of the contract to you for free. Try the professional and friendly mortgage consultants at www.iCompareLoan.com or Property Buyer.

Ramifications of co-signing

1. Affect your debt-to-service ratio (DSR)

Although you are not required to make any repayment on the loan unless the borrower defaults, financing institutions will still consider it as a financial liability when you apply for a loan yourself. Financing institutions may require you to declare if you are a guarantor.

Thus, the loan you are co-signing will add to your DSR and you may face difficulties in obtaining a loan. Or if you do obtain one, you may have to be contented with a lower loan quantum or higher interest rates (since banks with the best rates may not want to lend to you).

2. Added Financial Payments

If the borrower runs away, become insolvent or is not prompt in his monthly payment, the financier will turn to you to service his debt.

Do note that being a guarantor will not be reflected in the credit report of the Credit Bureau (Singapore). So even if the borrower defaults or makes late payments, it will not have any bearing on your credit score.

3. Removal of co-signer's status

Unfortunately, being a co-signatory is almost cast in stone. It is impossible to remove yourself from the contract without the permission of both the borrower and the bank. Further, there are legal fees involved for removal.  

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Taking a Mortgage Loan for the Self-Employed

by SUSAN TEO

This brief article discusses a few issues you need to be aware of if you are a self-employed person who is looking to take a home loan.
 

Good credit standing

As a self-employed person, you are deemed as a higher risk potential. Unlike an employee, there could be greater income and debt fluctuations since you are the person responsible for the business. Hence you need to demonstrate a favourable credit history to make up for the cash-flow instability.
 

Stable business

You need to be in business for at least two years because financing institutions require the latest 2 years of tax bill (Notice of Assessment) for application. If you have only been in business for a year, you can take a loan based on one-year Notice of Assessment and asset-based lending [not applicable to Housing Development Board (HDB) flat]. But still loan approval is case-by-case and not all financiers offer asset-based lending. To find out more about this form of loan, please look at “Property Buyer FAQ: What is Asset Based Lending in Singapore Property Lending?” In addition, financing institutions base the loan quantum on the income stated in the Notice of Assessment. Therefore, if you have claimed for tax deduction, this will lower the income in your tax bill.  

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What is the True Interest Cost for Buying a Property?

by PAUL HO
Many self-styled Finance or Property gurus have touted some universal motherhood statements to people who are awed by their "brilliance" or fanfare.  

"Do you know that you could end up paying more interest than the price of your house? For example, if you were to take a 100% loan for a property priced at $2m. At an interest rate of 5.30404% p.a., with a 30-year tenure, the total interest payable is $2,000,000.05.”

The guru asked. And soon, he/she shows you an interest table. And bingo!!! Everyone claps in agreement. They have just been shown financial utopia. How true is that?

Sensationalization: trivial or true financial wisdom? 

These kind of "education" smacks of sensational half truths. At the same time, they do not fully impart knowledge to people about the cost and benefit of debt. Total avoidance of debt hurts your financial well-being as you may miss out on many investment opportunities while total acceptance of debt could give you very high returns and make you a multi-millionaire or a bankrupt in a very short time. In this study, we try to limit this debt issue to Singapore property investment for simplicity.

As an illustration of home loan interest costs: - 

The scenario that these finance or property gurus often use applies only to a very narrow set of conditions. Only when interest rates are higher than 5.30404% and inflation must be ZERO before the total interest (at present value) that you paid will be higher than the price of the house. Let us assume a loan quantum of $2,000,000 and the property price is also $2,000,000. (For simplicity's sake)

• Tenor = 30 years
• Home Loan Interest Rate = 5.30404%
• Assumed Inflation = 0%
• Total Interest Paid = $2,000,000.05 (Nominal value)
• Total Interest Paid = $2,000,000.05 (Present value)

Only at a rate of 5.30404% and above will the total interest exceed the price you paid for the house. However as you can see, this is on the condition that the inflation is 0%.

Therefore, it is costly only if inflation is zero.

This is because it makes no sense to compare the value of $2,000,000 which you have to pay now to interest payments in the future. It’s not a fair comparison. You have to bring these future costs back to the present for a valid comparison.

