Buying property can be seen as an important milestone in your life, but before you get too excited, here’s what to keep in mind before making your first Housing Board flat purchase.
1. You may still need to pay the COV.
It’s a common misconception that resale flat buyers no longer need to pay Cash over Valuation (COV). However, it depends on the situation. Previously, buyers would make an offer for a resale flat based on its valuation report, plus offer a cash amount known as the COV. An HDB maisonette in Bishan once attracted an enviable COV of $250,000, selling for a record $1.05 million in 2013. Since March 2014, HDB overhauled the system by allowing only a resale flat buyer or his agent to request a valuation report, and only after agreeing on one purchase price.
You need a valid valuation report if you are using your CPF funds or a housing loan from HDB or the bank. This request must be submitted by the next working day after you have been granted an Option to Purchase (OTP) by the seller, who has accepted a mutually agreed option fee of between $1 to $1,000. During the option period of 21 days – which includes Saturdays, Sundays and public holidays – you’ll need a valid HDB Loan Eligibility letter or Letter of Offer from the bank, before you can exercise the OTP. If you agreed to pay $500,000 for a flat, but the valuation is only $480,000, HDB or your bank will give you a loan based on the lower of the sale or valuation price; in this case, $480,000. You thus have to top up $20,000 in COV. Of course, you can back out and not exercise the OTP, but you will lose your deposit. Always check out recent transacted prices of flats around the neighbourhood to make a fair offer, to avoid a nasty surprise.
2. You’ll enjoy CPF housing grants, but they’ll incur interest when you sell your flat.
A subsidised Built-to-Order (BTO) flat offers buyers the best value, but thankfully, CPF housing grants help resale flat buyers to ease the pinch of buying an older (but more expensive) home. More good news: In February 2017, Minister for Finance Heng Swee Keat announced in the Budget Statement in Parliament that the Government will increase the CPF housing grant for families buying resale HDB flats for the first time, from a maximum of $90,000 to a maximum of $110,000. For example, a family will now enjoy a $50,000 grant if they buy a two- to fourroom flat, or $40,000 grant for a five-room or larger flat.
Families buying a resale flat to live with or near their parents or married child can get an extra Proximity Housing Grant of $20,000. Depending on the monthly household income, the family can also receive an Additional CPF Housing Grant of between $5,000 (for families who earn between $4,501 and $5,000), to $40,000 (for families earning $1,500 or less). However, these housing grants are disbursed through your CPF’s Ordinary Account and not as cash. Also, CPF housing grants can only be used to pay off your HDB flat’s initial purchase, or for reducing the housing loan amount.
They cannot be used to pay your monthly loan instalments or to reduce your minimum cash downpayment (for those taking a home loan from the bank). For an excited first-time home buyer who is using CPF funds to pay for the flat anyway, this may not seem important as the grants offset the cost of your new home seamlessly during the buying process. However, should you sell your flat, every cent used to finance your flat – including the “free” CPF grants – must be returned to your CPF’s Ordinary Account, with accrued interest (currently at 2.5 per cent), over the duration that you’d used those funds when you occupied the flat. Do note that these will eat into the cash proceeds that you will receive.
3. Buying resale doesn’t mean you won’t be affected by the resale levy.
It is common knowledge that those who buy subsidised BTO flats twice will have to pay a resale levy. But what if you intend to buy a resale flat now to meet your immediate housing needs, but plan to apply for a BTO flat in the future? As long as you enjoyed any of the generous CPF housing grants for a resale flat, should you buy a new BTO flat (or an Executive Condominium unit from a developer where the land sale was launched on or after Dec 9, 2013), you will have to pay a resale levy when you sell your first flat. Resale levies range from $15,000 when you sell a two-room flat, to $55,000 for an Executive Condominium (EC) flat. It applies to all sellers who are buying a second subsidised flat, regardless of whether you are upgrading to a larger flat, or right-sizing to a smaller one. However, resale levies will not affect those who sell a Design, Build and Sell Scheme flat from a developer; an EC from a developer where the land sale was launched before Dec 9, 2013; or those who buy a HDB resale flat or private residential property.
Some buyers may strategise that it is still worth buying a small resale flat first to enjoy the CPF housing grants, then upgrade to a bigger subsidised BTO flat, while hoping to make a tidy profit that will cover the resale levy. Don’t forget other costs like agent’s fees, legal fees and stamp duties whenever you buy or sell property. Also, be prepared for a longer wait for your new BTO flat, since, as a second-timer, you won’t enjoy first-timer benefits like getting two ballot chances and a higher proportion of the flat supply.
4. Restrictions kick in on CPF usage and HDB loan amounts for resale flats with leases of less than 60 years.
One in three flats in Singapore is 30 years or older, with about 280,000 units between 30 and 40 years old, and about 70,000 older than 40 years. Plan to use your CPF to fund your resale flat? HDB flats (and private properties, too) with leases of less than 60 years are subjected to rules such as:
– No CPF can be used if the remaining lease of a property is less than 30 years.
– You may use your CPF for the property if your age plus the remaining lease of the property is at least 80 years. (For example, you’re 35 years old and the flat has another 49 years on the lease, which adds up to 84 years.)
– The maximum amount of CPF that you can use is capped at a percentage subject to whichever is lower – the purchase price, or the value of the property at the time of purchase. This percentage is computed based on the remaining lease of the property when the youngest eligible member using CPF reaches the age of 55, in the following formula:
When applying for a HDB concessionary interest loan, make sure you’re eligible for the usual conditions – for example, at least one buyer must be a Singapore citizen; you don’t currently own a private property or sold one in the last 30 months; and you don’t bust the income ceiling of $12,000 per family or $18,000 for extended family for any flat size (or $6,000 for singles buying a five-room or smaller resale flat, or a new two-room BTO flat).
Check HDB’s website for full list of criteria. Additionally, factor in the age of the flat. You can take a HDB housing loan if there are at least 60 years left on the lease. Between 20 and 59 years, you can still apply for a loan if the remaining lease will cover the buyer (based on average age, if there is more than one buyer) up to the age of at least 80. The loan tenure will be the shortest of either 25 years; 65 years minus the average age of the buyers; or the balance lease at the point of purchase, minus 20 years. But if the lease is less than 20 years, no HDB loan will be allowed.
5. The Selective En bloc Redevelopment Scheme (Sers) is not a sure bet for every resale flat.
Minister for National Development Lawrence Wong recently reminded Singaporeans about the dangers of paying a premium for short-lease HDB flats, in hope of being chosen for the Sers. As he pointed out, Sers is on a selective basis and is offered only to HDB blocks located in sites with high redevelopment potential. “These are typically sites where the land has not been well utilised. It is also subject to the availability of suitable replacement sites for residents and the Government’s financial resources,” he explains.
Since its launch in 1995, only 4 per cent of HDB flats have been identified for Sers. For most flats here, when your lease runs out, the flats have to be returned to HDB, who will then return the land to the State. So, don’t splurge on a pricey older resale flat hoping you’ll strike the Sers lottery – odds are you probably won’t. You may be better off picking a flat that can last your family a longer time.