While most Singaporeans would choose to upgrade to a private property once their HDB BTO flats hit the Minimum Occupation Period (MOP), there are some who would prefer to buy another HDB flat due to a variety of reasons.
Some of these reasons include buying a home closer to their family, workplace, MRT/LRT stations, green lungs or other amenities. Another rationale is to upgrade to a more spacious flat, especially for large and multi-generational families.
But, buying another HDB flat is not without rules. To help you out, we compiled several important things you need to take note of before committing to buy a second HDB flat in Singapore. These include the pros and cons of buying first or purchasing later, the Enhanced Contra Facility (ECF), the HDB Resale Levy, HDB’s Conversion Scheme and considering a fresh MOP.
Read more here.
Six considerations to have when purchasing a second HDB flat:
- Committing to another five-year MOP
- How to transition (buy first and sell later, or sell first and buy after?)
- Resale Levy
- Enhanced Contra Facility (ECF)
- HDB’s Conversion Scheme
- Sellers might not move out immediately
1. Committing to another five-year MOP
When you buy a Build-to-Order (BTO) unit, resale HDB flat or a new executive condominium (EC), remember that you need to consider the five-year MOP. During this period, you’re not allowed to sell or rent the flat out.
Apart from the inflexibility of this, also remember that a lot can happen within five years. For instance, there might be changes in the family nucleus (e.g. your family is growing and you need more space), or a job loss which results in the inability to repay the monthly mortgage instalments.
Should any of this occur during the MOP, HDB may either compel you to return the unit or exempt you from the MOP depending on your circumstances.
So, before committing to a new HDB flat, remember to consider the risk associated with this.
2. Buy first and sell later, or sell first then buy afterwards?
There’s no right or wrong answer for this, but you will need to weigh the pros and cons of both choices.
Buying second HDB flat before selling existing flat
Opting for this route means you do not have to fret over rushing to secure a new home before relocating from your former HDB unit. But this choice is fraught with dangers and has an impact on your finances.
You need to sell your existing flat within six months
Under HDB rules, you need to sell your existing flat within six months when you receive the keys to your new flat.
Typically, you can appeal for an extension to HDB if you fail to meet the deadline. Usually, HDB will be lenient enough to provide you more time to sell your flat by deferring your key collection date, or providing you a maximum grace period of one year.
However, HDB still has the legal authority to ask you to give up your home in exchange for compensation. So although the authorities will likely give you an extension, it is not advisable to place yourself in such a risky situation, in which you could end up losing your home plus a significant amount of money.
The financial burden of having two HDB flats
Paying the mortgage for one flat is already costly enough, let alone two! Before you decide to buy a new flat before selling your current one, remember to factor in the monthly instalments of both properties at the same time. Aside from miscellaneous expenses such as Buyer’s Stamp Duty (BSD) and legal fees, you also need to take into account costs for possible repairs and renovation for both properties.
Lower loan-to-value (LTV) ratio
If you choose to buy a new HDB flat before selling your current one, remember also that this will significantly reduce the amount you can borrow to fund the purchase of your new flat.
Under existing rules, your existing financial obligations will reduce the LTV ratio of your mortgage. For instance, according to the Monetary of Singapore (MAS) rules as of July 2020, if you have one outstanding housing loan, you can only borrow between 25 to 45% of the new property’s value, based on your age and the loan’s tenure. Given the lower obtainable loan quantum, you need to pay a minimum of 25% cash downpayment out of your own pocket.
Total Debt Servicing Ratio (TDSR)
Under the existing TDSR imposed by MAS, you’re only allowed to use 60% of your gross monthly income to pay for your loans, which includes property mortgages and other financial obligations.
Assuming you earn $10,000 per month, your outstanding debt repayments (student loan, personal debt, car loan and etc.) should not surpass $6,000 per month. So if you’re servicing an existing housing loan and you intend to purchase another HDB flat, it’s possible that you may not get the loan amount you want. This is among the top disadvantages of buying another HDB unit before disposing of your current one.
Moreover, variable income – such as rental income, monthly bonus, salary from part-time/freelance work and sales commissions – are trimmed down by 30% when calculating the TDSR.
Mortgage Servicing Ratio (MSR)
Apart from TDSR, you’ll also need to consider MSR when seeking funding for HDB flats or ECs, which is capped at 30%.
This means that you can only use up to 30% of your gross monthly income to service your home loan, in addition to TDSR restriction. This is tricky to overcome if you’re servicing two mortgages simultaneously.
Heftier interest expense
HDB will impose a greater interest rate versus its standard concessionary rate if you plan to apply for a second HDB loan to finance the acquisition.
Additional Buyer’s Stamp Duty (ABSD)
On top of BSD, you’ll also need to pay ABSD, which is calculated based on the valuation or the selling price of the property, whichever is higher. The amount of ABSD you need to pay is dependent on your citizenship, as well as the number of property that you own.
If you’re buying as a couple, the good news is that you can get ABSD remission if you manage to sell your existing flat within six months of taking ownership of your new flat property and meet the remission conditions. You also do not need to submit a separate form to IRAS and HDB as HDB will approve the remission automatically.