How does inflation affect your property investing decision? 

If inflation is not ZERO, but 4.5%, then the total interest paid, adjusted for inflation to reflect the present value will be $1.291m and not $2m. Therefore, it will be relatively cheaper.

Of course, this is the official inflation figure, if you are currently about to purchase a 2.5m dollar landed property, it is evident that you are fairly well off.

At this wealth bracket, your consumption pattern may be different (perhaps higher) from that indicated by the Consumer Price Index.

• Tenor = 30 years
• Home Loan Interest Rate = 5.30404%
• Assumed Inflation = 4.5%
• Total Interest Paid = $2,000,000.05 (Nominal value)
• Total Interest Paid = $1,291,258.96 (Present value)

Therefore the interest cost at present value is actually much lower - $1,291,258.96.

If interest rates stay low at 2.5% throughout the 30 years

• Tenor = 30 years • Home Loan Interest Rate = 2.5%
• Assumed Inflation = 0%
• Total Interest Paid = $844,870.47 (Nominal value)
• Total Interest Paid = $844,870.47 (Present value)

As you can see, the cost would be dramatically reduced to $844,870.47 over the course of the loan.
 
If inflation stayed at 2.5% throughout the 30 years 

• Tenor = 30 years
• Home Loan Interest Rate = 2.5%
• Assumed Inflation = 2.5%
• Total Interest Paid = $844,870.47 (Nominal value)
• Total Interest Paid = $664,771.43 (Present value)

If inflation is greater than zero (let's say 2.5%), then the total interest paid adjusted to present value is less than that of the nominal value. This is because the value of money in the future is smaller. After adjusting for inflation, the money that you pay in the future (say at the 20th year) is only 61.81% of the value today. If you paid $21,947 in interest for the 20th year, that is only worth $13,566 after adjusting for inflation.

If we modify the inflation figure to 5% throughout the 30-year loan 

• Tenor = 30 years
• Home Loan Interest Rate = 2.5%
• Assumed Inflation = 5%
• Total Interest Paid = $844,870.47 (Nominal value)
• Total Interest Paid = $536,410.68 (Present value)

This time, you end up incurring $536,410.68 in interest cost when inflation is set higher. Therefore, the higher the inflation rate, the lower the interest cost (at present value).

What is the "Rental Cost" of property in Singapore? 

But let's assume a not so ideal case where you are paying 5.30404% interest and an inflation of 4.5%.

• Tenor = 30 years
• Home Loan Interest Rate = 5.30404%
• Assumed Inflation = 4.5%
• Total Interest Paid = $2,000,000.05 (Nominal value)
• Total Interest Paid = $1,291,258.96 (Present value)

Your interest cost per month is $1,291,258.96 / 30 / 12 = $3,586.83. At a cost of $536,410.68 (based on 2.5% interest and 5% inflation) over 30 years, marked to present value, you will end up paying $1,490 per month of "Rental" interest cost. ($536,410.68 / 30 / 12) So the “interest” or “rental” costs would be around $1490 to $3586 per month. For the same class of property, you would probably be paying $6,000 to $8,000 a month for rental in today's Singapore landed property market.

So buying a property is better than renting a landed property? 

The answer for whether it is better to buy or rent lies in answering these few questions: -

• Although the interest cost may be cheaper than renting, but don't forget the principal payment as well. The outlay is significant. Can you afford it?
• Is the price of the property already at an elevated level that looks likely to fall back?
• Are you planning to stay or to invest?
• Are you buying a landed property to pounce on future opportunities or waiting to expand the building when it is allowed?

Once you have these answers, you can get in touch with the mortgage consultants at www.iCompareLoan.com to sort through the details at (sms/text) 9782 8606 or through email.
 
What about the opportunity cost of committing the principal amount for a landed property?

If you didn't buy a property, and assuming you had the discipline to invest the money that would have gone into paying down the principal. Then you will need to calculate what you could have earned (annualized returns) of your funds.

If you did not buy a landed property and instead invested that $2 million dollars, at zero returns over 30 years, you would end up accumulating $2 million in cash (30 years later), if you invested at a return of 0%.

