Keep HDB and Buy Condo? Here Are 5 Factors To First Consider

Two decades ago, the answer to this question was almost always yes – it was the “default” move to rent out your flat, and use the rental income to cover the mortgage on a condo.

In 2022 however, the question has become more complicated.

From ABSD to higher down payments, it’s no longer the best choice for everyone to keep both their flat and own a private property. It’s also been a very popular question, even if just about 3 per cent of the HDB population owns at least one private property.

Can You Buy Condo While Owning A HDB?

The answer depends on your citizenship, and the sequence in which you acquired the properties.

If you buy your HDB flat first, and at least one of the flat owners is a Singapore citizen, all you need to do is wait out the Minimum Occupancy Period (MOP) of five years (or 10 years for Prime Location Housing). 

After MOP, you can then purchase a private property while still retaining your flat.

This answers another popular question...

Can I buy condo before MOP?

No. You cannot buy another private property before you HDB's MOP.

If you purchase a private property first, however, you must first dispose of it, wait 15 to 30 months before you can buy a HDB.

• Sell private property, ballot HDB BTO: Wait 30 months
• Sell private property, buy HDB Resale: wait 15 months

Also, if all the flat owners are Permanent Residents (PRs), they must dispose of the flat within six months of buying a private property. 

Should I Keep HDB, Buy Condo?

These are the five biggest factors to consider if you're thinking of keeping your HDB and buy a condo:

1. ABSD rate
2. Which property you’re living in
3. The age of your flat
4. Ability to cover down payment with recent loan curbs
5. Issues beyond investment 

1. Additional Buyer's Stamp Duty (ABSD)

If you retain your flat, you will have to pay the Additional Buyers Stamp Duty (ABSD).

This is currently 17 per cent of your second property’s price or value, whichever is higher (for PRs, the rate is 25 per cent). 

For some buyers, the question is how much rental income, the returns on the HDB when sold, will offset the higher stamp duty.

For example: if you pay the ABSD of 17 per cent on a $1.6 million condo, this comes to $272,000. Assuming a gross rental rate of $3,000 per month for your flat, it will be close to 7.5 years before the rental income covers just the ABSD; not a palatable proposition to many, despite high current rental rates. 

Alternatively, you might consider the appreciation rate of your HDB flat. Assuming your current home is worth $500,000, you would need around 45.4 per cent appreciation in your flat price, to cover the ABSD by the time you resell.

Reviewing transaction histories in your area can help to determine how realistic this is. 

This must be measured against the potential returns of just upgrading to a single larger home, or even to two private properties. The right answer here will depend on your own expectations and the nature of the properties involved. 

That said, ABSD rates are so high in 2022, most buyers will be better off not holding on to the flat. This is almost certainly true for PRs, who face a 25 per cent ABSD rate. 

If you want to retain the flat, it’s best if only one spouse is the registered owner of the flat; this frees the other to purchase a second property without ABSD. This is why it’s important to plan early, which we’ve written a little bit more about here.

Read Also: Three Legal Ways To Avoid Paying ABSD

2. Which Property Will You Be Living In?

You could carry on living in your flat while owning and renting out your private property.

A typical example of this is an older Singaporean who has paid off their whole flat, and who now wants to purchase a small one or two-room unit for the rental income. 

The financial issues are broadly similar to the previous point - you need to ensure rental rates and eventual resale value are sufficient to justify the ABSD.

Depending on the property in question, it may easier to meet this criterion than with your HDB flat (e.g., your private property may appreciate a lot quicker than your flat). 

This approach can provide a good safety element: even if you ever need to sell the private property, there’s less discomfort as you just carry on living in your flat. 

This is especially important since the last property cooling measure in September 2022: those who sell their private homes may now need to wait up to 15 months to buy a resale flat, depending on their age and the flat size. 

That said, don’t forget you will still need to pay the maintenance of the condo either way. If you do continue to stay in your flat and rent out the condo, the monthly maintenance is still paid by you and not your tenant.

Read More: Property Cooling Measures 2022 - Beginner's Guide

3. Age Of Your Property

HDB flats tend to appreciate slower – or in some cases even depreciate – after the midpoint in their lease.

