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Investors who do so in a relative’s name to avoid ABSD can’t hide any more
Mindy Tan
29 June 2013
Parents who try to outsmart regulators by buying properties in their children’s names will find that the loophole has been closed.
This was done as part of new rules announced by the Monetary Authority of Singapore (MAS), which discourage property loans that result in borrowers using more than 60 per cent of their monthly incomes to service debt.
When granting property loans, banks must consider all of a borrowers’ outstanding debt obligations - including loans for cars, renovations and credit cards.
A particular loophole that has been closed was the one that allowed homebuyers to circumvent the original intent of lowering the loan-to-value (LTV) ratio and imposing the additional buyers stamp duty (ABSD). MAS has specified that “guarantors” will now have to be brought in as co-borrowers and stated as one of the purchasers on the OTP (option to purchase).
This will discourage investors who tried to avoid paying the ABSD and obtain a higher LTV ratio by using their children’s names to purchase a second property. More of them had started taking this route, consultants noted.
“In some cases, children are still studying without any income. But under the previous rules, parents could act as guarantors for the children and the loan tenure could go well beyond the parents’ retirement age,” said Christine Li, head of research and consultancy at Orange Tee, citing the example of parents aged 55 buying properties in the name of children in their 20s without income. Now, banks will have to use the income-weighted average age of all co-borrowers based on their gross monthly income, when applying the rules on loan tenure.
Under the cooling measures introduced in January this year, borrowers who are on their second housing loan saw their LTV limit lowered from 60 per cent to 50 per cent. In cases where the loan tenure is more than 30 years or where the loan tenure extends past age 65, it was lowered from 40 per cent to 30 per cent.
Borrowers on their third housing loan saw their LTV limits cut by 20 percentage points to 40 per cent, and 20 per cent if the loan tenure is more than 30 years or extends past the age of 65.
ABSD rates were also raised for Singaporeans buying their second and third homes to 7 per cent and 10 per cent respectively.
While this clause may have been targeted at homebuyers who were making use of the loophole, the overall message is one of financial prudence, stressed Lee Liat Yeang, a partner at Rodyk & Davidson’s real estate practice group.
“The new rule is clear that the borrower has to be one of the owners of the property to be financed. This makes it mandatory for one of the property owners, if not all, to be responsible for financing the purchase.”
“The other objective is to prevent a cloak to cover two 80 per cent loans in the guise of a guarantee for one of them,” said Mr Lee, referring to the LTV limit of 80 per cent for the first housing loan, assuming the loan tenure is not more than 30 years, and does not extend past the age of 65.
“It’s a message of prudence. If you let a person be principally responsible for two loans (by taking one loan and guaranteeing the other loan), you are allowing that person to be financially imprudent and over-stretched.”
DTZ’s South-east Asia chief operating officer Ong Choon Fah pointed out that after January’s cooling measures, it was widely expected that demand would taper off.
One of the reasons this had not happened could be that people were buying using proxies, she reasoned.
“The other factor to take into consideration is that interest rates are expected to rise and property is a long-term investment,” she said, adding that with an ageing population financial prudence is of greater importance.
“The impact will be mostly felt in property segments that have a relatively high level of investment demand, such as the high-end segment, Sentosa Cove and certain properties located near MRT stations. However it may temporarily boost the demand for small strata-units as some die-hard property investors may turn to buy properties which have a relatively lower price quantum,” he added.
In line with last night’s announcement, the Urban Redevelopment Authority announced that the tender closing date for the residential site at Tampines Ave 10 (Parcel B) will be July 16. The tender was originally scheduled to close on July 2.