As we approach the start of a new year, some Singaporeans may be considering plans to upgrade – be it from an HDB flat to a condo, or a condo to a… bigger condo or even a landed property?
In any case, upgrading your property is a big move that can lead to a lot of financial missteps, so take note of some key precautions:
1. FAILING TO SET ASIDE SUFFICIENT FUNDS FOR UNEXPECTED DELAYS
Whether you are upgrading to a new condo or a resale property, you will need to brace yourself for unexpected delays.
There are cases where developers take longer than expected to finish a unit, the most notorious examples to date being Sycamore Tree and Laurel Tree (the condos were expected to get their Temporary Occupation Permit (TOP) in 2016).
Even for resale units, there can be delays – your interior design firm may run into subcontractor issues, or you may find the previous residents left so much junk you need another few days to clear it out.
Whatever the case, never assume you will be able to smoothly move in on your completion date. Always have some cash set aside, enough for about three months of temporary accommodations.
Even if you do not eventually use that money, you can set it aside as an emergency fund to keep your mortgage paid during a crisis.
2. FAILING TO UNDERSTAND THE DIFFERENCE BETWEEN HDB LOANS AND BANK LOANS
If you are upgrading to an Executive Condominium (EC) or other private property, you will have to use a bank loan. The key difference to note is that the loan-to-value (LTV) ratio is much lower compared with the HDB loan you may have been using previously.
Your HDB loan allows you to borrow up to 90 per cent of your flat’s value, with the remaining 10 per cent from CPF. As such, it’s possible you do not have to come up with upfront cash when using HDB loans.
Bank loans, however, will only cover 75 per cent of a property (assuming it is your only outstanding property loan – otherwise it falls to 50 per cent).
A minimum of 5 per cent of the remaining 25 per cent down payment must be in cash, with the other 20 per cent either in cash or CPF.
Remember to work out the overall impact on your finances: A S$1.2 million condo means an absolute minimum of S$60,000 in cash (5 per cent). You may want to beef up your savings, before going through with the deal.
Another thing to note is that, unlike your old HDB loan, bank loan interest rates fluctuate a lot more. Most typical bank loans are cheap for the first three years, and then jump significantly on the fourth year and thereafter.
Right now, a typical bank loan rate is around 2 per cent per annum, cheaper than HDB’s 2.6 per cent rate. But, interest rates have been rising in the past few years, and was just 1.5 per cent a year ago. So, bank mortgage rates may rise even higher and surpass HDB's rates in a few years' time.
A changing interest rate can mean that your loan repayments change every three months, or every month, depending on your loan package. Make sure you talk it through with a mortgage broker, and plan for the fluctuations. One common mistake among upgraders is failing to understand how the loan interest is charged, and how to refinance (ie, switch banks) when it gets too high.
3. PUSHING THE TIME LIMIT ON ABSD REMISSION
If you buy your new home before selling your old one, you still have to pay the Additional Buyers Stamp Duty (ABSD). This needs to be done within two weeks of completing the transaction.
However, a married couple with at least one Singapore Citizen can apply for ABSD remission. This is on condition that your previous property is sold within six months of buying the new one.
Some upgraders seriously push the time limit for all six months, trying to get a better price for their old home. But think twice before doing this.
Remember that even if the most last-minute buyer puts down an option just before the deadline, they may back out of the sale later. This can cause you to lose your ABSD remission. And whilst that means the buyer will forfeit their Option money to you, it still will not cover the loss of your ABSD, which is 12 per cent of the value of the property for Singapore citizens.
The important lesson: Do not take your time selling your old home, if you need the ABSD money to make your upgrading financially sustainable.
READ: Singapore households should stay financially prudent amid higher interest rate expectations: MAS
4. TAKING BIG LOANS BEFORE UPGRADING
Remember that you need to meet the Total Debt Servicing Ratio (TDSR) when applying for your new home loan. The TDSR restricts your total debt repayments – inclusive of the new home loan, your personal loans, car loans, and any outstanding home loans – to 60 per cent of your monthly income.
Failing to meet the TDSR means you might have to fork out a larger down payment, or you will be unable to afford the house you want. So be sure not to rack up large debts in the 12 months prior to your upgrading attempt, or clear as many outstanding debts as possible.
In addition to the TDSR, note that banks will check your credit score when you apply for a home loan. Taking out large loans in a short time can mark you as being credit hungry, which will lower your credit rating. This can also result in the bank giving you less than the maximum LTV.
5. SELLING YOUR HOUSE, AND THEN GIVING YOUR CHILDREN THE PROCEEDS TO BUY A BIG CONDO SO YOU CAN MOVE IN WITH THEM
On the surface, it looks like you are getting a two-for-one deal: You provide for your children, while upgrading from your flat. But this is a terrible, unsafe idea – especially if you are a retiree, or near retirement.
Never assume that you will be able to move in with your children or in-laws, and get along perfectly. What will you do if your children try to kick you out of the condo, or if the shared space becomes unbearable? This is a disturbingly common problem in Singapore.
If you have the means to leave and buy your own house when things don’t work out, then it may be safe to go ahead. But otherwise, just don’t do it.
SO, ARE YOU READY FOR AN UPGRADE?
To answer that question, we propose the following guidelines to follow. As a rule of thumb, we recommend that:
- Your total monthly loan repayments should not exceed 40 per cent of your monthly household income (despite the fact that the TDSR limit is 60 per cent).
- The total price of your property should be around five years of your annual household income to be prudent (and absolutely no more than seven years of your annual household income).
- You should have the ability to save up six months of expenses, after factoring in the new mortgage. Ideally you should have this saved up before buying. Otherwise, you should have the means to build this savings fund within the next three years.
That said, while it is possible to upgrade and buy a condo even if you do not meet any of the above, it is the financial equivalent of walking a tightrope without a safety net below.
Just about any emergency, from retrenchment to lawsuits to serious illness, could result in having to sell the property and downgrade again. Doing so may net you a substantial loss, if you need to sell in a hurry.
Even if you can get the same price or slightly higher than what you paid for the purchase price, costs such as the Seller’s Stamp Duty (SSD) can significantly dent your sale proceeds. Also, what you took out of your CPF account must be returned with accrued interest.
This article first appeared on 99.co.