Can you afford to upgrade to a condominium in Singapore?
Reaching the maximum Total Debt Servicing Ratio (TDSR) limit and having no preparation for Additional Buyers Stamp Duty (ABSD) issues are just some of the signs that you might not be in the position to do so.
Do you use four-ply embossed toilet paper? Do you blow your nose on S$20 supermarket vouchers? Do you suggest flying business class on an airplane when your friends are talking about the coach bus to Malaysia? If the answer is “yes” to all of the above, then you may be in the very enviable position to upgrade to a condominium in Singapore.
However, if you’re a regular joe like the rest of us, chances are, you might not be able to afford or be in the position to do so. Here’s what to look out for:
EMPTYING OUT YOUR SAVINGS FOR THE DOWN PAYMENT
There are no HDB loans for private properties, including Executive Condominiums (ECs). Using a bank loan means forking out the absolute minimum of five per cent of the price. What that means is that a S$1.6 million condo means plonking down S$80,000 in hard cash.
Is S$80,000 the amount of cash you can scrounge up by digging in your loose change pouch, or the inside of your calfskin sofa? If so, then congratulations. On the other hand, if S$80,000 is a sum you can only afford by emptying all your savings, then it’s clear you should remain where you’re currently residing.
Most people can only afford the down payment because the cash proceeds from selling their flat are incredibly good. If you have low or negative cash proceeds (especially after paying back your CPF), then you probably are not in the best position to upgrade right now.
REACHING THE MAXIMUM TDSR LIMIT
The Total Debt Servicing Ratio (TDSR) caps your total monthly loan repayments (home loan plus other debts) at 60 per cent of your monthly income. For example, if both you and your spouse are borrowers, and you make S$10,000 a month together, then your total debt obligations can’t exceed S$6,000 per month.
But just because you can meet the TDSR limit does not mean you should. It is not ideal if 60 per cent of your income is just to service a debt. This can lead to defaults, mounting use of credit, and premature balding if so much as one emergency arises. If both you and your spouse are both needed to pay the S$6,000 a month, what happens if one of you cannot work or loses your job?
It’s much better to keep your monthly expenses – including the home loan – at 40 per cent of your monthly income or lower. Yes, that still hurts if someone loses their job, but at least you won’t be forced to sell.
LESS THAN SIX MONTHS WITHOUT INCOME WOULD MEAN FORECLOSURE
What happens if you have no income for the next six months?
Property is an illiquid asset – it’s not easy to cut your losses and downgrade without shaving off a large chunk of its value. If times turn bad, it can take months for an agent to market the property, conduct viewings and negotiate the price.
Which is why you should have the means to service the mortgage for at least six months even if you have no income. A safety net is always useful to have in place before you climb any higher.
NO PREPARATION FOR ABSD ISSUES
This isn’t an issue for new ECs as you don’t pay have to pay for Additional Buyers Stamp Duty (ABSD) when upgrading from an HDB flat to a new EC.
For private condos, however, the sequence matters. It is most convenient to buy the condo first, and then sell your flat later. All it requires is 12 per cent of the condo price (for Singapore citizens) and you can get ABSD remission. But that’s only after you sell the flat within a six month period. You also need to be a married couple, and one of you must be a Singapore citizen.
The alternative is to sell your flat first, and then buy a condo; but you need somewhere to live in the interim.
UNABLE TO DEAL WITH QUARTERLY FEES
Condo maintenance fees for even fringe region developments can be around S$1,200 to S$1,400 per quarter; and most of them charge interest of around 15 per cent per annum for late payment.
Double check if you can afford to pay for this, as long as you’re a resident in the condo.
This story first appeared on 99.co.