What is the opportunity cost of buying a landed property at 6% returns? 

• Tenor = 30 years
• Home Loan Interest Rate = 2.5%
• Assumed Inflation = 2.5%
• Total Interest Paid = $844,870.47 (Nominal Value)
• Total Interest Paid = $664,771.43 (Present value)
• Investment Return = 6%
• Total Sum of Money from Investments = $4,646,154.13 (future)

At 6% annual returns, you would have accumulated $4,457,510.41 (future value at end of 30 years) at 0% inflation. This value is equal to a potential value to of $4.46m.

At 2.5%, the time-value of money 30 years later is equal to 47.99% of today's value. The potential gains from investment is $2,229,602.63 in present value if you had not invested in the landed property.

So if you include the opportunity cost, housing loan interest cost and other factors such as risks of holding onto the property, then buying a property becomes a less clear and less straight forward decision.

The key parameters things that affect these decisions will be (non-exhaustive): -

• Interest rate
• Loan tenor
• Inflation rate
• Expected average investment returns

Total interest cost and opportunity cost 

By adding $2,229,602.62 (opportunity cost) + $664,771.43 (Interest cost) and dividing it by 30 and then by 12, you end up with $8,039.93 of "rental" per month. The better you are at investing, the higher the "cost" for you to buy a landed property.

Landed properties have option value (especially those sitting on land of 999 years or free hold leases). And these potential capital gains contribute towards reducing the opportunity cost of owning a landed property, making the decision process even more complicated and interesting.  

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Tips to Make Your Mortgage Financing a Breeze

By SUSAN TEO and PAUL HO

Finding the right mortgage can be a stressful experience for novice mortgage hunters, this article attempts to offer simple advice to simplify the process and safeguard your wallet (figuratively, of course!).
 

Maintain a good credit standing

Always try to maintain a good credit history as some credit-related information is collected by the Credit Bureau (Singapore) and released to credit providers on the Bureau when you apply for a loan. Avoid making late payments or defaulting on any loans with a financing institution, as these will give you a poor credit score, which will lock you out of loans with the best interest rates (as many banks may decline to offer you a loan). The credit report of the Bureau shows the account status history on all the credit facility you have on a rolling 12-month basis. For closed accounts, the status history of the last 12 months before account closure is made available. If you have been making prompt payments for all your credit facilities in the last 12 months, you will be assigned the best score of 12 “AAAAAAAAAAAA”.

Arming yourself with too many credit cards is one way to adversely affect your financial health because it provides a false sense of financial strength when all you are doing is spending on borrowed money. Without financial discipline, you will soon find yourself mired in debt. Be prudent, do not sign up for more cards than you need!

Furthermore even if you don't owe a single cent on your cards, having credit cards reduce your overall loan borrowing quantum.

To check your credit score, you may do so at the Credit Bureau (Singapore).
 

Correctly assess your financial capabilities

Do not bite off more than you can chew. Buying a large house simply to keep up with the Joneses is not good financial sense. Rather, opt for a purchase that you can comfortably finance even when your financial situation changes for the worse. Use the debt-to-service ratio (DSR) of 30% as a rough gauge of affordability:

DSR = Monthly Debt Service for Mortgage / Monthly Gross Household Income 

A note of caution will be in place here. DSR has been criticised for being only a short-term measure of housing affordability (There are other indicators of long and short-run affordability, but these are beyond the scope of this article). In the long run, household income may rise or fall, and so will the debt service. Therefore, you may want to compute DSR for different scenarios. For example, when a household member loses his job or when there is an increase in financial liability (debt service) – for instance from an unexpected spike in interest rates.

Besides the DSR for mortgage liability, you also have to take into account your overall financial liabilities. Some things to consider: do you have children going to universities or any medical conditions? If yes, when the debt service surges will you be able to service all the debts, still?

At any rate, contingencies can always happen, be sure that you can still finance your mortgage when that happens; lest you may be forced to sell that house - even at a loss.
 

