Read the full article here.
Join us on Facebook:
www.facebook.com/iCompareLoans
www.facebook.com/SGpropertyBuyer
www.facebook.com/sghomeloan
Showing posts with label CPF. Show all posts
Showing posts with label CPF. Show all posts
Monday, April 29, 2013
Thursday, April 18, 2013
Monday, March 11, 2013
Thursday, February 21, 2013
Freehold Residential Property: The Advantages of Acquiring One
by SUSAN TEO
Homes in Singapore come with different lease periods:
*A
land at Jalan Jurong Kechil is the first 60-year-lease plot to be sold
(on 15 November 2012) for residential development; thus 60-year-lease
homes will be available soon.
Most housings in Singapore either fall into freehold or 99-year lease, with the latter making up the bulk.
A 999-year lease is almost equivalent to freehold.
While 30-year-lease HDB studio apartments come in short supply and are only meant for elderly residents.
Private developments with a 103-year lease period (the lease period is determined by the developer) on freehold land are few and far between. At the expiry of the lease, the non-governmental land owner has the right to re-acquire the land (i.e. reversionary right), sell the freehold tenure or extend the lease for a price.
Residential properties with 60-year lease are not available yet, but will be in a few years' time when development on the first 60-year leasehold residential land plot at Jalan Jurong Kechil is completed.
Homes in Singapore are predominantly 99-year leasehold because the government sells most lands on 99-year tenure due to land scarcity in this country. At the end of the lease period, the state can acquire the land without any compensation to the home owners. Currently, the government does not offer freehold land parcels for sales anymore, except for the sale of remnant State land to the adjoining landowner whose existing private land is already held under a freehold title.
However, topping up of the lease of leasehold private housings is allowed.
Lessees may apply for a renewal of the lease with the SLA (Singapore Land Authority). The granting of extension is on a case-by-case basis and will be considered if the development is in line with Government's planning intentions, supported by relevant agencies, and results in land use intensification, mitigation of property decay and preservation of community (SLA, “Waiver of Building Premium”). If the extension is approved, a land premium, decided by the Chief Valuer, will be charged. The new lease will not exceed the original, and it will be the shorter of the original or the lease in line with URA's planning intention.
In addition, near the end of the lease period the State may require the land to be returned in its original conditions. If so, demolition of buildings, land fillings, etc. will have to be borne by the current lessees.
For HDB flats, legally the flat will be returned to HDB at the end of the lease. HDB does not have to make any monetary compensation, or offer a replacement flat to the owners. The owners may also be required to remove any fixtures fitting.
Only a handful of banks will grant housing loans for properties with less than 60 years of remaining lease, and it is on a case-by-case basis. The loan if granted may have a shorter tenure or lower quantum. Thus, if you purchase a freehold property it will save you from the disappointment of loan rejections, or unfavourable loan terms, because of the lease of the property.
Further, you may have a easier time selling off the property since the potential buyer will have a higher probability of obtaining the necessary funding.
2. Use of CPF funds
For freehold residential properties, you do not have to fret about not being able to dip into your CPF saving, or to do so at a lower withdrawal limit, for your purchase because of the property's expiring lease.
This is because you are not allowed to use your CPF funds for the purchase of private houses with under 30 years of lease left.
For houses with remaining lease between 30 and 60 years, the withdrawal amount is tied to the buyer's age and the remaining lease.
Withdrawal Limit
= (The remaining lease of flat or property when the youngest owner is 55 years old / The lease of the flat or property at the point of purchase) x Valuation Limit*
Valuation Limit is the lower of the purchase price or the value of the flat/property at the time of purchase.
(Source: CPF Ask Us, “What are these additional conditions to use CPF for flats/properties with remaining lease of at least 30 years but below 60 years?” )
These CPF withdrawal rules and the attendant limits will affect HDB flats from 1 July 2013.
3. En bloc sales
Homeowners of freehold properties have higher chances of profiteering from collective sales.
Developers may prefer to acquire freehold over 99-year leasehold properties because they do not have to incur a hefty land premium to top up the lease (of which the approval is not even guaranteed), which eats into their profit margins.
Even if developers do acquire 99-year lease lands, they may offer a relatively lower price as they factor in the land premium they have to pay.
4. Long-term stability in value
Leasehold housings nearing the end of their tenure will always fall steeply in value. But you will never have to face this problem with a freehold.
