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Financing the purchase of a HDB flat, new or old.

Thursday, July 31, 2014

I revealed in my last blog post that I have been exploring HDB's website and there is really plenty of useful information for anyone who is thinking of buying a flat, new or resale.

One question that some might wonder is whether they can afford a flat. Another question some people might wonder is how much of their CPF-OA money can be used to pay for a flat.



I would like to share what I have found with anyone who might be interested:

"Some measures of housing affordability use the Home Price-Income ratio (HPI), where a figure of 6, for instance, would indicate that the property being purchased is priced at six times the buyer’s current annual income.

"In Singapore, HDB uses the Debt Servicing Ratio, or DSR as a more accurate indicator of actual housing affordability. The DSR refers to the proportion of the monthly household income set aside for housing instalments.. This measurement takes into account interest payments, which the HPI does not. It is calculated on an assumed 30 year loan, and the figure would rise if the loan tenure were shortened.


"HDB’s commitment to Singaporean households centres on the provision of new BTO flats. A typical first-time home buyer of a new flat in a non-mature estate used on average, less than a quarter of their monthly income (at the point of application) to pay for their housing loans. This means that most buyers are able to pay for their monthly instalments using CPF, with no or minimal cash outlay. 

"For example, a buyer, with a lower monthly income of $2,500 may opt for a smaller 3-room flat in a non-mature estate, to be financially prudence. This buyer will only need to come up with a very minimal cash outlay of $4 for the monthly instalments."


Click to enlarge table.
Source: HDB speaks.

Actually, it is all about being financially prudent. Some people had trouble with money because they overstretched their finances, over-consuming on housing, and it usually happens during the boom years because stories of how people made tons of money selling properties would be plentiful. Being greedy at the wrong times and getting the purchase of a property wrong is likely to tie us down and hold us back for a long time.

Of course, it really doesn't pay for us to keep up appearances. Living below our means might not be glamorous but, financially, it will give us a lot less to worry about.

What about the amount of CPF money we are allowed to use for the purchase of a flat? Generally, there is less of an issue, if any, when purchasing BTO flats with fresh 99 year leases or resale flats with remaining leases of 60 years or more.

The problem is with the purchase of flats with remaining leases of less than 60 years. In fact, for flats with remaining leases of less than 30 years, CPF money cannot be used in their purchase at all.

I have a found a very nice info-graphic to help explain this:



Click to enlarge.


Source: Using CPF for a property.

So, as conventional wisdom goes, if we are considering the purchase of a resale flat, try to avoid very old flats especially if we want to keep the option of reselling the flat open. If our flat should have a remaining lease of less than 60 years by the time we want or need to sell, it could be more difficult.

Searching for solutions to a reader's predicament has led me to learn quite a few things and I hope you have found this blog post useful too.

Related post:
Retiring comfortably with a HDB flat.

26 comments:

Ray said...

hi AK,

any idea why age + remaining years in lease has got to be 80 years or more?

i don't understand the logic.

AK71 said...

Hi Ray,

Oops. I left out that bit of explanation. -.-"

This is so because we want the flat to last the owner until he or she is 80 years old. This is the current average life span of Singaporeans at birth.

Ray said...

ahhh.... i see. so if i lucky (or unlucky) that I live past 80 years old, then how? :)

AK71 said...

Hi Ray,

Maybe, they should tweak it so that age of buyer + remaining years in the lease = 90 instead? LOL.

If I were to buy a resale flat, I would try to buy one that is not more than 10 years old, actually. The older the property, the more likely it is that we would find problems too.

Ray said...

AK, don't like that leh...
I'm still hoping to sell my flat leh.
You know your influence right...
the moment you say something, every investor takes note.
Now nobody will wanna buy my flat (older than 10 years) :(

AK71 said...

Hi Ray,

I think you have overestimated my blog's influence. LOL.

Don't worry lah. It will be the very old flats which will have more trouble selling due to a smaller pool of eligible buyers.

10+ years? No problem lah. ;p

pf said...

If i buy a resale 10yr old, i hope to just stay there until i am old. Then rent it out to finance my stay in old folks home. Lol...

Sorry for the dark humor. :)

AK71 said...

Hi pf,

Sounds like you have a well thought out plan (again)! Dark? Not at all. I see light at the end of the tunnel here. ;p

pf said...

My friends thought i am pessimistic and negative by having such thoughts. Hahaa

AK71 said...

Hi pf,

I think you are pragmatic but with a pinch of pessimism, similar to many realistic people out there. LOL. ;p

pf said...

I just came back from the hdb resale flat seminar. Very good info from presenters of hdb, cpf, cea, and valuations. Have nice food for tea break. Only 25 bucks.

Now I'm equipped to diy my resale flat purchase. :D

AK71 said...

Hi pf,

This seminar sounds like a definite value for money deal for you. Happy flat hunting! :D

pf said...

Hey....need to throw this question out to get some help. I would like to get a mortgage broker to find me the best mortgage deal for my financial profile and i want to discuss on tenor, rates and to ensure that my cpf withdrawal limit is not reached.