Shop around for the right mortgage type and financier

Do your homework and study the different loan types available on the market. Financing institutions may introduce new loan features and types every now and then. Some packages available include the fixed rate, floating rate or a combination of both, also known as a hybrid loan.

There are also interest-offset loans. To read more about these different loan types, go here. Select the one that best suits your financial and risk profile.

Try to select a loan that will offer affordable interest rates throughout the entire life of the loan, not just in the beginning, if possible. Do not assume you can always refinance or reprice to a cheaper loan package after a few years.

MAS (Monetary Authority of Singapore – Singapore's Central Bank) may introduce new regulations from time to time, which could make borrowing easier or harder. For example, from 6 October 2012, MAS (Monetary Authority of Singapore) mandates that all new and refinanced loans have a 35-year cap on the loan tenure.

In addition, interest rate trend do not remain stationary. When the time for refinancing comes, you may find yourself in a high interest rate environment. An example follows

Loan Package X has an interest rate of 1.5% for the first three years, and 1.7% thereafter.

Loan Package Y has an interest rate of 1.3% for the first three years, and 2.0% thereafter.  

If you started off with Package Y, thinking that after three years you could refinance to a more affordable loan, you may discover - horror of horrors - that the cheapest loan starts at 1.9% now. You would be better off if you had selected Package X right from the start. But, of course, you can wait for rates to drop again before refinancing (incurring higher interest rates for several months or longer). Thus, when faced with alternatives, similar to the example, you will have to carefully consider whether the initial lower rates justify the risks of possibly higher rates a few years down the road.

If you feel lost in the sea of loan types, you can always make use of the free professional mortgage advice and home loan reports at www.iCompareLoan.com, which boosts Singapore's most advanced cloud-based home loan analysis system.

Finally, choose a reputable financing institution. You do not want a case of the financier exercising his right of “margin call” when valuations fall!
 

Understand the legal and financial jargon

After you have found your ideal loan and made a successful application, you will receive a Letter of Offer from the bank. Scrutinise this document and understand what all the conditions in the loan entail. If in doubt, consult a lawyer. Or alternatively asks the bank to clarify in plain English whatever terms you have problems understanding.
 

Changing jobs

It is best to make a loan application and complete the loan disbursement before a job change. Because for some financiers you have to be in the same job for a minimum duration before you will be eligible for a loan.
 

Adding on new debt

Steer clear of applying for a new loan during the interim period after obtaining an in-principle approval but before loan disbursement.

A case in point: A week after Person A had obtained an approved-in-principle home loan, he went to purchase a car and financed it with a car loan. Two weeks later, the financier who was to grant formal approval for the mortgage discovered Person A had taken a car loan too. Consequently, he substantially reduced the loan quantum. Because of the reduction, Person A could no longer afford the house so the deal fell through and he had to forfeit his 1% deposit.

Therefore it is important to check with a home loans expert before taking on a new loan obligation.  

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Should You Buy or Rent a Property in Singapore?

By SUSAN TEO and PAUL HO

 

Many factors come into play when deciding between buying or renting a property in Singapore. The booming rental and sales market in the island suggest that people are always on the search for living spaces. What then are the factors that property buyers should consider when choosing between the two?

Level of commitment

Renting a house as opposed to buying provides people with more freedom to relocate. The moment the rental contract expires, you can move. Any move before that is possible, but that will mean the forfeit of your deposit.

At times you may find your neighbourhood or neighbours to be unsuitable, renting allows you to uproot easily.

For some people, renting is a lifestyle option because it gives them the flexibility of changing their living environment and homes every now and then.

In contrast, buying a house requires more commitment as people are unlikely to move every few years due to the cost of selling and buying. For example, if you are financing your house with a loan, you have to incur a penalty for early repayment. Not to mention the agent fees and administration costs involved. Most importantly, there may be capital losses if you are selling during a property slump!

Nevertheless, having a place you can call your own brings with it benefits. You can experience pride in being the proud owner of a beautiful house. You also have every right to renovate it as your taste dictates and your pockets allow (or let it fall into a decrepit state if you so wish!).

Down-payment

Besides intangible considerations, the more practical concern for most is the financial aspect.