However this is not saying a freehold property will not depreciate in value over time. This can also occur due to the decay of the building. When this happens, the redevelopment value of the land may exceed the value of the building; thus resulting in a collective sale.
Another warning. If you are attracted to freehold because you are harbouring hopes of bequeathing the property to your descendants till perpetuity, you might want to perish that thought. En bloc sales could go through as long as there is a majority consent. Further, under the Land Acquisition Act, the State has the authority to acquire the freehold property “for public and certain other specified purposes”, with due compensation. This Act also applies to leasehold property.
When all said and done, leasehold homes will still remain attractive to buyers due to their affordable prices and proximity to amenities.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Homes in Singapore come with different lease periods:
|
Most housings in Singapore either fall into freehold or 99-year lease, with the latter making up the bulk.
A 999-year lease is almost equivalent to freehold.
While 30-year-lease HDB studio apartments come in short supply and are only meant for elderly residents.
Private developments with a 103-year lease period (the lease period is determined by the developer) on freehold land are few and far between. At the expiry of the lease, the non-governmental land owner has the right to re-acquire the land (i.e. reversionary right), sell the freehold tenure or extend the lease for a price.
Residential properties with 60-year lease are not available yet, but will be in a few years' time when development on the first 60-year leasehold residential land plot at Jalan Jurong Kechil is completed.
Homes in Singapore are predominantly 99-year leasehold because the government sells most lands on 99-year tenure due to land scarcity in this country. At the end of the lease period, the state can acquire the land without any compensation to the home owners. Currently, the government does not offer freehold land parcels for sales anymore, except for the sale of remnant State land to the adjoining landowner whose existing private land is already held under a freehold title.
However, topping up of the lease of leasehold private housings is allowed.
Lessees may apply for a renewal of the lease with the SLA (Singapore Land Authority). The granting of extension is on a case-by-case basis and will be considered if the development is in line with Government's planning intentions, supported by relevant agencies, and results in land use intensification, mitigation of property decay and preservation of community (SLA, “Waiver of Building Premium”). If the extension is approved, a land premium, decided by the Chief Valuer, will be charged. The new lease will not exceed the original, and it will be the shorter of the original or the lease in line with URA's planning intention.
In addition, near the end of the lease period the State may require the land to be returned in its original conditions. If so, demolition of buildings, land fillings, etc. will have to be borne by the current lessees.
For HDB flats, legally the flat will be returned to HDB at the end of the lease. HDB does not have to make any monetary compensation, or offer a replacement flat to the owners. The owners may also be required to remove any fixtures fitting.
Advantages of buying a freehold or 999-year leasehold home
1. Loan Approval
Only a handful of banks will grant housing loans for properties with less than 60 years of remaining lease, and it is on a case-by-case basis. The loan if granted may have a shorter tenure or lower quantum. Thus, if you purchase a freehold property it will save you from the disappointment of loan rejections, or unfavourable loan terms, because of the lease of the property.
Further, you may have a easier time selling off the property since the potential buyer will have a higher probability of obtaining the necessary funding.
2. Use of CPF funds
For freehold residential properties, you do not have to fret about not being able to dip into your CPF saving, or to do so at a lower withdrawal limit, for your purchase because of the property's expiring lease.
This is because you are not allowed to use your CPF funds for the purchase of private houses with under 30 years of lease left.
For houses with remaining lease between 30 and 60 years, the withdrawal amount is tied to the buyer's age and the remaining lease.
Withdrawal Limit
= (The remaining lease of flat or property when the youngest owner is 55 years old / The lease of the flat or property at the point of purchase) x Valuation Limit*
Valuation Limit is the lower of the purchase price or the value of the flat/property at the time of purchase.
(Source: CPF Ask Us, “What are these additional conditions to use CPF for flats/properties with remaining lease of at least 30 years but below 60 years?” )
These CPF withdrawal rules and the attendant limits will affect HDB flats from 1 July 2013.
3. En bloc sales
Homeowners of freehold properties have higher chances of profiteering from collective sales.
Developers may prefer to acquire freehold over 99-year leasehold properties because they do not have to incur a hefty land premium to top up the lease (of which the approval is not even guaranteed), which eats into their profit margins.
Even if developers do acquire 99-year lease lands, they may offer a relatively lower price as they factor in the land premium they have to pay.
4. Long-term stability in value
Leasehold housings nearing the end of their tenure will always fall steeply in value. But you will never have to face this problem with a freehold.
