Updated: Nov 18, 2020
Breaking down the options and showing you the calculations for upgrading
“Singapore's Government introduced cooling measures to slow price increases in July 2018, including raising stamp duties for second homes and entities, and tightening loan-to-value limits for housing loans granted by financial institutions.”
"It was, as we had stressed then, not to bring down prices but to stabilize and moderate the cycle, and I think we have achieved that effect,"
said Mr Lawrence Wong – Minister for National Development
Source: Business Times
In our previous article, we talked about 3 Ways to Avoid Losing Money with Your HDB. How a couple in Punggol lost $180,000 in profit just because they sold their BTO flat 7 years later than their neighbour.
But as long as you plan properly and ride on the private property cycle, you will be able to grow your wealth through property systematically.
Whether you are upgrading from HDB to private property or Executive Condominium (EC), there are many factors you should consider other than the price of the next property you intend to purchase.
Beside ABSD and LTV, you should consider whether the property is in a good location, whether the entry price is right, are there any future developments in the area, know your holding power etc.
You might have seen some advertisements telling you that you can “Upgrade to private property with a household income of $7,000 without using your savings”. You should be prudent, work out your sum and plan carefully, never rush into it. Explore various options that are available to you before deciding.
If you are planning to upgrade to a private condo or executive condo, it is important to know which option suits your family best. In this article, we will show you the calculations of 5 different upgrading options:
Sell HDB, Buy Executive Condo Using Up All Cash Proceeds and Savings
Sell HDB, Buy Executive Condo And Have Reserve Funds
Sell HDB, Buy Private Condo with Maximum Loan
Sell HDB, Buy Private Condo And Have Reserve Funds
Sell HDB, Buy 2 Private Condos Using OTP Concept
Comparison Between Executive Condominium EC and Private Condominium
The advantage of getting an Executive Condominium is considered a privilege for Singaporeans. It is subsidized by the government and priced 20-30% lower than a private condominium. First time buyers are also entitled to grants. The monthly household income cap has been raised from $14,000 to $16,000.
As compared to an EC, a private condominium has much lesser restrictions. Private property owners have an advantage, they do not have wait for 5 years Minimum Occupation Period (MOP) to sell their property to a local and 10 years to sell to foreigner. Single owners and non-related owners are allowed to buy a private property whereas for EC, you must form a family nucleus to be able to purchase an EC. Private property buyers can loan up to 60% of their income based on Total Debt Servicing Ratio (TDSR) whereas EC is calculated based on 30% (MSR) of household income.
CASE STUDY OF A COUPLE WHO OWNED A HDB BTO FLAT:
KEN AND JANE OWNED A HDB 5 ROOM FLAT IN SENGKANG
Option 1: Sell HDB, Buy Executive Condo (EC) Use Up All Proceeds and Saving
For EC, the loan calculation is based on Mortgage Servicing Ratio (MSR), which is 30% of their combined income less debt. Ken and Jane’s combined income allows them to loan up to $895,233. If they use all their proceeds (Cash & CPF) from the sale of their HDB and cash savings, they can buy an EC with a price tag of around $1,601,301. There are currently 3 ECs selling within this price range. They are Piermont Grand at Punggol, Parc Canberra at Canberra and OLA at Sengkang. They can choose between 3-5 bedrooms.
However, it is risky to use up all their proceeds and savings as this would mean they would not have enough to fall back on in the event they need a large sum of cash. We would recommend them to keep some savings in case of unforeseen circumstances like the current pandemic.
Option 2: Sell HDB, Buy Executive Condo And Have Reserve Funds
As Ken and Jane can loan up to $895,233, we recommend them to use part of their proceeds and keep $300k as a reserve fund for rainy days. They can EC around $1,300,000. They can get a 3-4 bedroom EC from Piermont Grand at Punggol, Parc Canberra at Canberra and OLA at Sengkang within this price range.
The reserve fund of $300k acts as a safety net which could last them for the next 7 years.
Option 3: Sell HDB, Buy Private Condo with Maximum Loan
With Ken and Jane’s combined income, they can loan up to $1,679,121 or purchase a property price at S$2,238,828. There are many options with this budget.
However, we do not recommend them to max out their budget due to unforeseen circumstances like Covid-19 which may cause financial difficulties that may require them to use their cash savings. They should set aside some reserve funds which can last them for the next 3 years.
Option 4: Sell HDB, Buy Private Condo And Have Reserve Funds
Good news! Ken and Jane are able to upgrade to a private condominium without touching their cash savings. The total proceeds from the sale of their HDB flat is sufficient to purchase a private condominium up to $1,800,000.
They can consider any property priced between $1,500,000 to $1,800,000 without using their cash savings. Their cash savings of $200,000 can be set aside as a reserve fund in the event of unforeseen circumstances. They have a holding power of 3-4 years. The previous property down cycle lasted about 2 years.
Option 5: Sell 1 and Buy 2 Private Condominium Using OTP Concept
Is it possible to own 2 private properties with their income? It is important to understand the reason behind owning 2 private properties. Why own 2 private properties instead of one? This is because of OPM concept. The concept is to use “Other People’s Money” to pay for your mortgage and create a passive income from your second property.
This way of structuring the property ownership helps Ken and Jane SAVE 12% Additional Buyer’s Stamp Duty (ABSD) on their second property. They would have saved $120,000 in tax for a $1million property.
Let’s see how it works:
Based on the above financial calculation above, they can afford to sell their HDB and buy two private properties and still have around $150,000 in reserve funds We recommend them to work with not a normal agent but a salesperson who has a good track records of assisting clients in selling HDB and buying two private properties to help ease the process of upgrading.
Looking to buy/sell your property? Contact our agent today, drop us an email at email@example.com for more information!
All efforts have been taken in ensuring the accuracy of all data and information presented here. We shall not be liable or held responsible whatsoever for any loss or inconvenience caused relating to decisions and actions made by the audience. This article is not intended to give investment advice or recommendations.