When a property has 60 or fewer years on the lease, banks may decrease the maximum loan quantum available; and the higher cash outlay may dissuade future buyers.

This will also eat into the returns of the flat, which you were hoping would cover the ABSD.

The worst result outcome is to hold on to your flat, but sell it at little to no appreciation a decade from now due to lease decay – this would compound the cost of paying the ABSD. 

See Also: House Tour - A 50-Year-Old Joo Chiat Walk-Up Apartment Transformed Into New York Loft

Rental income, however, is less affected by this issue. Tenants don’t really care about your flat’s remaining lease, so long as the location is good and it’s well-maintained.

So if all you want is to collect rental to the end, it could sometimes be worth keeping even an older flat. 

4. Do You Have Enough Cash To Pay Home Loan Down Payment?

You may have heard that you just need to save up to five per cent of the price to buy a private property. This can make keeping your flat seem much more viable. 

After all, if you can make the five per cent down payment without selling your flat, you may as well keep it, right?

In practice, however, the initial cash outlay for a second property can be much more:

• Down payment realistically can range from 5 to 25 per cent in cash
• Buyer's Stamp Duty (BSD) has to be paid in cash first
• Additional Buyer's Stamp Duty (ABSD) has to be paid in cash first
• Total Debt Servicing Ratio (TDSR) may cause your loan quantum to be lower (means more down payment to pay in cash)

Under normal circumstances, the maximum Loan To Value (LTV) ratio for a bank loan is 75 per cent of the property price or value (whichever is lower). It’s true that only the first five per cent (first $80,000) is payable in cash, but the next 20 per cent must also be paid in any combination of cash or CPF. 

So, for a $1.6 million home, this is $400,000 down, not $80,000 – and you need to make sure your CPF has enough to make up the remaining sum.  

Also remember that the ABSD, for your second home, will be around $272,000. Can your CPF pay for 20 per cent of your condo, plus the stamp duties? 

You should be earning $11,500 monthly to afford a second $1.2mil condo

We need to also consider the Total Debt Servicing Ratio (TDSR), currently set at 55 per cent of the borrowers’ income. Since September 2022 cooling measures, TDSR is calculated with an interest rate floor of four per cent. 

Assuming a loan of $1,200,000 for the above property, for 25 years at four per cent per annum, this is a repayment of $6,334 per month. 

This means borrowers need a monthly income of at least around $11,516 to qualify for the maximum loan quantum. If your income falls below this amount, your initial down payment will have to be increased even further, until the monthly loan repayment falls within the TDSR framework. 

You may find, after calculating these costs, that keeping your flat is much harder than just “saving up five per cent” for your next home. 

In addition, few Singaporeans can meet the TDSR limitations of having two home loans. 

Read Also: HDB vs Bank Home Loan - Which Is Better?

5. Issues beyond the investment

If you’re pooling cash with your children to buy a private property and moving in with them, it might be a good idea to retain your HDB flat.

This ensures you can move back into your own home, in the event family situations and relationships don’t work out.

Here are two sample scenarios:

Scenario 1

An elderly couple sells their flat and gives the entire sale proceeds to their children. They then move into a big condo with the children. Within a few years, they find living together to be too uncomfortable.

The couple is stuck, as they probably don’t have the funds to buy their own home again – not unless their children agree to sell and split the cash amicably. There’s a lot of potential for infighting here. 

Scenario 2

An elderly couple retains their flat but gives what they can afford to their children to purchase a larger condo. They then move in with the children, while renting out their flat. 

Not only do they receive rental income, but they can also move back into their flat if arrangements don’t work out. 

(In both above scenarios, we assume the children are registered as the owners of the condo but not the parents – so no ABSD is involved). 

Some other reasons for retaining your flat could involve wanting passive rental income, with no concern for future resale value.

For example, you might aim to collect rental income from the flat to help your retirement, with no plans to sell it – if so, you may not care about resale gains, making up the cost of the ABSD, etc., not if you’re just happy having a reliable income stream for your twilight years. 

As everyone’s scenario is different, do reach out to us if you need specific help. Don’t make the mistake of giving up your flat when you shouldn’t (it’s hard to get back), or of paying unnecessary ABSD rates.

This article first appeared on Stacked.