However this is not saying a freehold property will not depreciate in value over time. This can also occur due to the decay of the building. When this happens, the redevelopment value of the land may exceed the value of the building; thus resulting in a collective sale.
In summary
Generally, freehold residential properties cost more than leasehold ones. But less clear-cut is which category enjoys a higher rate of price appreciation. If you are considering residential real estate as an investment vehicle to reap capital gain, you should be looking at the rate of price appreciation.
Another warning. If you are attracted to freehold because you are harbouring hopes of bequeathing the property to your descendants till perpetuity, you might want to perish that thought. En bloc sales could go through as long as there is a majority consent. Further, under the Land Acquisition Act, the State has the authority to acquire the freehold property “for public and certain other specified purposes”, with due compensation. This Act also applies to leasehold property.
When all said and done, leasehold homes will still remain attractive to buyers due to their affordable prices and proximity to amenities.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Friday, February 15, 2013
A Quick Look at the Drawbacks of HDB Loans
by SUSAN TEO
In the last article, I discussed about the pros of using a HDB loan. Here, we look at the opposite instead.
1. No saving left in your CPF (Central Provident Fund) Ordinary Account
Before you are allowed to take a HDB loan, it is mandatory that all the balance (after setting aside an amount for the miscellaneous fees of the flat purchase) in your CPF Ordinary Account up to the valuation limit (the lower of the purchase price or valuation at the time of purchase) if applicable, be utilised first. After that, HDB will decide on the loan quantum based on the outstanding amount to be paid for the flat.
As the savings in the CPF Ordinary Account generate an interest, which has remained at 2.5% p.a. since July 1999, you lose this interest earning when you use the savings to pay for the flat.
However, you save on the interest payable for the HDB loan which is 0.1% above the interest rate for the Ordinary Account. In other words, the loan rate is 2.5% + 0.1% = 2.6% p.a..
Had you not utilised the savings in the CPF Ordinary Account, you would have to use the loan. The below illustrates the loss:
Loss from using your CPF balances instead of the HDB loan:
Further, when the flat is sold, all CPF saving used and interest that would have been accrued if the sum had remained in the account, will be deducted from the sales proceeds, and refunded to the Ordinary Account. This will reduce the cash proceeds which you may need for other purposes. Anyhow, if you had financed the flat with a loan (bank or HDB), you would still need to repay the outstanding loan amount from the sales proceeds.
Another drawback of depleting your CPF Ordinary Account savings is that in the event of a job loss there might not be adequate balance to service the monthly home loan repayment; hence you may be required to service it with cash.
A way to circumvent having to use the CPF Ordinary Account balances to pay for the flat is to invest it before you make the flat purchase. You can do so for the savings in excess of S$20,000 under the CPF Investment Scheme - Ordinary Account. Or instead you can transfer the monies in your Ordinary Account to the Special Account which interest rate has remained at 4% p.a from 2000 till now. This transfer is irreversible and there is a limit to it - the balance in the account (inclusive of the amount withdrawn under the CPF Investment Scheme for the Special Account) after the transfer cannot exceed the prevailing Minimum Sum. Once the monies are in the Special Account, you cannot utilise it for your housing purchases anymore.
2. Possibly relatively higher interest and opportunity cost
During a high interest-rate environment, a financing institution will, in all likelihood, offers a loan with a lower interest rate as compared to a HDB loan.
So the opportunity cost (best foregone alternative) for not using a private loan becomes higher. In addition, you also lose the 1% of additional interest on the savings (capped at S$20,000) in your CPF Ordinary account.
Whether you decide on a HDB loan or a bank loan, do bear in mind that you are not allowed to refinance to a HDB loan once you have taken a bank loan.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
In the last article, I discussed about the pros of using a HDB loan. Here, we look at the opposite instead.
1. No saving left in your CPF (Central Provident Fund) Ordinary Account
Before you are allowed to take a HDB loan, it is mandatory that all the balance (after setting aside an amount for the miscellaneous fees of the flat purchase) in your CPF Ordinary Account up to the valuation limit (the lower of the purchase price or valuation at the time of purchase) if applicable, be utilised first. After that, HDB will decide on the loan quantum based on the outstanding amount to be paid for the flat.
As the savings in the CPF Ordinary Account generate an interest, which has remained at 2.5% p.a. since July 1999, you lose this interest earning when you use the savings to pay for the flat.