A housing purchase is a major financial commitment. Most people have to spend their entire working life, or even beyond, to pay off their mortgage.

But even before being eligible for that housing loan, you have to come up with the down-payment. If you opt for a HDB flat, unless you are eligible for a HDB concessionary loan, you will have to pay 5% or 10% of the purchase price in cash. Using of CPF fund to pay for this component is not allowed. Do note that when buying a HDB flat, whether on the open market or a direct purchase from HDB, not everybody is eligible for a HDB concessionary loan. Hence, taking a loan from a private financing institution becomes the next alternative.

For private properties, mortgage financing by a private institution is the only choice. Identical to a purchase for a HDB flat using a private loan, you will have to stump up a cash component for the down-payment. With no existing home loan, this will be 5% or 10% (if the loan tenure exceeds 30 years or extends beyond age 65) of the purchase price. With an existing loan, it jumps to 25%.

Raising the cash component of the down-payment proves to be a stumbling block for many, particularly for younger people.

Thus, renting becomes an option when you want to have a place to live in, but you are unable to stump up the cash for the down-payment to buy a house.

In another scenario, you have the means to pay for the down-payment, but you have a more lucrative investment compared to a housing purchase. As a result, you prefer to rent instead of buying. In such a case, you will have to carefully weigh whether your investment will reap you a higher capital gain than a house.

 

A concrete illustration of the cost of buying vs renting

To compare the cost of renting and buying, we will proceed to use real data; namely the median rental and sale price of Beacon Heights at Mar Thoma Road.

Table 1: BEACON HEIGHTS

	Period	S$ psf	(Assuming a size of 1000 square feet) S$
Median Selling Price	Sept' 12	851	851,000
Median Rental	3Q12	3.796916	3,797

Source: URA Real Estate Information

Using the median S$ psf from URA, we assume a 1000 square feet apartment to work out the median selling price and rental.

Cost of renting

Table 2: Renting a 1000 sq feet unit at Beacon Heights

 

	3Q12 Median Rental (S$)	+ 30% (S$)	- 30% (S$)
Monthly Rental	3,797	4,936	2,658
Monthly Maintenance Fee	400	400	400
Total Annual Cost	45,963	59,632	32,294

As rental changes over time, we include the scenarios when it rises or falls by 30%.

Cost of renting over a 3-year period

Table 3: Renting a 1000 sq feet unit at Beacon Heights for 3 years

 

	3Q12 Median Rental (S$)	+ 30% (S$)	- 30% (S$)
Total Cost	137,889	178,896	96,882

Cost of buying

Table 4: First-Year Cost for Buying a 1000 sq feet unit at Beacon Heights

 

	Scenario 1	Scenario 2	Scenario 3
Price (S$)	851,000	851,000	851,000
Down-payment (S$)	170,200	170,200	170,200
Stamp Duty (S$)	15,024	15,024	15,024
Loss of Interest on Down-payment and Stamp Duty	1%	1%	1%
A - Opportunity Cost (S$)	1,852	1,852	1,852
Loan Quantum (S$)	680,800	680,800	680,800
Interest Rate (p.a.)	1.5%	2.5%	3.5%
B - Annual Interest Payment (S$)	10,212	17,020	23,828
C - Annual Maintenance Fee (S$)	4,800	4,800	4,800
D - Owner-occupier Property Tax* (Estimated) (S$)	1582.56	1582.56	1582.56
Total Annual Cost (S$) (A + B + C + D)	18,446.56	25,254.56	32,062.56

*To learn the computation, go here.