It’s also important to note that decoupling (one of the spouse/co-owners gives up and transfers the share to the other spouse/owner so that he/she can buy another property without incurring ABSD) is no longer allowed for HDB properties after HDB tightened the regulations in 2016. Transfer of ownership for HDB properties is only allowed on the grounds of marriage, divorce, death of an owner, financial hardship, renunciation of citizenship and medical reasons.
Read more here.
Sell current HDB flat first, then buy another afterwards
So now that you know the downsides of buying first and selling later, you might think that maybe selling first would be a better route. However, this choice also comes with its own risks – the chief concern of which is failing to secure a replacement accommodation on time.
Typically, it takes about eight to ten months (or sometimes even longer) to sell your HDB flat in the open market, but this is dependent on a host of other factors including if your property has a good value, has a good locale, is within close proximity to an MRT/LRT station, amenities such as schools, eateries, etc.
Renting interim lodging and storage space
If you fail to purchase a replacement HDB flat on time, you will likely seek temporary housing. While some might have relatives, who have a spare room to offer, most will likely lease a unit for the time being until they can buy another property from HDB.
However, your rental expenses could reduce the proceeds from your sale, and leasing could get pricey if prolonged. If the temporary flat is small, you might even need to subscribe for a storage unit where you can keep your larger things before eventually securing another home. But in Singapore, where land is precious, renting a flat and storage space will put a dent on your wallet.
Settling for second best
Amidst such spiralling expenses, second-timers might settle for an HDB unit that doesn’t really meet their requirements and forego the chance of owning an ideal home, in a bid to control costs.
Inconvenience of moving several times
Moving your furniture and stuff entails a huge amount of work and expenses, much so for those who have bought a second HDB flat. That’s really a hassle not only if you live alone, but also for those who have to look after their elderly parents or young children.
Lower loan quantum
If you’re applying for a second housing loan from the Housing Board, the overall mortgage quantum will be slashed based on your available CPF monies and including a portion of the proceeds you got from the disposal of your first unit.
Essentially, HDB will permit you to keep $25k or 50% of the sales proceeds, whichever is greater. The rest will of the amount you got from the sale will be spent on buying the other flat.
The objective of this rule is to reduce to amount you need to borrow, to keep your finances healthy and prevent your home from getting foreclosed.
3. Resale Levy
Those who have previously acquired government-subsidised housing – new HDB flats bought from HDB as well as DBSS units or ECs purchased from a private developer – need to pay a resale levy if they buy a second subsidised home from HDB. The objective of this rule is to ensure an equitable sharing of government subsidies between first-time buyers and second-timers.
Basically, the amount of resale levy that needs to be paid depends on the type of unit sold and the category of housing grant obtained before. For details, please see the table below.
4. Enhanced Contra Facility (ECF)
The ECF jointly introduced by the HDB and CPF Board aims to reduce the inconveniences faced by second-timers, by making sure you already have a new home to move into once you complete the sale.
Under this scheme, the sale of your current flat will simultaneously occur with the purchase of another unit. As a result, proceeds from the sale and refunded CPF monies can be utilised immediately for buying another HDB flat.
Although CPF monies cannot be spent on conveyancing fees and stamp duty, the scheme can reduce the cash outlay needed for the acquisition. In turn, the buyer only needs to borrow a lower amount and the monthly instalments will be less expensive.
However, ECF is an intricate process as it requires the coordination of three parties – you, your unit’s buyer and the seller of the flat you plan to acquire. Hence, it’s advised to engage a real estate agent familiar with such set-up
5. HDB’s Conversion Scheme
If you are aspiring to upgrade to a bigger HDB flat, consider HDB’s Conversion Scheme. Through this initiative, those who reside in a three-roomer or smaller units are eligible to buy an adjacent three-room or smaller unit then combine both into a single property.
As such, this is a convenient way for second-timers to get a more spacious flat, without having to face the troubles associated with moving into another HDB unit.
But if you need a bigger flat, you can also consider buying a jumbo HDB flat.
6. Sellers might not move out immediately
When buying an HDB BTO flat, the buyer will get vacant possession of the unit when it is completed, but this is not the case when purchasing an HDB resale unit.
Read more here.
While the former owners of the resale flat need to move out once the sale is officially concluded, there are cases when they ask for an extension before relocating to set their affairs in order.
There’s no problem if they want to ink a rental agreement with you to prolong their stay in the flat you’ve just bought. You also need to apply for a Temporary Extension of Stay from HDB so that they can lawfully reside in the unit for a maximum of three months. Moreover, the particulars of the extension and the rent can arrive through a private contract among the concerned parties.
But if you’re jinxed, the seller might change his mind and no longer proceed with the transaction and refuse to move out. Nevertheless, if the seller inked the Sale and Purchase Agreement (SPA), he needs to follow the contract. Otherwise, you can take him to court.
However, court proceedings are expensive and protracted. For instance, a certain lady buyer had to wait five years before the Singapore Supreme Court ordered in August 2015 for the flat sellers to vacate the premises. To avoid having to wait for a long time and paying hefty legal fees, please talk with the seller first and try to solve the problem before resorting to legal means.
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