3 alternative ways of financing a property purchase

Savvy investors are always on the lookout for new or unconventional ways of growing their property portfolio.

The introduction of several cooling measures has made it harder for average Singaporeans to get financing for investment properties. However, one expert has lifted the lid on some lesser known methods available such as co-investing, which could prove beneficial for singles.

By Stuart Chng

Many Singaporeans love investing in real estate because it offers long-term capital growth and allows them to collect rental income and retire early. It can also be passed down through generations to provide inflation beating income that their loved ones can comfortably rely on.

However, this appetite for property investments can be both a blessing and a curse. While a healthy interest for properties can stimulate the economy through job creation and infrastructure spending, over-consumption can wreak financial havoc on individuals and easily spiral into a nationwide crisis, such as the US subprime crisis a few years ago. That predicament is to some extent the reason for the ongoing property cooling measures in Singapore.

With the various restrictions imposed by the Monetary Authority of Singapore on property purchases, investors are now looking for alternative investment strategies. In this article, we will explore three different property financing options that investors can consider to help them build solid investment portfolios.

Co-investment strategy

Many singles may have insufficient funds to buy their first property, and so one potential strategy is to jointly co-invest with another single friend. They can combine their cash and Central Provident Fund (CPF) savings to start investing immediately, instead of waiting several years to accumulate more savings while facing the prospect of a shorter loan tenure.

The main issue with co-investing is that if either party were to get married, they would not be able to apply for a Build-To-Order flat or executive condominium unit, unless they dispose of their investment property at least 30 months beforehand.

If they were to buy a private property as a matrimonial home, they would have to set aside half of the basic retirement sum ($83,000 at the time of writing) in their CPF Ordinary and Special Accounts before the excess savings can be utilised, and will not qualify for an 80 percent mortgage loan if they have an outstanding loan. They will also be liable for Additional Buyer’s Stamp Duty.

This strategy only works for close friends as you will need their consent to sell the property in future. Moreover, if you intend to settle down within the next three years and must dispose of the investment property, you will need to pay Seller’s Stamp Duty, so tread carefully.

Equity loans

An equity loan (also known as a term loan or gear up) is a common type of financing that allows property owners to withdraw equity built up over time from their properties for short-term cash flow needs. Some people may use it as a low interest credit line (rates are similar to mortgage loan rates) to pay off higher interest loans like credit card and car loans.

The official position on equity loans is that they are not allowed to be used for property investments. However, it is widely known among savvy investors and without a doubt, the authorities themselves, that this is not actively enforced.

Individuals and families holding property portfolios with low or zero leverage typically use this strategy to free up equity and recycle them into other investments. This helps them to optimise their return on equity, take advantage of low interest rates and redeploy the funds into higher yielding assets.

There are limitations to using equity loans as an alternative form of financing, and investors risk breaching the terms of the loan agreement. It is important to highlight that CPF savings cannot be used to finance the monthly repayments of a term loan and purchasers would need to do so entirely in cash.

Assets pledging

In the past, asset-based lending was widespread and investors with a few hundred thousand dollars in the bank were eligible for multi-million dollar loans without the need to ascertain their loan servicing eligibility. This was scrapped with the introduction of the Total Debt Servicing Ratio (TDSR) framework in June 2013. As such, the days of easy credit are over.

There are two types of pledged assets, namely liquid assets such as Singapore dollar deposits, and savings and other securities like stocks, bonds, foreign currency deposits and gold.

This strategy of property financing works when buyers have zero or insufficient income to support their loan application. Although they may be cash-rich, the lack of income proves an obstacle for banks to grant a loan. Hence, asset pledging helps to increase their income to levels that are in line with the TDSR criteria and allows them to qualify for purchasing property which they might otherwise not be able to do.

Assets that are pledged for at least four years are taken at 100 percent of their value. If they are pledged for less than four years, an immediate haircut of 70 percent of their value is applied.

For instance, in the case of an unemployed person, for every loan of $100,000, about $36,000 in liquid assets must be pledged for four years, but this rises to $120,000 if it is pledged for less than four years.

To utilise this strategy, buyers would need to have a significant amount of savings, assets or financial support.

In summary, the optimal use of funds and structuring of financing strategies is an area that investors should continually explore to put their savings to work. Property investment is a lifelong journey of learning and fine-tuning strategies which pays huge dividends for investors.

Stuart Chng bio
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