However, you save on the interest payable for the HDB loan which is 0.1% above the interest rate for the Ordinary Account. In other words, the loan rate is 2.5% + 0.1% = 2.6% p.a..
Had you not utilised the savings in the CPF Ordinary Account, you would have to use the loan. The below illustrates the loss:
- CPF Ordinary Account Saving = S$50,000
- Interest earned at 2.5% p.a.= S$1,250
- Interest payable on loan at 2.6% p.a.= S$1,300
- Loss = S$1,300 – S$1,250 = S$50
Loss from using your CPF balances instead of the HDB loan:
- Interest Rate Loss
- Annual Loss
Further, when the flat is sold, all CPF saving used and interest that would have been accrued if the sum had remained in the account, will be deducted from the sales proceeds, and refunded to the Ordinary Account. This will reduce the cash proceeds which you may need for other purposes. Anyhow, if you had financed the flat with a loan (bank or HDB), you would still need to repay the outstanding loan amount from the sales proceeds.
Another drawback of depleting your CPF Ordinary Account savings is that in the event of a job loss there might not be adequate balance to service the monthly home loan repayment; hence you may be required to service it with cash.
A way to circumvent having to use the CPF Ordinary Account balances to pay for the flat is to invest it before you make the flat purchase. You can do so for the savings in excess of S$20,000 under the CPF Investment Scheme - Ordinary Account. Or instead you can transfer the monies in your Ordinary Account to the Special Account which interest rate has remained at 4% p.a from 2000 till now. This transfer is irreversible and there is a limit to it - the balance in the account (inclusive of the amount withdrawn under the CPF Investment Scheme for the Special Account) after the transfer cannot exceed the prevailing Minimum Sum. Once the monies are in the Special Account, you cannot utilise it for your housing purchases anymore.
2. Possibly relatively higher interest and opportunity cost
During a high interest-rate environment, a financing institution will, in all likelihood, offers a loan with a lower interest rate as compared to a HDB loan.
So the opportunity cost (best foregone alternative) for not using a private loan becomes higher. In addition, you also lose the 1% of additional interest on the savings (capped at S$20,000) in your CPF Ordinary account.
Whether you decide on a HDB loan or a bank loan, do bear in mind that you are not allowed to refinance to a HDB loan once you have taken a bank loan.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Wednesday, February 13, 2013
Explaining the Advantages of HDB Loans versus Bank Loans
by SUSAN TEO
Before 1 January 2003, people buying a HDB (Housing Development Board) flat have to finance it either with a HDB Concessionary Rate Loan or a HDB market rate loan. But since then the HDB market rate loan was replaced by home mortgage from financing institutions, which are gazetted by the Monetary Authority of Singapore.
HDB Concessionary Rate Loan
Compared to a home loan from a financing institution, a HDB loan has more stringent eligibility requirements. The below covers most of them.
Eligibility Criteria:
Given the many restrictions of a HDB loan, why then do Singaporeans still want to take one? We delve further into the pros of this loan in the following sections.
1. Higher CPF (Central Provident Fund) withdrawal limit
For financing by bank loans, the CPF Ordinary Account withdrawal cap is up to 100% of the valuation limit (VL), which is the lower of the purchase price or valuation at the time of purchase. If the loan is still outstanding when this limit is breached, the housing withdrawal limit can be increased to 120% VL provided that half (entire) of the prevailing Minimum Sum is set aside for borrowers below 55 (55 and above). This housing withdrawal limit varies with the purchase date of the flat, for purchases from 2008 onwards it is 120%.
With a HDB concessionary loan, however, you can enjoy a higher withdrawal limit.
For direct purchase from HDB, there is no limit to the saving in the Ordinary Account you can use.
For resale HDB flats, there is no limit to the saving in the Ordinary Account you can use, after you have set aside half of the prevailing Minimum Sum.
But from July 2013 onwards, for flats with leases between 30 and 59 years the use of CPF fund is allowed only if the remaining lease covers the buyer till at least 80. For such flats, the withdrawal limit will be computed based on the below formula:
Withdrawal Limit
= (The remaining lease of flat or property when the youngest owner is 55 years old / The lease of the flat or property at the point of purchase) x VL
For example, at the point of purchase the buyer is 38 years old and the lease is 40 years. When the buyer turns 55, the remaining lease will be 23 years. Hence
Withdrawal Limit = 23/ 40 x VL
Table 1 further illustrates what is VL.
