What does Owner-Occupier mean?

Every day, 99.co picks a piece of property jargon to explain it. Today we look at the term owner-occupier, and what you need to know about it:

What is an owner-occupier?

An owner-occupier is a person who lives in the property they own. This is often used interchangeably with terms like “home owner” or “home buyer”. The general assumption is that, because owner-occupiers live in the property, they have different priorities compared to landlords or investors.

Financial considerations are also different for owner-occupiers, as compared to investors. For example, an investor often lets out the entire property, thus generating rental income to cover housing costs. But this is different for owner-occupiers, who often generates no income stream from their property (although they may let out rooms to offset the costs somewhat).

The other important distinction is that owner-occupiers are subject to different tax rates.

How are the tax rates different?S

The tax rates for owner-occupiers is as follows. The sum on the left is based on an estimation of how much rental income your property could generate in a year, by IRAS estimates (this is called the Annual Value, or AV):

First S$8,000 Next S$47,000	N/A 4%	S$0 S$1,880
First S$55,000 Next S$15,000	– 6%	S$1,880 S$900
First S$70,000 Next S$15,000	– 8%	S$2,780 S$1,200
First S$85,000 Next S$15,000	– 10%	S$3,980 S$1,500
First S$100,000 Next S$15,000	– 12%	S$5,480 S$1,800
First S$115,000 Next S$15,000	– 14%	S$7,280 S$2,100
First S$130,000 Above S$130,000	– 16%	S$9,380

For example, if IRAS deems that your property could generate S$4,000 in month if rented out, you have an AV of S$42,000. You would thus pay a tax of 4% of (S$42,000 – S$8,000 = S$34,000), or S$1,360 per annum.

For non-owner-occupied properties, the taxes are higher:

First S$30,000 Next S$15,000	10% 12%	S$3,000 S$1,800
First S$45,000 Next S$15,000	– 14%	S$4,800 S$2,100
First S$60,000 Next S$15,000	– 16%	S$6,900 S$2,400
First S$75,000 Next S$15,000	– 18%	S$9,300 S$2,700
First S$90,000 Above S$90,000	– 20%	S$12,000

So in the above example, if your property with an AV were rented out, you would pay S$3,000 for the first S$30,000, and 12% of the remaining S$12,000 (S$1,440). That’s a total of S$4,440 per year.

How do priorities differ?

Owner-occupiers focus a lot more on personal comfort, than on the monetary rewards of the property. A typical example of this would be the buyers of million-dollar flats.

For example, consider the flat that was sold for over S$1 million in Queenstown. At the time it sold in 2018, the median price was only around S$850,000. There were many alternative flats in the same area, which had the same amenities but were cheaper.

Why would anyone pay S$150,000 more than the average?

The reason is probably that they’re home buyers first, and investors second (or perhaps not investors at all). They’re probably aware that they’re overpaying; but they don’t really care, because the view, the location, or the neighbourhood is more important to them. They may intend to stay there till the very end, thus making any talk of capital gains or rental yields irrelevant.

The second difference is that owner-occupiers may seek amenities different from the norm. An investor would be pretty excited, for instance, to find a low-priced unit next to a neighbourhood mall. In their eyes, that’s a gold mine. But an owner-occupier who likes peace and quiet may not be interested – the mall brings congestion and crowds that they prefer to do without.

This can result in situations where owner-occupiers prize units that are – by conventional wisdom – less desirable. Remember, they don’t care as much about resale value as they do personal comfort.

In essence, owner-occupiers buy for emotional and lifestyle driven reasons, whereas investors tend to be strict economic rationalists.

That’s not to say owner-occupied properties are never investments

While owner-occupiers and investors have different priorities, it’s wrong to think of them as being completely separate mindsets. Singapore home owners, especially, tend to fall somewhere between an owner-occupier and investor.

This is because most Singaporeans can’t afford a second house to rent out, but also rely on their homes as a retirement asset. For example, when you buy a resale flat, you may think like an owner-occupier: you may be willing to pay more for a flat that’s nicely renovated, even though it’s not a quantifiable boost to your capital gains 15 years from now.

But at the same time, you may still be thinking about whether you can let out one room sometime in future; or you may be attracted to the area because you’ve seen the history of growing property values.

Likewise, some owner-occupiers do rent out their homes. They may let out a room to supplement their retirement income, for example, after the last of their children have moved out. This rental income may be a big factor in their retirement planning, and they may strategically renovate, refurbish, and refinance like any other investor.

The reality is, most Singaporeans – even owner-occupiers – are a hybrid of home-owner and investor. It’s relatively unusual to find someone (at least among Singaporeans) who is purely a homeowner.

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