Deferred Payment Scheme (DPS) Singapore: Worth it For Condo?

If you have been actively searching to buy a new condo, you might have come across several property developers offering different payment schemes when enquiring about the price. One such widely acclaimed marketing program used by property developers is the Deferred Payment Scheme (DPS).

This scheme allows buyers can move into their homes by making a small downpayment and buying some time to pay the rest of the sum.

Note that while DPS (and other schemes) offer enticing options, it is important to realise that if it sounds too good to be true – there must be a catch. There’s a price for everything, especially if it is something that lets you not pay a home loan for two years.

In this article, we will summarise all you need to know about DPS, how they work and learn why they might work out to be costlier in the long run.

What is a Deferred Payment Scheme (DPS)?

A Deferred Payment Scheme refers to a payment arrangement offered by many condominium developers where the buyer forks out only a certain percentage (usually 20% to 30% of the purchase price) as a downpayment and reserves the unit.

After the initial payment, the next payment is deferred. Depending on the developer’s rules, the next payment may come a few months or even two or more years later. There is no need to pay anything for a specified period of time (typically the next two or three years). This means the condo buyers could pay the downpayment and then have some time to save up for the remaining payment.

Here’s how a deferred payment for a condo works:

1. You pay to secure the Option to Purchase (5% of the purchase price);
2. Exercise the OTP and sign the S&P Agreement (15% of the purchase price) within eight weeks;
3. Pay nothing – no home loan instalment, no property stamp duties and so forth – for the next two years;
4. Pay the remaining 80% that can be deferred for 24 months.

So, instead of the usual 25% downpayment, your initial outlay is much lower.

In the time being, the condo buyer can undertake possession, move into the condo, or even rent it out without taking up any housing loans.

But why do property developers offer DPS to condo buyers and foreign investors? Well, DPS has a wide range of benefits not just for homebuyers but for property developers as well.

According to the real estate rules and laws in Singapore, the property developers are required to build and sell all units of their housing project within five years. Only if they succeed in doing so, they can be granted a remission of the ABSD, equivalent to 30% of the land price.

If they fail to sell all units within five years, they have to pay the 25% ABSD plus an extra 5% imposed by the government. In addition to the ABSD, foreign developers have to work hard for the Qualifying Certificate (QC) regime that demands to complete and sell out all units within five years, or face a hefty penalty of up to 24%.

Cautious of incurring such high-cost penalty fees and rigid timelines, many property developers choose to offer buyers a deferred payment scheme to help boost their property sales.

How does a deferred payment scheme work?

Say a completed new launch condo is up for sale at $1.6 million. To boost the property sales, the developer uses a DPS. This results in developers marking up the condo price by around 10%, say to 1.76 million in this case.

Here, the buyer can just pay $352,000 to get immediate ownership of the condo. Until the next two or three years (as per the DPS conditions), the buyer doesn’t have to pay anything but still move in or rent it out.

Many people also call DPS a ‘buy now and pay later’ scheme as it allows the buyer to move into the unit immediately and then pay for it later. This appears super attractive to landlords as they are assured positive rental incomes for two or three years (of course, if they find a tenant during this period).

However, the Ministry of National Development has urged buyers to “exercise due diligence and prudence” before committing to a property purchase under a deferred payment scheme.

Different types of Deferred Payment Schemes

Stay-Then-Pay Scheme

Known as the Stay-Then-Pay scheme, these developments require Singaporeans to pay a 10% downpayment (or 15% for foreign buyers) initially and pay the remaining 90% (or 85%) one year later. Ideal for those looking to buy a second property as they get more time to settle outstanding loans, sell existing properties, etc. which can help them qualify for a higher loan amount.

Preferential Payment Plan

Buyers need to pay 7% of the purchase price before they can move in, followed by 8% in the next year and the remaining 85% in the subsequent year. Just like Stay-Then-Pay, this scheme aids buyers who want to buy their second property by allowing them more time to manage their assets accordingly.

Enhanced Payment Scheme

Under this scheme, buyers need to fork out 20% of the purchase price, which is the Option Fee. This DPS allows buyers to exercise the OTP after the two-year deferment period and sign a master tenancy agreement with the developer to rent the condo for rental income.

The buyers can even resell the condo and re-assign their OTP to another buyer before exercising the OTP – without incurring the Seller’s Stamp Duty (SSD).

Buyers can benefit from reselling the condo if the property price increases or earn back some of their investment by renting it out. Plus, they also save money as they don’t have to pay stamp duties, property tax or maintenance fees for two years.

There are many other variants of DPS available in the market. Compare different DPSs to find which deferred payment scheme suits you best taking interest rates and account inflation into consideration.