For flats with under 30 years of lease, use of CPF fund is prohibited. In other words, buyers will to cough up cash for the down-payment, monthly repayment of the loan, stamp duties and other miscellaneous fees.
2. No cash component required for the down-payment
A key advantage of a HDB loan is that you do not have to stump up any portion of the down-payment in cash. You are allowed to use the balance in your CPF (Central Provident Fund) Ordinary Account to pay for it completely.
Whereas with a bank loan, you will have to pay at least 5% of the Valuation Limit (VL) in cash. If the loan tenure exceeds 30 years or extends past the age of 65, the minimum amount jumps to 10%.
3. Higher loan quantum
For the first HDB Concessionary Rate Loan you are taking, the loan quantum is as high as 90% VL. In contrast, for bank loans, the quantum is capped at 80% LTV (loan-to-value ratio). It dips to 60% if the loan tenure exceeds 30 years or extends past age 65. Table 2 compares the down-payment components and loan ceilings for HDB and bank loans.
Source: HDB (http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/HLHDBWhat?OpenDocument)
Monetary Authority of Singapore (http://www.mas.gov.sg/~/media/resource/news_room/press_releases2013/Annex%20II.pdf)
MoneySENSE (http://www.moneysense.gov.sg/en/Life-Events/Buying-a-Home.aspx)
*Do note that there is a limit to the CPF amount you can use for mortgage financing, as discussed earlier in the article.
** This loan quantum only applies to the first HDB Concessionary Rate Loan. The loan quantum for the second HDB loan will be reduced by the full CPF proceeds and part of the cash proceeds made from the sales of the previous flat.
*** Since buyers are not allowed to own more than 1 HDB flat concurrently and must dispose of their private residential properties within 6 months after buying a HDB flat, technically there shan't be a case with an outstanding mortgage.
New regulations, that have kicked in from 12 January 2013, dictate that the mortgage servicing ratio (MSR) for private loans must not exceed 30% of the gross monthly income of the borrower and 35% for HDB loans. So do note that to be eligible for the maximum loan limits stated in Table 2, you also have to meet the MSR cap.
Effectively, this can translate into a lower loan quantum for a bank loan compared to a HDB loan. For example, for a 30-year loan with a 80% quantum for a S$800,000 HDB flat, at an interest rate of 1.5% p.a., the monthly repayment amount will be S$1,932.67. In order to be eligible for a
Therefore, a HDB loan will allow a higher loan quantum.
4. HDB is more lenient
As a Government agency which main goals are to provide affordable quality housing and encourage home-ownership, HDB tends to be more tolerant of delinquent borrowers.
But for a loan from a financing institution, you are always required to pay the monthly stipulated amount even if you have suffered a pay cut.
Further, HDB usually grants deferment of monthly installment payment if you have fallen into financial hardship. The banks, on the other hand, will likely be hot on your heels if you defer payment even for a day!
5. No penalty for partial or full repayment of loan, interest rebate given instead
Of note, is that HDB imposes zero penalty for partial or full repayment of its loan.
Most mortgages of financial institutions, however, come with a lock-in period (aka commitment period) typically of 3-5 years. During this period, any repayment above the prior agreed amount will result in a penalty - usually at most 1.5% of the repayment amount. Financial institutions profit from the interest incurred on the loan, any partial or full repayment of the loan means a loss on interest earnings. Hence, the penalty helps to compensate for this loss.
In fact, HDB even reward you for making capital repayment. Interest rebates will be given on any amount of capital repayment made by flat owner from the next following day after payment is received. The rebate is calculated based on the below formula:
Interest Rebate = (Amount Repaid x Interest Rate) / 12 x 1/ No of Days in the Month x (No of Days in the Month – Day in which Amount is Repaid)
To illustrate
Interest Rebate = (1000 x 2.6% ) /12 x 1/ 31 x (31 – 20) = $0.77
6. Stability in interest rate
Since revision to the interest rate of a HDB loan is made quarterly in tandem with changes to the CPF rate, which has been the same for over 10 years. The interest rate has, likewise, remained stagnant. A HDB loan, thus, offers relatively more stability than even a fixed-rate mortgage which rate is only fixed for 3- 5 years. This is not saying that there have been no fluctuations in HDB interest rates. For instance, in the 1990s rates demonstrated more volatility (Source: CPF, “Historical HDB Concessionary Interest Rate”).
