This is a guest post from Dennis Ng, the founder of www.HousingLoanSG.com, who helps consumers to get the Best deal in Housing Loans in Singapore and he is a volunteer speaker for MAS’s moneysense program.
On 2 Feb 2010, I was invited by MAS to speak on News Radio 93.8 FM for its Moneysense program (National Financial Education Program) on the difference in getting Home Loans for investing vs Home Purchase.
I shared the differences, and the DJ Keith felt it was the first time someone explained it so simply to make it easy to understand.
For most home buyers, if they have Cash/CPF, they actually try to minimize the Loan amount. For investors, they typically try to maximize the loan amount. Why? Firstly, Rental income adds to their personal income and thus, adds to their Personal Income Tax. Thus, by maximizing the Loan Amount, they can enjoy “maximum deduction” as Interest paid on Housing Loan can be deducted against the Rental Income they receive.
If they borrow more money, eg. 80% vs 70% of Purchase Price, they can also minimize the Upfront Cash they put into the property, thereby reducing the “capital” they invest, by doing so, with a smaller capital invested, they would enjoy a Higher Return on Capital, given the same increase in property value.
Eg. If a person bought a S$1 million property and price goes up to S$1.3 million, if he borrowed S$800,000 and only invested S$200,000 of his money, he would have enjoyed over 100% returns. On the other hand, if he had borrowed S$600,000 and invested S$400,000 of his money, his returns might drop to slightly over 50% instead.
If you are buying a property as a home, you might want to time your loan period to the time you plan to retire. Eg if you plan to retire at age 60, then the loan period should ends by when you reach age 60.
On the other hand, investors try to lengthen their loan period wherever possible. They might stretch the loan up to age 70 and for clients in their 50s, they can still stretch the loan period to say, 20 or 30 years by adding in a Younger relative as Owner and/or Borrower.
For investors who plan to sell their property within the next 1 to 2 years, they might want to choose Housing Loan period with a shorter lock-in period or even Housing Loan package with NO lock-in period (ZERO Penalty period).
On the other hand, home owners might choose Housing Loan packages with lock-in period of 2 year or longer as typically loans with lock-in period comes with lower interest rates.
Use More Cash, Less CPF
Most home owners use a lot of CPF to pay for their property. Investors might actually use Cash instead of CPF, as any CPF used have to be refunded back to CPF account when the property is sold, together with Acrrued interest of 2.5% on the CPF withdrawn. On the other hand, if a person uses Cash, when he sells the property, he can withdraw all the profits (gains) on the property without need to lock the money inside CPF account.
Thus, most investors use more cash and less CPF for their property investments. Furthermore, in future if the investor wants to get an additional loan on his property, he can do so, while the person who used CPF needs to deduct CPF used from the maximum additional loan amount he can obtained.
Using an example to illustrate.
A person bought a property for S$1 million. Value of property rose to S$1.5 million after a few years. His Housing Loan outstanding is S$500,000. He can easily obtain additional loan of S$500,000 if he did not use any CPF. If he had for example, used S$300,000 CPF for this property, this amount S$300,000 has to be deducted from the additional loan he can obtain, in this example might be just S$200,000 vs additional loan of S$500,000.