Advantages of Deferred Payment Scheme (DPS)

The Deferred Payment Scheme is typically more appealing to Singaporean buyers who do not have enough cash as well as to landlords and property investors who want to earn rental income on their initial investment. As discussed above, these seem very good terms for buyers who intend to use the property as an investment as well as for those with outstanding home loans. Let’s see how.

#1 Pay a lower downpayment and a reduced initial cash outlay

Deferred payment schemes allow buyer to purchase a condo by putting down a small downpayment at the start, typically 20%, thus significantly reducing your cash outflow. The DPS requires buyers to put down just 20% of the purchase price as initial downpayment as compared to 25% upfront costs required by a conventional payment method. This small difference of 5% can easily translate to around $50,000 to $60,000, which is not a small change for any condo buyer.

#2 More flexibility in options

If a buyer is facing a problem in upgrading his family home due to an outstanding loan for his current property, a DPS can prove to be a valuable aid.

A deferred payment scheme with a minimal cash outlay and longer deferment period can offer the buyer ample time to settle outstanding home loans as well as sell his previous property to qualify for a maximum 75% home loan.

#3 Potentially avoid maintenance fees and property tax

Under a deferred payment scheme, buyers can even escape property tax and monthly maintenance fees to lenders or bank groups until the agreed deferred period, typically two to three years.

If the exercise date is beyond 21 days, it means the buyer is not the true owner of the property – and the developer is just allowing you to move in – during the deferment period, say two years. And if the buyer has not yet bought the condo, why would they pay for property tax or maintenance fees. However, in such cases, it is important to note that buyers cannot rent the condo unit during the deferment period.

Disadvantages of Deferred Payment Scheme (DPS)

There’s always a catch with things you feel are too good to be true, which is why we must analyse the pros and cons separately. Let’s take a look at some of the downsides of the deferred payment system.

#1 Potential undesirability of the property

Some people are of the view that units available for DPS are not worth it as these have been in the market for quite a while and yet unsold. This might compel you to re-think that if something is in such hot demand, why they have not been already taken up yet?

It is suggested for buyers to inquire about the reason behind why the units are still unsold upon the project’s completion. Check for things like less-efficient floor plans, outdoor views, amenities, etc. on your own before purchasing such units.

#2 Marked-up condo price

Property developers charge you more when you are buying a condo with deferred payment. Although the prices vary, in general, the condo cost goes up by 5% to 10%. Think of it as the added cost for the extra time granted by the developer for paying the remaining payment or allowing you to move in right away.

However, it is up to each buyer to decide whether paying $120,000 more for a $1.2 million condo is worth it or not.

#3 You might not get the terms you prefer

Different property developers offer different deferred payment schemes for different properties. Each scheme has different terms and conditions, which may or may not favour a buyer. For example, a genuine homeowner would be happy with the terms that allow them to pay the stamp duties, property tax, maintenance fees, etc. after the two-year deferment period.

However, an investor might not be very happy with such terms as this means they are not truly the owner of the property and thus can’t rent out the unit before two years. Investors usually look for schemes that allow them to rent out the condo as soon as they gain its ownership.

#5 Lowered maximum home loan amount

The maximum financing for a home loan that a buyer can get under normal conditions is 75% of the property price. Since MAS considers DPS a benefit for the buyer, according to MAS loan guidelines, this will be deducted from the purchase price when calculating the maximum loan amount one can borrow.

This means buyers of private condos using DPS will get smaller loan amounts, which will translate into a bigger downpayment when the buyer ultimately obtains a home loan at the end of the deferment period.

#6 Inability to predict the future

Life is full of uncertainties. No matter what and how much you plan, there might be emergencies or issues that cause a drastic change in your financial situation and ability to qualify for loans.

If your financial condition doesn’t stay stable in the next two or three years, there is a risk that you might fail to qualify for a sufficient bank loan after the deferment period is over. This can result in penalties imposed by the developer plus the loss of the initial downpayment you had made.

So… should I get on the Deferred Payment Scheme?

Surely, DPS is a win for certain types of buyers but might not turn out to be so for others. Those looking to upgrade or waiting for their en-bloc monies to come in might find such a scheme beneficial but for some buyers, the added property cost may be too heavy to bear.

Remember that not every scheme will be a good fit for you; different developers may have their own processes, terms and deals – so pick and choose wisely, depending on your financial capability.

There are different factors that make a DPS ‘good’ or ‘bad’, including the homeowner’s personal financial situation or the property they’re looking to purchase. Don’t let the deferred payment lure you into overlooking the fundamentals when comparing different properties.

If you want expert advice on purchasing a property with a DPS that best suits your situation or any help on getting the best home loans and financing, get in touch with us at DollarBack Mortgage today.