Cost of buying over a 3-year period

Table 5: Buying a 1000 sq feet unit at Beacon Heights for 3 years*

 

Interest Rate (p.a.)	1.5%	2.5%	3.5%
Year 1 Interest Payment (S$)	10,212	17,020	23,828
Year 2 Interest Payment (S$)	9,940	16,207	22,532
Year 3 Interest Payment (S$)	9,515	15,414	21,283
Total Interest Payment (S$)	29,667	48,641	67,643
Total Opportunity Cost (S$)	5,556	5,556	5,556
Total Maintenance Fee (S$)	14,400	14,400	14,400
Total Property Tax (S$)	4,747.68	4,747.68	4,747.68
Grand Total (S$)	54,370.68	73,344.68	92,346.68

*Assumes that interest rates are fixed for the 3 years  

Savings from buying a house versus renting (3-year horizon)

Table 6: Cost saving from buying (3-year horizon)

Interest Rate (p.a.)	1.5%	2.5%	3.5%
A - Rental (S$)	137,889	137,889	137,889
B - Total Buying Cost (S$)	54,370.68	73,344.68	92,346.68
Savings (S$) (A-B)	83,518.32	64,544.32	45,542.32

So it would seem that there will definitely be savings from buying a house compared to renting. Is that really the case?

If property prices stayed stagnant, that would definitely be the case. However, prices of properties tend to fluctuate.

Currently, the asking price for units at Beacon Heights range between S$1,000 to S$1,300. Hence if you happen to buy at S$1000 instead of S$851, the cost saving will be substantially lower.  

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Seven Ways to Get Your Property Purchase Timing Right

How can you tell when is the perfect time to buy or sell your property? In any marketing venture, sports adventure, or even constructing a home timing is critical. It can mean a big difference between failure and success. We give you 7 things to consider just to help ensure you understand and know the perfect time to buy or sell a property.

 

1. Definition of your goals and development of business or personal plan

Establish your purpose in buying or selling the house. Write down your goals and specify the period you think it will take to do the research and review, as well as the time it takes to achieve your objectives. A clearer view of your goals is needed as well including the timetable reflecting when you want to realize your goals. You need to set up your own timetable of achievement. Do you want to keep a stable cash flow and maintain the increase of your capital growth? Work to move closer to your network, collaborate with your plans and set up a realistic budget.
 

2. Learn to understand and forecast property cycles geographically

Just like in other countries with different time zones, you need to learn which suburb, city, or geographic location performs best in a certain period of the year. Think smart and act savvy to outperform the market. Focus on regional areas with potential positive cash flow investors. Low rental or areas whose market are starting to decline may be a concern for the inner city units.
 

3. Be ready with your money

You need to prepare the cash before you start searching for a property. Identifying this main limitation helps narrow the search for the perfect property to match your goals.
 

4. Perform your research smartly and systematically

Spend your time wisely. Create an outline and then design your research. We have two basic types of research First, is to find the perfect area suited to your lifestyle. Second, is picking the perfect property within the area that would be perfect for your taste and goals. However, if you are an investor, you may need to learn to use some tools and quantify your data for further analysis. Statistical and qualitative analysis are critical when making an investment decision. There are areas still undergoing developments or solid infrastructure development that offers low vacancy rates, which may give you a big difference in terms of price. Research and offers are very time sensitive. Use a check-list to ensure you have everything covered and look at a minimum of 50 odds properties in your price range.
 

5. Identify which months are ideal for buying properties

As we have already discussed, we need to identify the location that is good for buying properties because there are months where vendors are more interested in accepting offers such as in November and before Christmas in December. The reason is that this is the time of the year when investors close their books and start calculating taxes, especially land taxes. Meaning, the properties may be up on the market for some time. Another reason is that some buyers want a good resolution. They may want to sit on the Christmas table satisfied thinking that they will be moving to a new home in the New Year.
 

6. Timing is crucial for offering negotiations

Timing is the cornerstone of negotiation. This important technique causes you to win or lose a deal. One factor you should establish is the reason behind the property sale. Timing means how quickly you can come up with a counter offer. Remember, that each negotiation largely differs according to the circumstances. Agents often want to sell hurriedly at the end of the year because of the yearly target quota including the commission.
 

7. Learning how to move quickly to closing the deal

The point of exchange is critical. You are competing with another buyer for that property. You need to rethink your negotiation strategy. Engage your conveyancer to review the contract first and then proceed to the inspection of the property such as the pest control and materials. Offer and acceptance mean nothing unless the final contract is drawn. Using the Buyers’ Agent could facilitate the sale of the property. This is easier and a more time-efficient move. The vendor may want to test the auction first before releasing the property.  