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Before 1 January 2003, people buying a HDB (Housing Development Board) flat have to finance it either with a HDB Concessionary Rate Loan or a HDB market rate loan. But since then the HDB market rate loan was replaced by home mortgage from financing institutions, which are gazetted by the Monetary Authority of Singapore.
HDB Concessionary Rate Loan
Compared to a home loan from a financing institution, a HDB loan has more stringent eligibility requirements. The below covers most of them.
Eligibility Criteria:
- For HDB flats only (resale or direct purchase from HDB)
- At least one buyer must be a Singapore citizen
- Must have a gross monthly income not exceeding $10,000 (or $15,000 for extended families)
- For DBSS flat the income ceiling is $8,000 (or $10,000 for extended families)
- For applicants under the Single Singapore Citizen (SSC) scheme, the income ceiling is $5,000
- Must not own any private residence (in Singapore or abroad), including HUDC and executive condominium
- Must not have sold a private residential property within 30 months and taken a HDB loan before
- Must not have previously obtained a HDB loan within 30 months
- Must not have taken more than two previous HDB loans
- Must not own more any market / hawker stalls or commercial / industrial property (Except if you operate the business yourself, have no other source of income, and only own one market / hawker stall or commercial / industrial property)
Given the many restrictions of a HDB loan, why then do Singaporeans still want to take one? We delve further into the pros of this loan in the following sections.
1. Higher CPF (Central Provident Fund) withdrawal limit
For financing by bank loans, the CPF Ordinary Account withdrawal cap is up to 100% of the valuation limit (VL), which is the lower of the purchase price or valuation at the time of purchase. If the loan is still outstanding when this limit is breached, the housing withdrawal limit can be increased to 120% VL provided that half (entire) of the prevailing Minimum Sum is set aside for borrowers below 55 (55 and above). This housing withdrawal limit varies with the purchase date of the flat, for purchases from 2008 onwards it is 120%.
With a HDB concessionary loan, however, you can enjoy a higher withdrawal limit.
For direct purchase from HDB, there is no limit to the saving in the Ordinary Account you can use.
For resale HDB flats, there is no limit to the saving in the Ordinary Account you can use, after you have set aside half of the prevailing Minimum Sum.
But from July 2013 onwards, for flats with leases between 30 and 59 years the use of CPF fund is allowed only if the remaining lease covers the buyer till at least 80. For such flats, the withdrawal limit will be computed based on the below formula:
Withdrawal Limit
= (The remaining lease of flat or property when the youngest owner is 55 years old / The lease of the flat or property at the point of purchase) x VL
For example, at the point of purchase the buyer is 38 years old and the lease is 40 years. When the buyer turns 55, the remaining lease will be 23 years. Hence
Withdrawal Limit = 23/ 40 x VL
Table 1 further illustrates what is VL.
Table 1: VL
| Flat A | Flat B | |
| Purchase Price (S$) | 400,000 | 370,000 |
| Valuation (S$) | 350,000 | 420,000 |
| VL (S$) | 350,000 | 370,000 |
For flats with under 30 years of lease, use of CPF fund is prohibited. In other words, buyers will to cough up cash for the down-payment, monthly repayment of the loan, stamp duties and other miscellaneous fees.
2. No cash component required for the down-payment
A key advantage of a HDB loan is that you do not have to stump up any portion of the down-payment in cash. You are allowed to use the balance in your CPF (Central Provident Fund) Ordinary Account to pay for it completely.
Whereas with a bank loan, you will have to pay at least 5% of the Valuation Limit (VL) in cash. If the loan tenure exceeds 30 years or extends past the age of 65, the minimum amount jumps to 10%.
3. Higher loan quantum
For the first HDB Concessionary Rate Loan you are taking, the loan quantum is as high as 90% VL. In contrast, for bank loans, the quantum is capped at 80% LTV (loan-to-value ratio). It dips to 60% if the loan tenure exceeds 30 years or extends past age 65. Table 2 compares the down-payment components and loan ceilings for HDB and bank loans.
