Investing in Property - Part 1

Investing in Property

Property is a tangible cash-generating asset that appreciates with time and doesn't quickly lose value. Buying a property is a smart way to invest your money and increase financial security in the long term. A good way to increase cash flow, it also offers many profitable investment opportunities. This investment potential is further supported by a limited supply of land in Singapore and Singaporeans' strong desire for home ownership.


Step 1 : Can I afford my dream home?

Property has been a popular route to wealth for many years. However, investment in properties is not a “sure win” thing as prices will depend on the economic and business conditions, timing of investments, housing and land policies, understanding of profits and risks, location and maintenance of property.


1. Economic and business conditions

If you are cash-rich, you could buy property when prices are depressed and hold on until prices have risen. However, if you are uncertain about having a stable income especially during an economic downturn, then you should think twice before investing.


2. Timing of investment

Time your investment so that you buy as property price is appreciating, and sell before they decline. Experience and constant monitoring of market movements would help you make better decision. You must have the financial resources to stay invested for some years, and shouldn’t bet on being able to make a quick profit on the property.


3. Housing and land policies

Equip yourself with the latest government policies, property developers’ plans and commercial banks’ practices as these may affect property prices.


4. Understand profits and risks

Be realistic when you do your sums on the cost of purchase and the expected return or income from the investment. In particular, you should assess how you’d be affected if the property market falls. That’s when your expected return/income would fall, while you’d still have to keep up with your on-going mortgage costs.


5. Good location

A well-maintained property in a good location increase rental yield or ability to fetch a good price at the end of the investment. It’s thus important to make a physical inspection to ensure that the environment is suitable for occupation or investment.

In addition, buying a property may have a significant impact to your financial health. Hence, it is imperative that you understand the costs and profits of investing in a property. A wrong decision can have serious implications to your financial health, and affect your retirement nest-egg.

Some of these costs are:


Up-front costs
Booking fee

A portion of the purchase price that must be paid before an Option to Purchase (OTP)* is issued. The amount is negotiable and is typically 1% to 5% of the purchase price. The OTP will be valid for a period agreed by you and the seller, during which you own the sole right to purchase the property. To exercise the OTP, you will have to pay 5% or 10% of the purchase price less the booking fee. The first 5% of the purchase price must always be in cash and the balance can be a combination of cash and/or Central Provident Fund (CPF) savings^.

Stamp Duty

Stamp duty is imposed on documents executed for the sale and purchase of a property. Duty will be computed on the purchase price or market value of the property (whichever is higher).

  Computation of Stamp Duty

Duty payable at ad valorem of the purchase price (PP):

First $180,000 1%
Next $180,000 2%
Thereafter 3%

Stamp duty is to be paid within 14 days from the date of acceptance of the OTP or Sale and Purchase (S&P) Agreement#.

Legal Fees

The costs for legal services rendered in the purchase of the property and mortgage documentation relating to the bank loan, and which may be paid via CPF.

Housing Agent's Commission and Fees

A fee paid to the housing agent engaged for the purchase of the property. The quantum or amount of the commission is based on a certain percentage (varying from 1% to 2%) of the purchase price.

Housing Agent's Commission and Fees

A fee paid to the housing agent engaged for the purchase of the property. The quantum or amount of the commission is based on a certain percentage (varying from 1% to 2%) of the purchase price.

Home Advice Tips
Require financing for your Booking Fee?

Bank bridging loan can help you procure your dream home while you await the proceeds from the sale of your existing property.

Should I use all my CPF funds?

You are advised to set aside at least 6 months of CPF savings for the monthly instalments to cater to any unforeseen circumstances.

* An OTP is a right or option given by the vendor of a property to an intending purchaser to buy the property at a specified price within a specified period of time (the validity period of the option).
^ Only the amount in your CPF Ordinary Account can be used.
# An S&P Agreement is a private contract between the buyer and seller for the sale and purchase of a property. Once the agreement is signed, neither party may withdraw from the Agreement.
Relocating costs
  • Outstanding mortgage costs
  • Renovation costs
  • Movers
Ongoing expenses after your purchase
Property Tax

A tax on all immovable properties (houses, buildings or land). All property owners are liable to pay property tax. It is payable based on a percentage (Tax Rate) of the Annual Value (AV) of a property. The AV of the property is the estimated annual rent of the property. The Tax Rate is 10% per annum but if you purchase and occupy a residential property, you can claim for the concessionary rate of 4% per annum.

