Updated: Apr 14, 2020
Recently, I received an SMS from a friend lamenting that her process of upgrading from her HDB to private property is not smooth in terms of timeline and there will be cash shortfalls to pay some of the transactional expenses. Of course, she is not asking me to lend her money, but seeking some advice from me on how to manage her timeline.
Upgrade to Private Property Is Not As Easy As ABC
Someday, you and your family will outgrow your first starter property which is the BTO flat and will be looking to trade up for a better and bigger place. If you are handling the upgrading process on your own unassisted, you will face the same issue as my friend.
Assuming you have already fulfilled the Minimum Occupation Period for your HDB or EC, you are now free to explore your possible options: bigger resale Executive Maisonette or Executive Apartment in a more mature estate / newly launched condo that will T.O.P. soon or resale condo to enjoy better quality of life / Executive Condominium with potential price appreciation.
Since selling house and purchasing new home involve huge investment and commitment, everyone would definitely want to make sure that the finances and timeline are well managed. After all, nobody likes to be caught in a tricky situation where they are stranded with no roof over the head or need to cough out unnecessary extra cash.
In this article, I will share with you the financial aspects of upgrading to a private property. I will also highlight the traps you should avoid as you plan the sale and purchase of your home.
Today, I am sharing with you the 5 TRAPS that most upgraders will fall into.
Trap 1: Existing Property Value
If you have sufficient cash to purchase another property, this trap doesn’t matter so much. However, if you are relying on using the sale proceeds to pay for the new home's downpayment and transactional expenses, then it is better to make sure the existing property has accumulated certain value over the years of holding on it. Hopefully, you have not been holding on the property for so long that the value is no longer able to hold the fort. Read more here about the consequence of holding on property for too long. If the property value has not gone up by much, then you may be selling at a loss (after taking into account of CPF refund with accrued interest and outstanding loan).
If your home has just fulfilled MOP requirement or is still within 10 years old, it should have appreciated in value since the time you bought it. Congratulations! You have higher possibility than any other estates to upgrade to private property.
Trap 2: Over Estimating Cash Proceeds
For any sale of HDB / EC, sellers have to replenish their CPF ordinary account with the utilised principal plus accrued interest. However, that is not all that will be deducted from the sale proceeds. Sellers also need to take note of some transactional costs such as paying agent service fee, covering the lawyer’s conveyancing fees and settling the miscellaneous charges (such as town council fee, property tax etc).
You may not get much in cash after all the deductions. This is especially important to note if you are thinking to upgrade to private property which requires minimum 5% cash downpayment. A detailed Sales Proceeds Financial Calculation which includes all future expenses is what I will usually do with my clients during consultation sessions.
Trap 3: Under Estimating Cash Upfront and Overstretching Loans
Monetary Authority of Singapore (MAS) implemented the Total Debt Servicing Ratio (TDSR) in maximum bank loan calculation. This is to prevent borrowers from over stretching by borrowing too much money from financial institutions. Under this TDSR framework, the loan repayment obligations must not exceed 60% of income. Existing home loans, car loans, credit card debt, personal loans and other debts reflected in the Credit Bureau will greatly reduce the maximum loan amount.
For those buying second homes before selling off the existing one, there is trap which most owners will fall into. They tend to under estimate the amount of cash upfront needed. By taking 2nd home loan concurrently together with existing 1st home loan, the Loan-to-Value ratio will drop from 75% to 45% (assuming 30 years loan tenure). Since there is a cap on the amount of CPF withdrawn to pay for the next, one can expect higher cash downpayment with lesser bank loan amount. In order not to break your piggy bank, a comprehensive Purchase Financial Calculation which includes all potential expenses is what I will usually do with my clients during consultation sessions.
Trap 4: BSD & ABSD
For those who wish to have smoother timeline by purchasing first before selling existing property, one is expected to pay for the Additional Buyer Stamp Duty (ABSD) first, then apply for an ABSD remission from IRAS for the second property if the first property is sold within 6 months.
The 6-month window period will start from:
a) the purchase date of the completed second property
b) the date that the Temporary Occupation Permit is issued
CPF can be utilised towards Stamp Duty payment. However, the amount has to be paid in cash first before it is reimbursed from CPF account. If you are caught off guard by having no cash to pay for Stamp Duty with 14 days, one will be liable for hefty penalty. The only way to avoid paying ABSD is to sign the contract to sell current residential property before signing the Option to Purchase (OTP) for the next property.
Trap 5: Timeline
HDB sellers can request from HDB buyers to grant them maximum 3 months of extension stay after the sales completion. This policy actually does help to smoothen the process if sellers are upgraders from HDB to private property. This is actually a piece of good news to sellers. However, this could turn into a nightmare if the buyers take back their words for not granting extension stay. HDB agency will not interfere with any arrangement made between sellers and buyers during the extension stay and they will not enforce any side agreement made between two parties. In the end, sellers will be left with no roof over the head. This situation is made even worse if the private property sellers also take back their words for not being able to complete the transaction earlier or unable to handover the unit earlier for renovation.
I have highlighted the potential pitfalls that most upgraders will face in the process of upgrading to private properties. If I am involved in the process, firstly, I will make sure it is financially viable to make the switch and secondly, I will make sure the timeline is comfortable for my clients.
Not confident if you can handle the timeline and finance well in the process?
If you have a plan in mind but not sure if it works well – do share with me or let me know.
I will do my best to assist you to make sure you look at your plan from multiple angles and ensure you have a very clear picture on what’s going on.
Drop me a HI! in whatsapp and share with me your top most concern in the property upgrading journey.
JJ Wong is the founder of MOPUpgraders.sg and has been a Property Wealth Planner in the real estate market for the past 6 years. He has helped many clients achieve their aspirations with the right financial planning and sound timeline planning. He is the man behind upgrading case studies of those who are holding on property under 10 years.