Table 2: Payment Structure for a HDB Flat
Down-payment
|
|||
Cash Component
|
CPF Component
|
Maximum Loan Quantum
|
|
| HDB Loan |
≥ 0% of VL
|
First 10% or more of VL*
|
≤ 90% of VL**
|
| Private Loan without*** Outstanding Mortgage AND• Loan tenure does not exceed 30 years; and • Sum of loan tenure and age of borrower at the time of applying for the loan does not extend beyond retirement age of 65 years. |
≥ 5% of VL
|
Next 15% or more of VL*
|
≤ 80% LTV
|
| Private Loan without Outstanding Mortgage AND• Loan tenure exceeds 30 years; or • Sum of loan tenure and age of borrower at the time of applying for the loan extends beyond retirement age of 65 years. |
≥ 10% of VL
|
Next 30% or more of VL*
|
≤ 60% LTV
|
*Do note that there is a limit to the CPF amount you can use for mortgage financing, as discussed earlier in the article.
** This loan quantum only applies to the first HDB Concessionary Rate Loan. The loan quantum for the second HDB loan will be reduced by the full CPF proceeds and part of the cash proceeds made from the sales of the previous flat.
*** Since buyers are not allowed to own more than 1 HDB flat concurrently and must dispose of their private residential properties within 6 months after buying a HDB flat, technically there shan't be a case with an outstanding mortgage.
New regulations, that have kicked in from 12 January 2013, dictate that the mortgage servicing ratio (MSR) for private loans must not exceed 30% of the gross monthly income of the borrower and 35% for HDB loans. So do note that to be eligible for the maximum loan limits stated in Table 2, you also have to meet the MSR cap.
Effectively, this can translate into a lower loan quantum for a bank loan compared to a HDB loan. For example, for a 30-year loan with a 80% quantum for a S$800,000 HDB flat, at an interest rate of 1.5% p.a., the monthly repayment amount will be S$1,932.67. In order to be eligible for a
- HDB loan: Gross monthly income ≥ S$5,521.92
- Private loan: Gross monthly income ≥ S$6,442.24
Therefore, a HDB loan will allow a higher loan quantum.
4. HDB is more lenient
As a Government agency which main goals are to provide affordable quality housing and encourage home-ownership, HDB tends to be more tolerant of delinquent borrowers.
But for a loan from a financing institution, you are always required to pay the monthly stipulated amount even if you have suffered a pay cut.
Further, HDB usually grants deferment of monthly installment payment if you have fallen into financial hardship. The banks, on the other hand, will likely be hot on your heels if you defer payment even for a day!
5. No penalty for partial or full repayment of loan, interest rebate given instead
Of note, is that HDB imposes zero penalty for partial or full repayment of its loan.
Most mortgages of financial institutions, however, come with a lock-in period (aka commitment period) typically of 3-5 years. During this period, any repayment above the prior agreed amount will result in a penalty - usually at most 1.5% of the repayment amount. Financial institutions profit from the interest incurred on the loan, any partial or full repayment of the loan means a loss on interest earnings. Hence, the penalty helps to compensate for this loss.
In fact, HDB even reward you for making capital repayment. Interest rebates will be given on any amount of capital repayment made by flat owner from the next following day after payment is received. The rebate is calculated based on the below formula:
Interest Rebate = (Amount Repaid x Interest Rate) / 12 x 1/ No of Days in the Month x (No of Days in the Month – Day in which Amount is Repaid)
To illustrate
- HDB Interest Rate = 2.6%
- Capital Repayment = $1,000 on 20th Mar 2013
- No of Days in March = 31
Interest Rebate = (1000 x 2.6% ) /12 x 1/ 31 x (31 – 20) = $0.77
6. Stability in interest rate
Since revision to the interest rate of a HDB loan is made quarterly in tandem with changes to the CPF rate, which has been the same for over 10 years. The interest rate has, likewise, remained stagnant. A HDB loan, thus, offers relatively more stability than even a fixed-rate mortgage which rate is only fixed for 3- 5 years. This is not saying that there have been no fluctuations in HDB interest rates. For instance, in the 1990s rates demonstrated more volatility (Source: CPF, “Historical HDB Concessionary Interest Rate”).
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Thursday, January 31, 2013
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:
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).
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.
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.
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.
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.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
References
Michelle Tee and Koh Siok Hui, Bright Spot in Singapore Property Market: Strata-titled Office, Colliers International White Paper March 2012, Web
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)]
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
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.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
References
Michelle Tee and Koh Siok Hui, Bright Spot in Singapore Property Market: Strata-titled Office, Colliers International White Paper March 2012, Web
Subscribe to:
Posts (Atom)
Posts
