Despite measures to moderate demand for residential properties and keep overborrowing at bay in Singapore, many property owners are still snatching up second properties for themselves and for decent reasons. A second home can serve as an upgrade to your present living condition. It can also mean extra space for your kids to enjoy.
But while buying a second property or a second home can be a worthwhile investment, the act of purchasing one is a tough choice that comes with extra hassles, including extra stamp duties. So, before you move forward, here are the rules for buying a second property in Singapore.
Buying a second property can be quite challenging after you've narrowed down where you want to buy the property and its purpose; it boils down to the budget. Your budget must include ABSD. ABSD is the additional tax that applies to all subsequent properties. It is expressed as a percentage of the house's value or purchase price, whichever is more. New ABSD rates came into force in July 2018.
Singapore citizens: 12 percent ABSD on a second home
Singapore PR's: 5% ABSD on the first property and 10% on a second home
Foreigners: 20% ABSD rate on any property (Doesn't apply to American citizens)
Entities: 25% ABSD on any property plus an extra 5% in the case of house developers.
ABSD's are part of cooling measures to regulate the property market. It's always wise to factor in these expenses and determine if the purchase is worthwhile.
The Loan-to-Value ratio is the proportion of the house's value one can borrow if they decide to use a bank loan to finance a purchase. You can borrow up to 80% for first properties and put down the remaining 20% as a downpayment. The amount you can borrow drops significantly in case of long loan tenures.
You can use a combination of CPF and cash to put down the downpayment. But there are stipulations on the amount of CPF you can use. It is determined by your Total Debt Servicing Ratio (TDSR) and LTV.
It is always a wise idea to discuss with your financial manager first. Some buyers choose to sell their first properties to increase their TDSR and LSV and avoid ABSD because the second purchase will be processed as a first property.
Usually, properties under Singapore's Housing Development Board require a Minimum Occupancy Period of 5 years before you can purchase them. This applies to Executive Condominiums, too; they can only be privatized after 10 years. Always verify the MOP first. Also, you cannot buy a new HDB property if you already own one.
Different tax rates apply between properties purchased as investments and those used as homes by the buyer. Rentals must pay tax amounting to 10-20% of their annual value. For homes, the tax range is 0-16% of their annual value. The IRAS determines a property's annual value based on the rental income it could produce per year.
What are your loan options?
As explained before, if you already have a loan on the first property, your eligibility for a second property loan may differ. Your LTV ratio is the amount you can borrow for a particular house. It reduces with each additional housing loan. It's always good to finish paying one housing loan first before borrowing to buy a second property.
Your TDSR is the proportion of your gross monthly salary used to service a loan. The Singapore government says not more than 60% of your gross monthly income should go to loan payments.
We've already mentioned that there are restrictions on second property purchases if you own an HDB. Always check your eligibility before moving forward.
For an HDB, you will need to live in the property for a 5-year minimum period before you can sell, buy, or rent it. However, this doesn't apply for resale flats acquired without CPF grants before 30th August 2010.
Additional rules include:
A second home is a huge investment so invest in the right property. First impressions count a lot. Go inside, check the curb appeal, the walls, the roof, the bathroom, etc. check the neighborhood too, the noise, neighbors, and traffic conditions. You can always tell a property is right for you by how it tugs to you and the memories it brings to mind.
While trying to verify if the home suits your lifestyle, check with the URA too. What plans do they have for the neighborhood? That peaceful, serene neighborhood can turn into a busy, noisy business hub in a few years. It all depends on the URA's plans.
For rental properties, URA plans also impact rentability and market price. For example, the growth of lifestyle hubs may cause a spike in a property's market value.
Before taking the big step forward, set aside enough funds in case of emergencies when you can't go to work and make money. These emergency funds will go towards mortgage payments. Experts recommend setting aside emergency funds for at least 6 months of mortgage payments. This will keep you from having to sell your properties in an unfavorable market.
Buying a second property, whether for rental income or residential or purposes, is a big decision. You will have to check your eligibility and budget for ABSD. You'll also determine how to pay for the property and the proportion that will be met by a bank loan or CPF grant. Of course, this will be impacted by your LTV and TSDR.
It's always a good idea to work with a financial manager and a property agent to navigate this complex process. For more information on the Singapore property market, keep browsing our website.