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A Summary of the Latest Cooling Measures

By SUSAN TEO

This article provides the thrust of the latest round of cooling measures – the 7th since 2009. For the full details, please visit the Monetary Authority of Singapore (MAS) website at http://www.mas.gov.sg/en/News-and-Publications/Press-Releases/2013/Additional-Measures-To-Ensure-A-Stable-And-Sustainable-Property-Market.aspx#1. The slew of measures that has kicked in on 12 January 2013 are

• Changes to Residential Financing:

1. Cash Down Payment,
2. Loan-to-value ratio (LTV),
3. Mortgage Servicing Ratio (MSR) for HDB Flats

• Changes to Additional Buyer’s Stamp Duty (ABSD)
• Additional Housing Measures for Permanent Residents (PRs)
• Regulations on Executive Condominiums (ECs) Size and Sales
• Implementation of Industrial Seller’s Stamp Duty (SSD)

The measures (only apply to HDB flats with less than 60 years of lease) that will kick in on 1 July 2013 are

• Changes to Financing:

1. Use of CPF funds
2. HDB Housing Loan

The following outlines the various measures in a diagram, tables, and points.

 

 

Additional Buyer’s Stamp Duty (ABSD)

 

Table 1: Changes to Additional Buyer’s Stamp Duty (ABSD)

	Rate on 1st purchase	2nd purchase	3rd & subsequent purchase
Singapore citizens	No change	7%	10%
Permanent residents	5%	10%	10%
Foreigners and non-individuals	15%	15%	15%

Of note, is that under the new rulings, permanent residents have to incur the ABSD for HDB flats purchases. But for Singaporeans, ABSD will continue to be remitted for HDB flats and new EC purchases.

Please refer to the MAS or IRAS website for the details about the changes to ABSD, including the conditions for remission.

 

Additional Housing Measures for Permanent Residents (PRs)

a) No subletting of entire HDB flats

b) Dis-allowed from owning a HDB flat and a private residential property concurrently. Have to sell off the HDB flat within 6 months after buying a private residential property.

 

Regulations on Executive Condominiums (ECs)

 

a) The maximum strata floor area of new EC units will be capped at 160 square metres.

b) Sales of new dual-key EC units will be restricted to multi-generational families only.

c) Developers of future EC sale sites from the Government Land Sales programme will only be allowed to launch units for sale 15 months from the date of award of the sites or after the physical completion of foundation works, whichever is earlier.

d) Private enclosed spaces and private roof terraces will be treated as gross floor area (GFA). The GFA of such spaces in non-landed residential developments, including ECs, will be counted as part of the ‘bonus’ GFA of a residential development and subject to payment of charges.

Source: http://www.mas.gov.sg/en/News-and-Publications/Press-Releases/2013/Additional-Measures-To-Ensure-A-Stable-And-Sustainable-Property-Market.aspx#1

Industrial Property Market: Imposition of Seller’s Stamp Duty (SSD)

Affect industrial properties bought or acquired on and after 12 Jan 2013

Table 2: Seller’s Stamp Duty (SSD) Rates

Holding period	1 year	2 years	3 years
% of price or market value, whichever is higher	15%	10%	5%

 

 

New Housing Measures that will kick in on 1 July 2013

 

Table 3: Use of CPF Funds and Provision of HDB Loans for HDB Flats with Less than 60 Years of Lease

Remaining Lease of HDB Flat	Use of CPF funds	HDB Housing Loan
30 - 59 years	Allowed, except for buyers for whom the remaining lease cannot cover them to the age of at least 80. The total CPF usage by the household will be the pro-rated Valuation Limit (VL) based on the ratio of the remaining lease when the youngest buyer who can use CPF turns 55 years old, to the lease at point of purchase.	Allowed, if remaining lease can cover the buyer* to the age of at least 80. Loan tenure will be the shortest of: 30 years; 65 years minus average age of buyers; and balance lease at the point of purchase minus 20 years.
20 - 29 years	Not allowed	Allowed, if remaining lease can cover the buyer* up to the age of at least 80. Loan tenure will be the shortest of: 30 years; 65 minus average age of buyers;and balance lease at the point of purchase minus 20 years.
< 20 years	Not allowed	Not allowed

*Based on the average age if there is more than one buyer to a flat.
Source: Adapted from "Use of CPF Funds and Provision of HDB Loans for Purchase of Public Housing" (http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2013/Annex%20IV.pdf)    

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Fixed-Rate Versus Floating Rate Home Loan Packages in Singapore: Which is Right for You?