Does anybody hv experience w mortgage brokers?

Getting a mortgage is a big thing in life. Impact up to 30years. But amazingly....all my friends did not perform thorough due diligence. Just go to a bank they like and take up the package they offer. I was stunned!

Please kindly share your experience w mortgage broker if you have. :)

AK71 said...

Hi pf,

This was what Jimmy suggested on my FB page:

"Moneysmart or HousingLoanSG for their advice. Ultimately, the final decision may be the lender's but it will be good to know what are the options available here."

pf said...

Let me go and consult them :)

pf said...

Thanks AK71!

AK71 said...

This conversation took place on my FB wall:

Jack James:
Most of them already en-bloc half way through the lease .

Assi AK:
I wouldn't say "most of them". Government has stated before that whether an estate is selected for SERS depends on redevelopment potential. Old estates will go through upgrading but unless their location is slated for redevelopment, they will not be selected for SERS.

Jack James:
as for now , history is too young to witness the first 99 years lease to be expired . I guess we need to see this to happen 20 years later , even so , some claimed that perhaps we only need to pay a small fee to extend the lease , or whatsoever . We will know once the day comes .

Assi AK:
I don't think we need to wait for 20 years... We just need to see what developers who buy old 99 years leasehold properties have to pay the government to top it back up to 99 years... It is not a small fee, unlike in Hong Kong. ;)

Jack James:
That's private properties . I doubt it will be exactly the same as HDB . We will know 20 years later for HDB . :)

Jack James:
If HDB value turns S$0 when 99 years lease expired . I am very sure there would be a rush of selling HDB in the future when lease is getting lesser and lesser ( as people are smart to realise ) .!

Assi AK:
You might feel some dismay but research papers have been published on the subject and HDB flats will not have any special treatment when it comes to the issue of lease decay and renewal.

Assi AK:
Unfortunately, most people are not aware of this problem until it slaps them in the face.

Jack James:
Good reminder , I still have 83 years lease . I will see how the early batch being handled by the government and change my strategy accordingly. Maybe I should call HDB hotline for this matter for early indication . Haha

Assi AK:
They will probably give you a textbook answer which is currently in the literature. At the end of the 99 years, the land reverts to SLA and will have no retained value. It isn't even HDB's property anymore.

Ray said...

asking HDB is useless. you will get the same textbook answer. :)
Some engineering and ownership issue to ponder though.
How long can a building of around 12 to 15 storey high last?
by 60 years old, will it become dangerous?
if it does, who's responsibility will it be to get it "fixed"?

AK71 said...

Hi Ray,

HDB said before that once the warranty period is over, if the problem is within our flats, they are our problem. If the problem is in the common areas, HDB will take care of it. People who complain that they don't own their HDB flats and that they are merely leased from HDB for 99 years can take comfort in that. :)

Ray said...

But from an engineering perspective, a building of 12 storeys may not last 60 years. And by that time govt may be forced to enbloc because otherwise lives may be at stake.

AK71 said...

Hi Ray,

That is something I will leave to others to speculate but, to be prudent, I will say that we should avoid buying very old flats. :)

Ray said...

Of course I'm being speculative to assume govt will be responsible. But highly likely that will be the case. The same cannot be said for private properties. When a condo gets old and dangerous, the owners are on their own

AK71 said...

Hi Ray,

Yes, that is only reasonable since buyers of a condo have full ownership compared to buyers of a HDB flat. Must take the good with the bad.

Ray said...

By full ownership, I take that you mean the choice of who they can rent or sell to without any residency or ethnic quota? That's the only downside of hdb. Otherwise public property is just as good.

AK71 said...

Hi Ray,

If we only need a place to stay in our lifetime, HDB flats are not just as good as private condos. They are better! ;)

I paid more than half a million dollars for my shoebox apartment. That costs as much as a BTO HDB 5 room flat in a mature location. I would much prefer to have the BTO flat but I am not allowed to buy as I do not meet the requirements.

However, if we are thinking of leaving a lasting legacy in the form of a property, then, of course, buying FH or 999 yrs leasehold would be preferred. For this reason, I think buying a 99 years leasehold condo just because we want to "upgrade" is rather silly.

AK71 said...

National Development Minister Lawrence Wong recently warned in a blog post that people should not be buying very old Housing Board (HDB) resale flats in the hopes that they would be selected for the Selective En bloc Redevelopment Scheme (Sers). Under Sers, the Government picks HDB estates it wants to acquire for redevelopment and gives flat owners market-rate compensation, and replacement units at discounted prices.

Recent trends have shown that young buyers are willing to pay high prices for ageing HDB resale flats as they assume that the Government will bail out flat-owners and offer Sers, or other schemes with generous payouts as the lease nears its 99-year expiry date.

Source:
https://www.reach.gov.sg/participate/discussion-forum/2017/04/17/should-you-buy-an-old-hdb-flat

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