Singaporean Special: How to fund your 2nd and 3rd property?
How can a Singaporean couple fund their 2nd and 3rd property?
Singaporean's first property is usually for home stay. Therefore, when we buy our first property, our consideration tends to be non-investment related as our main focus is to buy a home that we love to stay in rather than for its investment value. We may even buy a house above market value because investment value is the last thing on our mind at that stage of our life. Therefore, after putting money in that first property, how does a typical Singaporean couple fund their 2nd and 3rd property? If you are lucky and your first purchase meets that of an investment grade property (Good location, located in growth area, at or below market value etc), expanding your property portfolio would be an easier task. However, if your first property is located in a less ideal location with insufficient price increase potential, but you desire to increase your net worth by expanding your property portfolio, careful assessment and planning needs to be made.
We suggest that you engage a real estate professional (not just a real estate agent) who has an understanding of the real estate regulations, property trends and mortgage loan information to assist you. We will start by first understanding your investment objectives and your risk profile.
Some of the methods that you can use to fund your 2nd and 3rd property includes:
1. Co-investment with friends
This is applicable when your current property has not increased by a significant amount and you are unable to sell or release equity from your first property. You can jointly co-invest with your friends by combining each other's cash and CPF. However, as this is your 2nd property,
- You will need to set aside half the amount of the full retirement sum in your CPF OA and SA accounts before you can use the excess amount .
- Your maximum loan is 50%
- You will be liable for ABSD of 7%
2. Decoupling of Mortgage
If both you and your spouse has a strong income such that either of you can support the mortgage loan on one single income and still fulfill the TDSR requirements, you can request for a decoupling of mortgage during refinancing. This effectively “frees up” one owner to get maximum loan for a 2nd property as this will be then be his/her first mortgage (up to 75% LTV) subject to TDSR.
3. Home Equity Loan
Home Equity Loans or Term Loans allows a property owner to obtain cash from the value of your property that has been built up over the years. For example, if your current property was bought in 2007 at $1m is now worth $1.75m, you can now use your home as a collateral to obtain up to 80% of the current property value. In this case, at a current price of $1.75m, the amount of loan you can get is $1.4m minus your outstanding loan amount minus amount of CPF used with accrued interest. Although officially not allowed to be used on property investments, authorities do not actively enforce it. It is also important to note that repayment of monthly installment for Home Equity Loan can only be made in cash and NOT CPF.
When you fund your property purchase with Home Equity Loan, it is a debt and there is a risk of foreclosure involved. As with any strategy of high gearing, a risk mitigation strategy need to be put in place for this method.
4. Asset Pledging
If your income is insufficient to meet MAS' TDSR requirements, you can use your assets for pledging to the bank to augment your income to a level that meets the 60% threshold. MAS categorizes the assets into 2 types (liquid and others). Liquid assets refer to Singapore dollar note and coins and those deposited in bank accounts. Other assets include collective investment schemes, business trusts, stocks, foreign currency deposits and gold.
For liquid assets, the bank will recognize 100% of its value if you pledge it for at least 4 years. On the other hand, if you pledge for less than 4 years, a hefty discount of 70% is applied. For other assets, 70% of the value will be recognized if you pledge it for at least 4 years.
For example, if you pledge $300,000 of Singapore dollar cash to the bank, it will be amortized over 48 months at a value of $300,000/48, ie. $6250 per month. This means you have added $6250 to your monthly income during your loan application which can be used to meet the TDSR requirements.
There are other intricate calculations and creative solutions that we cannot describe in detail in this article. To recommend a strategy, we will need to further assess your investment objective, needs, risk profile, income and CPF balance. Please contact us for further discussion.
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