With the latest round of cooling measures - the 7th since 2009- instituted on 12 January 2013, demand for residential properties could soften. Nevertheless, some cash-rich Singaporeans may still be inclined to invest in housing. This article takes a look at existing and new regulations, that have taken effect from this 7th round of anti-speculative legislation, governing Singapore citizens' purchase of a second residential property, while still holding onto their first purchase.
Eligible type of housing for the 2nd purchase
The housing category in Singapore can be broadly classified into private and public. In between are the EC (Executive Condominium) and HUDC (Housing and Urban Development Company), with the latter no longer being built.
Regardless of which category your first residential property belongs to, your second purchase can only be private, resale EC or HUDC. Table 1 illustrates this clearly. (See Table 1)
Cash down payment
With effect from 12 January 2012, the minimum cash component of the down payment has been revised from 10% to 25% of the valuation limit (defined as the lower of current property value or purchase price), for the second and subsequent residential property purchase.
Loan-to-value (LTV) ratio
In a similar vein, the LTV ratio has been tightened to 50% or 30% if the loan tenure exceeds 30 years or extends past age 65 – down from the previous 60% or 40%, respectively.
ABSD (Additional Buyer's Stamp Duty)
Under the revised rules, buyers will also have to incur a 7% ABSD, on the higher of the purchase price or valuation, for their second residential property purchase.
CPF (Central Provident Fund) witthdrawal limit
If you have already utilised the fund in your CPF Ordinary Account (OA) for your first home, you can still use it for the purchase of your second and subsequent residential properties subject to the multiple properties (MP) rule.
Under this rule, which took effect from 1 July 2006, there is a lower limit to the CPF fund you may use as compared to your first residential property.
For the second and subsequent residential properties, you can only withdraw your CPF fund up to 100% of the valuation limit if the remaining lease of the property is at least 60 years. If instead the lease is between 30 and 60 years, the applicable Withdrawal Limit is computed according to the below:
= (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
In addition, you are allowed to use the fund in OA only after setting aside half of the prevailing Minimum Sum if you are under 55 years old.
The fund in both your Ordinary and Special Accounts (including savings invested under CPF Investment Scheme for Special Account) will make up the Minimum Sum. Presently, the Minimum Sum is S$139,000, but it is revised annually on 1 July.
For those age 55 and above, you have to set aside the entire prevailing Minimum Sum, before you can use the savings in your OA.
Since you are only allowed to claim for owner-occupier tax rates, which follows a progressive tax structure, for one residential property. You have to incur a flat rate of 10% (on the annual value of the property) for the other property.
The leased-out house will always follow the 10% flat rate for non-owner-occupied house.
If you own both a private residential property and a HDB flat, and neither are rented out, the owner-occupier tax rates will automatically apply to the HDB flat. However, you may apply for a refund of the property tax for the unoccupied house. Please visit IRAS for the details.
With effect from 2014, the vacancy property tax refund will be scrapped.
The current flat tax for non-owner-occupied homes will be replaced by a progressive tax structure with rates that vary between 10% to 20%. This change will be introduced in two phases in 2014 and 2015.
Rental income is taxable at the prevailing income tax rates. Therefore, if you are planning to rent out either of your properties, the tax will reduce your net rental yields.
Before you embark on a second residential property investment, it will be prudent to work out if the rental income will cover the loan repayment, tax, and other miscellaneous fees; thus you may wish to contact a mortgage consultant for a free discussion. Conversely, you may want to use iCompareLoan Investment Calculator to check the annual returns you can earn from leasing out your property.
Despite the additiona1 financial outlay of income tax, the good news is that certain items on your leased-out property are tax deductible. In other words, these claimable expenses can be subtracted from the rental income – lowering the net taxable rental. The allowable expenses include property tax and interest on the loan taken to finance the leased-out property. Please refer to IRAS' “Rent from property” for the full list of claimable expenses.
Now, that you know all the additiona1 costs you have to incur in buying a second property, it is more critical than ever that you select a suitable mortgage that will minimise your interest payments. Speak to the mortgage brokers at iCompareLoan today for sound advice, go here!
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Susan Teo is a writer for research-focused Singapore mortgage consultancy firms: Property Buyer, iCompareLoan and Singapore Home Loan, which offer free professional advice and use reports from Singapore's best loan analysis system (exclusive to them) to help borrowers select the best property loan.