Changes have been announced regarding the Seller Stamp Duty (SSD), and Total Debt Servicing Ratio (TDSR) restrictions on cash-out refinancing. These policy changes take effect from 11th March 2017, and are possibly to impact a little bit the private property prices. Here’s what they all mean:
Changes to the Seller Stamp Duty (SSD)
The Seller Stamp Duty (SSD) is a tax imposed for selling your property, within a certain time period of buying it. According to the old rules, the SSD works as follows:
|SSD for purchase of private property||0-1 yr||1-2 yrs||2-3 yrs||3-4 yrs||>4 yrs|
|Before 11 Mar 2017||16%||12%||8%||4%||No SSD|
|After 11 Mar 2017||12%||8%||4%||No SSD||No SSD|
Changes to the TDSR restrictions on mortgage equity withdrawal loans
Mortgage equity withdrawal loans are loans that use your property as collateral. This allows you to tap into the value of your house, without having to sell it.
Total Debt Servicing Ratio (TDSR)
Before: Loan obligation cannot exceed 60% of gross monthly income.
After: 60% threshold no longer applied if loan to value (LTV) ratio is 50% and below.
Say you purchased your house 25 years ago, and have since paid it off in full. Your house has also appreciated over the years; when you bought it the value was $800,000, but today it’s worth $1.4 million.
You could then take out a mortgage equity withdrawal loan. For example, you could borrow 50 percent of your current property value ($700,000) – a 50 percent Loan-to-Value ratio (LTV) – while putting up your house as collateral. Because your house is used to guarantee your loan repayment, the interest rate is extremely low (typically around one percent per annum).
This type of loan is often used to raise capital for other investments (e.g. set up a business or invest in a high growth fund), or to consolidate debt by repaying your other loans. For example, you could repay all your credit card, car, and children’s education loans at once, by replacing them all with a single, one percent per annum mortgage equity loan.
Previously, mortgage equity loans were subject to the TDSR. The TDSR imposes a 60 percent “cap”, which means your home loan obligations and your other outstanding loans, cannot exceed 60 percent of your monthly income. Therefore, if your income is $5,000 a month, your total debt cannot exceed $3,000 a month.
Starting on 11th March, the TDSR will no longer apply for mortgage equity loans with an LTV ratio of 50 percent or below.
Who benefits from the rule changes?
There are two main groups who benefit from the new rules.
Short-term property investors
The first group are short-term property investors who like to buy and sell single units. These investors will have an incentive to selling it over the short term (on the fourth year and beyond). For example:
An investor could buy a new, under-development condo using a FHR loan (banks like DBS and UOB have loans that are as cheap as 0.6 percent per annum for under-development properties). Once the property is completed in four years, they can sell it without incurring the Seller Stamp Duty. As such, they pay low interest for the first three years, and then cash out on the fourth.
Even using other types of home loans, these investors stand to benefit. This is because most home loans have very low interest rates (teaser rates) for the first three years. Just before the interest rates are set to rise, the investor can offload the property.
As such, new developments that are between 3 – 3.5 years to TOP, such as eg. Grandeur Park Residences, Parc Riviera, Park Place Residences and The Clement Canopy might stand to gain. In such cases, there is usually a small jump in capital appreciation and a spike in liquidity when TOP happens. One of the reasons why investors should buy a unit now and time it to sell in 3 years when the Seller Stamp Duty/TOP is completed.
The second group to benefit are retirees, those who mostly paid up housing, but with little income.
For example, a retiree might own a property that is worth $2 million, but have a small sum of savings on hand. This group of people wouldn’t have been able to get mortgage equity loans before the rule change, as they cannot meet the TDSR with little income.
However, there is a caveat; this will only work if retirees can prove they are receiving a sufficient amount of income (be it via CPF repayments, savings etc) to begin with. When doing an equity withdrawal, banks will need to assess one’s repayment capability, so retirees with no income do not stand to benefit unless they can show they have some means of repaying the loan.
Who doesn’t benefit from the rule changes?
HDB flat owners/buyers
For most HDB flat owners or buyers, these rule changes will not matter much to them. You cannot use mortgage equity withdrawal loans for HDB flats, only private property. Likewise, the easing of the Seller Stamp Duty is not relevant to most flat buyers; HDB flat buyers cannot sell their flat before the Minimum Occupancy Period (MOP) of five years anyway.
In addition, Singaporeans who have been servicing their mortgage using their CPF Ordinary Account (CPF OA) will not benefit much. This is because the amount you can borrow against your house is reduced by the CPF monies you have used (if your entire mortgage was paid using your CPF monies, you would not be able to borrow anything).
However, there is a small group of HDB owners that can still benefit – those who have taken a bank loan to finance their HDB AND have cleared 50 percent of their loan. This group of homeowners would also have their TDSR lifted and able to take up other loans for big ticket items such as a car, or a second property if they’d like.
Long term and foreign property investors
Long-term investors who want to buy and collect rent over 10 or 15 years, or long-term investors, will also benefit less. Easing the Seller Stamp Duty restrictions will have no bearing on them, as they don’t intend to sell over such a short period anyway. However, they do stand to benefit from mortgage equity loans, as they will be able to cash out of their properties later. In addition, foreign investors might not benefit as much, as the Additional Buyers’ Stamp Duty (ASBD) rates are still applicable to them. Although they still do stand to save (a marginal amount of 4 percent) from the SSD changes if they sell earlier (see example below).
eg. Selling after 1 year:
Before 11 Mar 2017 : 15 percent ABSD + 16 percent SSD = 31 percent in tax payable
After 11 Mar 2017: 15 percent ABSD + 12 percent SSD = 27 percent in tax payable
What about the general effects on the market?
House flippers do tend to cause prices to rise, if there are a lot of them (because they buy and resell properties at a higher price, within a short period). This could push up private property prices across the board, in a broad sense.
However, these slight tweaks are not likely to cause prices to jump right away. The main causes of a sluggish property market are still the ABSD, and the TDSR restriction for home buyers. These have not yet been eased.