Not everyone can be in the race to upgrade from HDB to Private Property
Recently, I happened to have a consultation session with a family who hoped to be like their friends who had the opportunity to sell their HDB and move into their dream private property. After I did all the sums based on all the current figures, sadly I had to tell them it is hard to be achieved unless CPF and Cash on hand is unusually large.
Dream to Move Into Private Property Still Far Away
Most HDB owners will definitely make some future plan to sell and upgrade to stay in private property for better lifestyle. They hope to enjoy using the condo facilities such as the 50m lap pool, jacuzzi, kids' pool, gym, BBQ pits, sky garden, star gazing lawn, sauna room, tennis court, badminton court, games room, karaoke room, dance studio, function hall etc.
I totally can feel the owners' aspirations to stay in private property during my consultation session with them but some have to face the hard truth.
“There are 4 reasons why some HDB owners are unable to fulfill their dream to own private property after selling their HDB."
Based on my experience from meeting up with various HDB owners, I am going to break down into 4 reasons why some of them are unable to upgrade as they would have wished to.
Reason 1: High Amount of Debt
When HDB owners borrow loan from financial institutions (a.k.a banks), they are subjected to Total Debt Servicing Ratio (TDSR) taking into account their monthly debt obligations and gross monthly income. High debt will cause the TDSR to decrease further which will directly affects the maximum bank loan amount in the end. Monthly debt includes all outstanding debt obligations: Property-related loans, car loans, student loans, renovation loans, credit card loans or any secured/unsecured loans, including revolving loans.
For those owners without fixed pay and also with existing debts, financial institution will apply a minimum haircut of 30% to variable income (e.g. commission, bonus and allowance). This will further reduce the amount of bank loan, indirectly causing the upgrading journey to be tougher by forking out more cash than expected.
Reason 2: Tight Cash & CPF
To secure a private property, no matter whether it is resale or new launch, 5% cash is compulsory as downpayment. Let's say the HDB owners have been staying in 4-room HDB and would like to enjoy the same kind of space in private property which could be priced at least $1.2 million in average. That will mean HDB owners should have $60,000 cash (5% compulsory cash as downpayment) on hand. If the bank is unable to grant up to 75% bank loan, the remaining balance of purchase price has to be paid using cash or CPF.
Not to mention another huge expense which is the Buyer Stamp Duty (BSD) to IRAS. Based on $1.2 million, BSD tax of $32,600 will be payable and need to be sufficient to be deducted from CPF, if buyers are not using cash. Being unable to afford the tax amount payable and the downpayment is one of the obstacles why HDB owners are unable to go ahead with their upgrading plans.
Reason 3: Household income
When HDB owners do not have a certain level of household salary, based on Total Debt Servicing Ratio (TDSR), the amount of loan they can obtain from bank will not be substantial to cover up to 75% of the purchase price of private property. Most HDB owners have the misconception that by being eligible for HDB loan before, they will also be eligible for bank loan. Owners are granted HDB loan up to 90% of the price by just paying 10% downpayment using either CPF or cash. However, if they upgrade to private property, owners no longer enjoy 90% loan quantum but only 75% of the purchase price. To be able to upgrade comfortably with up to 75% of approved bank loan amount, HDB owners' household income should minimally be in the range of $5000-6000.
Therefore, most HDB owners will want to hold on to HDB as long as possible so that they can meet the income criteria to be eligible for certain amount of bank loan in the future. This move will also create another 2 problems for aspiring HDB upgraders: firstly, the bank loan tenure will be shorter based on the purchasers' age which will mean that the monthly installment will be high. Secondly, with shorter HDB balance lease as they hold on to their HDB for a longer period, the valuation and price will not be in their peak performance as before.
Reason 4: Negative Sales Proceeds
It is sad to know that some owners will be getting zero cash proceed from their sale of HDB and not getting the full amount of CPF that they had utilised before in purchasing their HDB. In the situation of negative sales proceeds, CPF Board will not ask HDB sellers to top up the deficit amount if the house is being sold at market value with proof of valuation report.
One of the biggest reasons for having negative sales proceeds is that the balance lease of HDB is getting shorter, falling below balance 60 years lease. The valuation of old matured estate will not be able to hold the fort for long because short balance lease will have negative implication on the CPF usage and max loan amount. For fear that the valuation will start dropping drastically, most HDB owners will want to have quick sale to cut loss which will further worsen the situation. When the sale price is eventually much lower than the purchased price many years ago, it will bring about negative sales proceeds.
For HDB / EC owners who are holding their properties within the first 10 years, you have the great opportunity to upgrade and you are in better position than anyone else to do so!
The balance lease is still long and your property will not be affected by CPF and loan restriction unlike those in old estates. It is quite unlikely to see HDB upgraders from MOP fulfilled property (at least within 10 years) to experience negative sales proceeds. This will actually give some confidence to the HDB upgraders that they can afford the downpayment in purchasing their private property with the positive cash proceeds from the sale.
Those who aspire to upgrade to private property just need to focus on doing these 2 tasks well:
(1) maintain good credit record (can check from Credit Bureau report) &
(2) quickly rise the corporate ladder to meet certain household income level
You will have no issues in fulfilling your dream to sell your property which has met the MOP requirement and move into a private property to enjoy better lifestyle.
Still Not Sure If You Can Upgrade?
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.