Fire Insurance

An insurance policy that covers the reinstatement value or outstanding loan, whichever is higher, in the event that the property it insures is destroyed by fire. The coverage does not include home renovations, moveable household contents and personal belongings.

Mortgage Insurance

A mortgage reducing term insurance policy that provides for the repayment of your outstanding mortgage loan in the event of death, terminal illness or total and permanent disability.

The insurance payment may be higher or lower than the outstanding mortgage loan, depending on your choice of interest rate and the initial sum insured.

Conservancy or maintenance fees

Fees collected for the purpose of maintenance and use of common property (e.g., tennis courts, lifts, common areas etc.)

Apart from understanding the costs and conditions for investment, it is also prudent to check out on your CPF matters.

Points to note:

  1. If you are a HDB owner or occupier purchasing a private property, you will need to ensure that you comply with CPF rule on minimum occupation period.
  2. You can use your CPF to purchase more than one property after setting aside in your Ordinary and Special Accounts (including the amount used for investment from the Special Account) the prevailing Minimum Sum cash component if you are below 55 years, or the Minimum Sum cash component shortfall if you are aged 55 and above
Home Advice Tips
What are your buying objectives?

You should have a clear investment strategy that set out goals and objectives in your purchase. It should address the following:

  1. Long term/short term holding period
  2. Sufficient available funds
  3. Acceptable risk level
  4. Rental yield VS Cash outflow

Rental yield is calculated as

If you are looking to buy and resell for a profit, otherwise known as flipping, the returns can potentially be high but you do need to consider the financial costs before deciding if it is worthwhile to do so.

Costs

  • Stamp Duty
  • Legal Fees
  • Housing Agent Fees
  • Cancellation Fee / Full Redemption Fee for Bank Loan
  • Interest Incurred on the Bank Loan
How does the CPF withdrawal limit affect my housing loan?

You should be aware that there are withdrawal limits on the use of CPF for housing. Once you reach the limits, you may have to pay the housing instalments fully in cash. If you are using your CPF to pay your home loan, it is prudent to pay off your mortgage by the CPF withdrawal age of 55 due to the reduced CPF contribution rates after 55.

 

Step 2: Do I qualify for a home loan?


How do I qualify?

You can obtain a housing loan In-principle Approval* from the bank before you commit to your purchase. This will give you a clearer picture of your loan eligibility.

Credit assessment checks that you will be subject to upon your request for a loan:

  • Proof of regular income (e.g., Income Tax Notice of Assessment / latest computerised payslip / CPF contribution statement for the last 12 months)
  • Credit bureau checks (e.g., Good payment records for credit cards / previous or existing loans, no previous blemishes such as discharged bankrupts)
* An indication by the bank that it will grant a prospective buyer a home loan. However, an In-principle Approval does not constitute a formal approval. Further checks and conditions may be imposed by the bank.

How much can I borrow?

Two criteria banks use to access your loan eligibility:

  1. Financial Commitment-to-income Ratio

    A computation of your total monthly debt obligations (e.g., other home loan commitments, car loan, overdraft facilities etc.) to your total monthly gross income. This is to determine your repayment ability over a specific tenure.

    As a rule, your total financial commitment for loans per month cannot exceed 40% of your household income.

  2. Loan-to-value (LTV) ratio

    The amount of housing loan on a property in relation to its value expressed in percentage. The maximum LTV that banks in Singapore can legally finance: 90% of the purchase price or property's current market value whichever is lower. Do check with your bank for details.

    Factors that determine the LTV:

    • Singaporean / SPR / Foreigner
    • Use of property for owner-occupation or investment
    Home Advice Tips
    What is the difference between LTV 80% and LTV 90% financing?