By SUSAN TEO

It goes without saying that a mortgage is a great financial liability; choosing the correct home loan packages will save you both money and mental anguish. This article looks at the two of the most common types of mortgage. This is not an exhaustive guide, instead it hopes to offer some basic insights.
 

What is a fixed rate package?

As its name suggests, a fixed rate loan has its interest rate fixed. However, in Singapore, we only have packages with rates that are fixed for the first 3 to 5 years of the loan tenure. There are no perpetual fixed rate packages here. The availability of such packages depends on whether the lenders provide such packages.

Typically, fixed rate packages have interest rates that are higher than a floating rate loan. After the fixed rate period ends, the interest rates will be converted to variable rates. Specifically, the interest rate will be pegged at a discount below the financing institution's board rate or floating rate, which is based on SIBOR or SOR. Below is an example of the interest structure for a fixed rate loan:


Bank Y Fixed-rate Loan

Period	Interest Rate (p.a.)
First Year	1.15%
Second Year	1.35%
Third Year	1.45%
Fourth Year Onwards	0.50 % below the Board Rate

 

What is a floating (aka variable) rate package?

In contrast, a floating rate loan has its interest rates fluctuating during the entire duration of the loan. Today's floating (variable) interest rate loans come in three flavours:

• Interest rates pegged at a discount below the Board Rate
• Interest rates pegged at a margin (spread) above SIBOR
• Interest rates pegged at a margin (spread) above SOR

Financial institutions may not offer all three types.

After the first few years of the loan start-date, the spread is usually revised upward. An example follows

Bank Y SIBOR Loan

Period	Interest Rate (p.a.)
First Year	0.75% + 1-Month SIBOR
Second Year	0.75% + 1-Month SIBOR
Third Year	1.00% + 1-Month SIBOR
Fourth Year Onwards	1.25% + 1-Month SIBOR

 

When is a fixed rate package preferred?

• Financial stability is needed
• High interest rates environment

During the fixed rate period, the borrower will have certainty over the monthly installment amount he has to pay. This is most suitable for people with limited financial means who cannot accommodate sudden upswings in their monthly cash-flows.

But this financial stability comes with a price.

During a low interest rate environment, the borrower will have to contend with a higher opportunity cost (best foregone alternative). Because with a floating rate package he will get to enjoy relatively lower interest. Thus there is a trade-off between financial stability and interest payment.

On the other hand, during high interest rates environment, the borrower will not find himself on the horns of a dilemma. The choice is a straightforward one. Taking a fixed rate package will bring with it a lower opportunity cost and greater financial certainty (at least during the fixed rate period!). Furthermore, as the financiers need to hedge their future risks by providing you a fixed rate for several years, the interest rates for fixed-rate packages are usually more costly than for floating-rate.
 

When is a floating (aka variable) rate package preferred?

• Low interest rates environment

Obviously when interest rates are low taking a floating rate package beats a fixed rate anytime due to the interest saving. But what comes down must go up. The borrower will have to be prepared for the time when interest rates climb. For the astute borrower he will time the loan commencement such that when interest rates begin to inch up, he is already out of the lock-in and/or claw-back period; consequently, he can refinance to a fixed-rate loan at a lower exit cost.

Nevertheless, a floating rate package will always involve more interest rate volatility. A way to mitigate this is to opt for a longer tenor SIBOR or SOR. For example, a 12-month SIBOR or SOR rates is revised every 12 months, so you get to enjoy fixed rate for a year!

Conversely, you can consider an interest rate capped loan which safeguards against unexpected spike in rates. For example, Bank A's mortgage loan cap sets a 1.50% p.a. limit on the interest, so 1.50% is the highest interest you will have to pay even during a high interest rate environment.  

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