If you have been actively searching for an investment property in the past year, you should have come across several developers offering different Deferred Payment Schemes (DPS), a popular marketing scheme that was previously abolished in October 2007 due to the upswing in the economy and the property market.
The return of DPS is yet another interesting and creative loophole that developers are using to incentivise buying in projects that have been slow to move, or burdened by the upcoming Qualifying Certificate (QC) and Additional Buyer’s Stamp Duty (ABSD) penalties for not selling all units within a stipulated period.
In the past, such schemes were only offered in new project launches, and payment of up to 90 percent of the purchase price could be deferred until the Temporary Occupation Permit (TOP) date.
The latest versions of DPS are different from what they were previously, as they are now only allowed after the Certificate of Statutory Completion is issued, and the project is delicensed and no longer under the purview of the Controller of Housing.
What are the benefits of buying a DPS project?
The essence of a DPS lies in when the option needs to be exercised, and how long the completion period is deferred for.
Typically, a buyer would pay a 20 percent down payment (five percent in cash and 15 percent in cash or Central Provident Fund (CPF) savings) for a new unit, pay for stamp duties within two weeks of exercising the option to purchase, and start paying progressively increasing instalments within six to nine months as their housing loan starts disbursement. A buyer would also not be able to re-assign their option to purchase to another buyer without incurring the Seller’s Stamp Duty (SSD).
In a resale purchase scenario, a buyer would also pay the 20 percent down payment, pay stamp duties within two weeks of exercising the option to purchase, and draw down on the remaining 80 percent loan within 10 to 12 weeks. This means that he or she would begin servicing their monthly instalments upon completion as their loans are fully disbursed. In addition, a buyer would be able to resell the option prior to exercise if there were a provision of “And / Or Nominee(s)” in it.
The beauty of DPS lies in the flexibilities developers have upon delicensing their projects. Payment schemes can be tweaked to incentivise different groups of buyers with different needs.
Case study: Singaporean owner-occupier seeking to upgrade
Peter Tay faces difficulty in upgrading his family home as he has an outstanding loan for his current property. According to the Monetary Authority of Singapore’s (MAS) financing guidelines, he would need 25 percent in cash for the down payment, another 25 percent in cash or CPF savings, and be eligible for only a 50 percent maximum loan. He would also be liable for ABSD.
In his case, a DPS where the developer allows a longer deferred completion period would address his obstacles and reduce his down payment to 10 percent in cash, offer him the flexibility of moving into a new home early, ample time to sell his previous home and therefore qualify for an 80 percent loan.
Case study: Property investor keen to get into the market and feels there is potential upside in the next two years
Adrian Pang would like to buy into properties with ready cash flow, but feels that the ABSD could be revised in the next two years. He however, does not want his funds to remain idle in the meantime, and wants to start deploying them to work.
In his case, a DPS that allows him to own a property with minimal cash down, a deferred exercise and completion date means he could possibly pay less ABSD if the rules are tweaked in the near term.
As an investor, he would also enjoy the flexibility of being able to sell the property anytime during these two years without incurring any SSD.
As such, a project like Reflections @ Keppel Bay with its own version of the DPS, is suitable as it allows investors to take possession and rent out their units and exercise the option only 24 months later. The option between the developer and the buyer also has a nomination clause that allows the option to be exercised by another buyer should the market improve and the initial investor decides to sell.
This unique arrangement means that an investor experiences a higher return on equity before the completion, as he can start collecting rental income by putting down only 20 percent in cash and having no instalments to service for that same period. At the same time, the rental returns also lower the absolute entry price of his property, giving him an extra safety net.
That said, buyers would be prudent to do their due diligence on whether a project offering a DPS is marketed at a reasonable price today. Some projects have fewer discounts due to this scheme, and it would be wise to make a comparison between the normal payment scheme and the DPS. If the discount range is significant and the financial aspects make sense, it could be a wise choice to go with the norm instead.