Inflation has been in the spotlight for weeks, and more rate hikes are expected in the coming months. If you’ve been thinking about buying a second home, it might be a good time to start planning for it now, since a rise in interest rates could lead to price stability in the housing market.
There are many factors to consider when purchasing a second home in addition to the property’s price, such as eligibility, affordability, and intention.
Eligibility
If you already possess a private property, you can purchase a second privately owned property without any repercussions. However, there are requirements that must be met before you may purchase your first public housing unit, whether it’s a BTO flat, resale HDB flat, executive condo (EC), or Design, Build, and Sell Scheme (DBSS) flat.
The Minimum Occupation Period (MOP) for a HDB apartment is 5 years. This means that you must live in the unit for that long before selling or renting it out. Before you can buy a home, you’ll need to make sure you can pass the MOP.
Do keep in mind that only citizens of Singapore will be permitted to possess both an HDB and a private property at the same time. Flat owners who are Singapore Permanent Residents (PRs) must vacate their property no later than six months after a private party purchases the unit.
Affordability
Since houses in Singapore are so astronomically priced, you’ll need to do some serious budgeting if you want to buy a second one. The following are things to keep in mind:
- Additional Stamp Duty for Purchasers
When purchasing a second home, you’ll be subject to the Additional Buying Power Tax (ABSD). Your individual circumstances will determine the fee.
As part of efforts to foster a lasting real estate market, the ABSD was most recently readjusted on April 27th, 2023. The table below reflects the most recent prices:
To buy a $1 million private apartment, a Singaporean citizen who already owns a HDB unit but wishes to upgrade will have to pay an ABSD of $200,000 (20%). Please keep in mind that this sum is in addition to the buyer’s stamp duty.
- Minimum cash deposit
If you used a bank loan to buy your first home, you probably only had to put down 5% in cash. However, the second property you buy will require a 25% cash down payment. If the home costs $2,000,000, a 25% down payment would be $500,000.
- Total Debt Servicing Ratio
To discourage people from taking on excessive debt in order to acquire a home, the Total Debt Servicing Ratio (TDSR) framework went into effect on June 28, 2013. Borrowing limits for first-time purchasers are capped at 55% (as updated on 16 Dec 2021) of their monthly gross income. Your total revolving credit card, personal loan, and auto loan balances count against the maximum.
The amount you can borrow for a second house may be significantly reduced if you still owe money on a mortgage on your first property. If this is not your first mortgage, you need just make sure that your housing loan repayments and other monthly financial commitments do not exceed 55% of your monthly income.
- Loan-to-Value Ratio (LTV)
If this is your first mortgage, you can borrow up to 75% of the property’s worth from a bank, however this drops to 55% if the loan term is more than 30 years or if you are older than 65. The LTV on a second mortgage is reduced to 45% for terms of up to 30 years. When the loan term reaches 25 years or the borrower reaches age 65, the LTV reduces to 30%.
It’s clear that you’ll need a lot more money to buy a second home while still making payments on your existing mortgage. If your home is worth $1 million, you’ll probably want to have:
- A $250,000 cash deposit
- To ABSD: $200,000
- To BSD, $24,600
- Make the last $300,000 payment in cash or via CPF.
- Obtain a $450,000 loan
You can use your Central Provident Fund (CPF) to purchase a second house, but only if you have already used your CPF to purchase your first residence and have withdrawn an amount equal to or greater than the current Basic Retirement Scheme (BRS) of $96,000 from your CPF Ordinary Account.
Intention
Because of the increased financial commitment involved in purchasing a second home, it’s important to have a well-defined goal in mind before making the purchase. Is it an investment property or a vacation home?
If you know what you want out of a property, you can better choose the sort of property and the best location for it. If the second home is an investment property, this is of paramount importance.
To evaluate your return on investment (ROI), you’ll need to calculate the rental yield and capital appreciation, just like you would with any other investment. A home acquisition is a sizable financial commitment, therefore it’s important to create a plan that takes into account things like:
- To what length of time do you plan to invest? Is your plan to sell after five years and pocket the earnings, or to keep the property and collect rent in perpetuity?
- When and how do you plan to stop losing money?
- How long would you hold on if your mortgage costs were to exceed the meager rental income?
- To what extent do you anticipate capital gains?
- Find out where your ideal tenants live
Buying a home in Singapore requires significant financial resources, and a second home will necessitate even more careful planning. The monetary repercussions of an error in calculation might be substantial. To avoid making mistakes, it’s important to lay out a detailed plan and seek the advice of a wealth planning manager.