Buying a Second Property?

Property upgraders and those purchasing a second home, face an uphill financial battle, warns Adam Tan.

(Buying a second property now requires more time and a greater financial outlay. Image courtesy of Singapore Tourism Board.)

The anti-speculation measures of 2010 have made it clear that HDB flats are not to be used for investment purposes. If you wish to use property as an investment, private property or realizing capital appreciation when you upgrade your HDB flat are your options.

Consider a scenario where you are buying a new, second property for investment or your own occupation, while still servicing a mortgage. This means, you would be moving house while still paying off your current housing loan.

Potential second property purchasers will now find that the minimum cash deposit has now been raised from 5% to 10%, while the Loan-To-Value (LTV) ratio – the amount you can borrow based on the value of your current property – has now been lowered from 80% to 70%.

For a million-dollar property, you’re now going to need S$100,000 in cash and a further $200,000 in CPF monies for the down payment. Before the new measures, it was $50,000 and $150,000 respectively. Any shortfall in CPF monies will also have to be made up for in cash.

Compare that to the $50,000 cash you were paying prior to the new measures, and factor in the probability that your CPF was probably used to offset your first mortgage, it leaves you shouldering most of the second property’s down payment in cash, and suddenly you’re looking at a potential $300,000 cash outlay.

Of course, it’s still possible to get an 80% bank loan. You just need a document from your first mortgagee bank that states your outstanding loan will be discharged upon the sale’s completion, the IRAS certificate that proves your buyer paid stamp duty, and the signed Sale & Purchase Agreement (Private Property) or Approval Letter (HDB).

If you want to get that 80% bank loan, you now have to wait even longer before you exercise the option on your new property. For private property owners, you have to wait an extra five weeks for your buyer to exercise the option, pay the stamp duty and for you to get a copy of that stamp duty. But at least you can privately arrange to stay for that extra five weeks till you buy your new place.

For HDB upgraders, and with most of Singapore living in HDB flats, this would be the majority, having to use the Approval Letter to get an 80% bank loan now means they only have six weeks till the completion date when they have to hand over vacant possession of the flat. That means they cannot ask for an extension of stay. They cannot rent the flat since the new tenant has to fulfill a five-year MOP. The only option available is to rent for the two or three months it will take to get their new flat. Hopefully, the HDB and MAS will iron out this ruling, maybe accepting the Exercise of the Option for 80% for the new bank loan. Otherwise, many HDB upgraders will be caught in limbo for a couple of months when selling their flat.

First-timers meanwhile can look forward though to more reasonable HDB flat prices in the next few years as the supply of new flats increases. While most people can still use property as investment, speculators should be far more cautious. Quick turnovers are a thing of the past, as you will now have to wait for three or five years to be up before upgrading, depending on whether you stay in private or public housing.