    Banks generally offer lower interest rates for financing of housing loans with LTV less than or equal to 80%.

Which home loan should I choose?

Home loan packages are usually benchmarked by different indicators:

  • Board Rate determined by the Bank
  • Interbank Rates (e.g., Sibor* and SOR^)
  • CPF Ordinary Account Rate

Look out for these benefits in loan packages:

  • Absolute transparency which are pegged to publicly available benchmarked rates such as Sibor and CPF Ordinary Account Rate
  • Peace of mind; Get one where you'll be absolutely clear how much interest you will pay
  • No surprises, no fluctuations and no sudden rise in interest rates
Home Advice Tips
Why is it important to understand what your mortgage rate is benchmarked against?

Mortgage rates that are subject to the bank's discretion or vaguely defined factors such as processing costs, market rates; market competition and business costs; may adjust unexpectedly resulting in a sudden increase in your monthly mortgage instalment. You should know exactly how you are being charged for your mortgage. Do not leave it to chance.

* Sibor refers to the Singapore Interbank Offered Rate. Types of Sibor rates available include 3-month, 6-month and 12-month Sibor. The 3-month Sibor will be subject to change every 3 months to the prevailing 3-month Sibor. The 6-month Sibor will be subject to change every 6 months to the prevailing 6-months Sibor. Similarly, the 12 month Sibor will be subject to change every 12 months to the prevailing 12-month Sibor. For the prevailing Sibor rates, you can refer to Business Times or financial service providers such as Bloomberg and Reuters.
^ SOR refers to the Swap Offered Rate. Types of SOR rates available include 3-month, 6-month and 12-month SOR. The 3-month SOR will be subject to change every 3 months to the prevailing 3-month SOR. The 6-month SOR will be subject to change every 6 months to the prevailing 6-month SOR. The 12-month SOR will be subject to change every 12 months to the prevailing 12 month SOR. For the prevailing SOR rates, you can refer to Business Times or financial service providers such as Bloomberg and Reuters.

Step 3: Search for your dream home

Buyer's responsibilities

Ensure Satisfactory Condition of Property

The seller and his agent are not obliged to ensure that the property you are about to buy is defect-free. As a precautionary measure, we recommend that you fix an appointment with the seller to inspect the property and enquire on the asking price before deciding on anything.

Things to note while viewing the property:

  • Were there any additions or alterations?
  • Were these additions or alterations approved by the relevant authorities?

If no approvals were obtained, do note that banks will only provide financing subject to the property being restored to its original condition.

Home Advice Tips
How do I ensure satisfactory condition for uncompleted properties?

Uncompleted properties from licensed developers will include a 12-month defects liability period starting from the receipt of Notice of Vacant Possession by the home purchaser. The developer is obliged to rectify any defect which becomes apparent in the unit, common property or housing project. Please refer to your Sale & Purchase Agreement for the procedures involved in rectification of defects and claiming for the cost of rectification works.

Step 4: Obtain the Current Market Value (CMV) of the property from the Bank

The Current Market Value (CMV) of the property is obtained through a panel of valuers approved by the banks. Banks do not provide their own valuations of property. The quantum of loan (Loan-to-Value) provided by the Bank will be based on the CMV of the property. It is thus important that the following details provided by the developer / seller are accurate:

  • Address of property
  • Property type (Landed, Condominium, Others)
  • Land / built-in area
  • Freehold / leasehold (999 years/99 years)
  • Renovation (how much was done and when)
  • TOP Date
  • Age of Property

For the list of details required, please refer to Your Dream Home Checklist.

Home Advice Tips
Will the Bank's valuation of the property and purchase price differ?

The Bank's valuation, obtained through its appointed panel of valuers, may be lower or higher than the purchase price. In the event the Bank's valuation is lower than the purchase price, the purchaser has to pay the difference between the purchase price and the bank's valuation using cash. As such, the cash required up-front will be higher.

 

Investing in Property - Part 2

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Hans Chee
Senior Associate Director
Apex Link Properties Pte Ltd
hanschee@gmail.com
CEA Licence No.:
L3009377I / R002058G
+(65) 9786 8860