Changes to stamp duties and mortgage equity loans: What does it all mean?
by Ryan Ong
LATEST tweaks to property rules are not going to cause prices to shoot up again. There, everyone can relax now. Contrary to the rumours you’ve heard, the cooling measures are not lifted, banks are not giving out loans like door prizes, and you are not going to get a mortgage by replacing your income statement with a pinky swear. The changes will have a positive effect on property prices, but nowhere close to the sudden surge we saw between 2009 to 2013.
What are the changes?
There are two changes being made to property related policies. The first involves changes to the Sellers Stamp Duty (SSD). The second involves changes to the requirements for home equity loans. To be clear, there is no lifting of cooling measures like the Additional Buyers Stamp Duty (ABSD). Likewise, the income to get a home loan under the Total Debt Servicing Ratio (TDSR) framework has not changed.
The SSD is a tax on property owners, who sell within a certain time of buying their house. Under the old rules, the SSD was as follows:
– Selling on the first year: 16 per cent of property value or price
– Selling on the second year: 12 per cent of property value or price
– Selling on the third year: eight per cent of property value or price
– Selling on the fourth year: four per cent of property value or price
There is no SSD after this.
Under the new rules, which will be in effect from March 11 this year, the SSD will be revised as follows:
– Selling on the first year: 12 per cent of property value or price
– Selling on the second year: eight per cent of property value or price
– Selling on the third year: four per cent of property value or price
There is no SSD after this. Note that this means there is no penalty for selling your property from the fourth year onward, whereas previously you would incur at least four per cent SSD.
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What effect will this have?
This rule change is only of interest to short term investors, who intend to sell a house within four to five years of buying it. For example, an investor might buy an under-development property, which will only be complete in four years, for a discount (there is often an early bird bonus for buying early).
The investor might use a Fixed Deposit Home Loan Rate (FHR) package, which may only charge 0.6 per cent interest per annum.
By the time the property is finished on the fourth year, the investor sells the property off for a profit. The low interest rate, early bird discount, and lack of SSD all mean the investor could see a quick buck this way (it’s not guaranteed). However, the number of short term property investors is quite small; most of our property investors look at the long term, and sell after 10 or 15 years of collecting rental income.
The average home owner probably won’t find this relevant, as it’s rare to sell your house so quickly. For HDB dwellers, who cannot sell their flat until after the five year Minimum Occupancy Period (MOP), it makes no difference that the SSD is one year shorter.
At the most, this could cause some property prices to move up a little, as flipping (the process of buying and quickly reselling houses for profit) does tend to drive up prices. But again, given how few people do it, the impact is not likely to be huge.
The requirements for home equity loans
A home equity loan is when you borrow against the value of your house. For example:
Say you bought your freehold house in the 1970s, for the then low price of $600,000. Today, your house is worth two million. While its value has appreciated, you are semi-retired and have a much smaller income.
Now let’s say you need a lot of money for some reason (to start a retirement business, pay for the grandchildren’s university fees, or what have you). You will find it hard to get a loan, because of your limited income. At the same time, you don’t want to sell your house to get the money. That’s when you might use a home equity loan.
You could borrow against the value of your house (say you borrow one million, or half its value), and pledge your house as collateral for the loan. Because your house acts as a guarantee, the bank will be willing to lend you that huge sum, and often at a super low interest rate. Most home equity loans only have interest rates of one per cent per annum.
As you can see, this is a good deal for any asset rich, cash poor Singaporeans; such as retirees who have paid up private properties.
But prior to the new rules, anyone who wanted a home equity loan had to meet something called the Total Debt Servicing Ratio (TDSR). The TDSR limits the maximum loan you can take: the repayment on the home equity loan, inclusive of your other debts, could not exceed 60 per cent of your monthly income.
This meant a lot of people with very valuable houses but low income (such as retirees) couldn’t get the loans they needed. The new rules, which kicked in on March 11, removes the TDSR restriction for them. If they get a home equity loan of up to half the value of their house (not more), they do not need to meet income requirements.
This rule change also does not affect many Singaporeans. For example, owners of HDB flats cannot get home equity loans anyway, as you must own private property to do it.
For home buyers who are getting their mortgage, there is no change to the rules. They must meet the TDSR requirements as usual; so it is not easier to get a home loan now.
Overall, there are only a few, specific people who will benefit from all these.
The handful of short-term property investors will be happy to learn about lower SSD. However, this alone doesn’t mean they’ve found a goldmine. Ultimately, they still need to bank on property prices rising significantly in a short time to make money; and a shorter SSD alone won’t cut it. It helps, but it’s not a godsend.
For people who are lucky enough to have valuable private properties, with equity they can tap, the rule change is a major relief. It gives them access to big, cheap, loans, which can be effectively reinvested elsewhere to boost their retirement portfolio, or pay off their higher interest debts. It also gives retired property owners another option to get cash, without having to sell their house.
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