After living in your Build To Order (BTO) or first resale Housing & Development Board (HDB) flat for more than five years, you may be ready for an upgrade. This makes sense as you would most likely have gone for the most economical housing option as a young couple just starting out in the world.
After several years, many of you may have landed better paying jobs, have several more family members to feed and clothe or have finally saved up for a down payment on a bigger place. For many in Singapore, the dream is to upgrade to live in a condominium.
Before being able to do so, you have to ensure that you comply to certain measures and restrictions the government has put in place.
You Have To Serve Out Your Minimum Occupation Period (MOP)
Most of you would have already known that you need to serve out your MOP before being able to sell or buy another property in Singapore or overseas. Below is a chart detailing the different scenarios you may face depending on the type of flat you purchased and when you purchased it.
You also have to note that any period when you are not occupying the flat or if there has been an infringement of the flat lease will not count towards your MOP.
Purchasing Your Dream Condominium
If you have complied with your MOP, you can finally start working towards buying your dream home. You may already have some familiarity with the process, having gone through a similar one when you bought your first home. However, there are also some key difference between buying a private residential property and an HDB flat.
You have to take up a bank loan rather than rely on an HDB loan. This means you have to fork out 20% of the property value in down payment, of which at least 5% has to be in cash and the remaining 15% in cash and CPF savings. You will also incur lower interest rates on your loan – with HDB loans pegged at 2.6% and bank loans hovering at close to 1.5%.
Beyond this, you also have to draw up a proper plan to pay down your mortgage. This is because there are limits to how much of your CPF monies you can use to pay off your mortgage. A Valuation Limit (VL) and Withdrawal Limit (WL) will cap the maximum amount of CPF monies you can use to repay your mortgage. Once you reach these limits, you will need to fork out the rest of your mortgage payments in cash. You can use CPF’s calculator to see how this may affect you.
Now, you also have to comply with the Total Debt Servicing Ratio (TDSR), where you can only utilise up to 60% of your gross income to pay off your debt obligations. This includes any credit card debt, student loans, car loans, personal loans and, of course, home loans. If you are self-employed, only 70% of your gross income will be assessed in this calculation, which makes it even harder to qualify for a bigger loan.
You also have to adhere to a Loan-to-value (LTV) ratio, which sets the maximum loan you can take against the property’s value depending on your situation.
There are also other considerations you have to think about, such as paying stamp duty, engaging a property agent to help you buy your property, where you may incur 1%-2% commission fees for this, and hiring a lawyer to advise you on the process of buying a condominium and handling the legal documentations.
Some of you may also want to keep your HDB flats to rent out for passive income after moving into your new condominium. This option is only available to Singaporeans as Permanent Residents have to sell off your HDB flats within six months of buying a condominium, or any other private residential properties in Singapore or overseas.
Below are three possible scenarios HDB flat owners may face when deciding to upgrade to a condominium.
#1 Buying A Condominium And Selling Off Your HDB Flat
This is the most straightforward method to upgrade from your HDB flat. In this scenario, you can shop around for the condominium of your dreams. This can either be from the open market or a new launch. You may work with one or several property agents to view condominiums and eventually buy one.
Once you decide to purchase a condominium, you would usually be expected to make a 1% cash payment after signing an Option To Purchase, giving you the right to purchase the property within a limited period (usually two weeks). You will be expected to make a further 4% cash payment to exercise the Option before the deadline. After this, you will have to fork out the buyer stamp duty (BSD), of close to 3%, within two weeks of exercising the Option, and signing the sales and purchase agreement. After a further two months, the remaining amount has to be paid to the seller to complete the transaction.
Even though this seems fairly clear-cut, there are important things you have to think about. This includes considering whether you should be selling off your HDB flat before or after purchasing your condominium. This is crucial as you will have to secure a bank loan to complete the purchase as well as have fork out an additional buyer’s stamp duty (ABSD) of 7%.
If you intend to sell your HDB flat before buying your condominium, you will likely have sufficient cash resources to pay your down payment, but you may need to consider where you will be moving to if you do not time the purchase of your new condominium and sale of your HDB flat perfectly. On top of costing you extra money, you will have to contend with the time-consuming and stressful process of moving your entire home within a short space of time twice.
However, if you intend to sell your HDB flat after purchasing your condominium, you need to ensure you have sufficient cash reserves to pay for your down payment as well as comply with the TDSR, where you can only repay up to 60% of your gross salary on debt, which will now include two properties, and the LTV ratio, where you may be required to fork out 50% of the property value upfront.
You will also need to pay the ABSD, as this will be considered your second property. This may complicate your transaction or financially tie up your hands when it comes to completing the purchase. Nevertheless, you can apply for a bridging loan from the banks with your new home loan, and if you sell your HDB flat within six months of your condominium purchase, you will be able to apply for a refund for it.
#2 Buying A Condominium And Keeping Your HDB Flat To Rent Out
For those of you who want to keep your HDB flats, the scenario above where you only sell your HDB property after buying your new condominium applies to you. This means you have to comply to the TDSR, LTV and pay for the ABSD. This means you have to set aside significant financial resources for this.
On the bright side, you will definitely have a place to live in until your property is ready to move into – be it right away, whether renovations take longer than expected or even if construction or TOP of the property takes more time.
One other way you could work this scenario is to purchase a condominium when you feel it is at a good price, with the view of eventually moving into it. With the Straits Times recently reporting that private residential properties saw its 15th consecutive quarter of decline, dipping 0.3% in the second quarter of 2017, some may see it as an opportunity to buy and rent out, while waiting for the right time to shift in.
Alternatively, you could also look at the purchase of this condominium solely as an investment should you choose not to move into it.
Additional Restrictions You Face If You Want To Rent Out Your HDB After Moving Into Your Condominium
You and your tenants have to meet certain conditions to be able to rent out your HDB flat to them. If these conditions are not met, you will not be able to rent out your HDB flat.
Beyond fulfilling your MOP, you have to meet a non-citizen quota for renting out your HDB flat, which stipulates that you can only rent to Singaporeans and Malaysians freely. If you want to rent out your HDB flat to a foreigner, you have to adhere to the quota which restricts neighbourhoods from having more than 8% and individual blocks of more than 11% of foreigners respectively.
In addition, tenants who are not Citizens or PRs have to be legally residing in Singapore, holding Employment Passes, S Passes, Work Permits, Student Passes, Dependant Passes, or Long-Term Social Visit Passes. And these passes must have a validity of at least six months at the date of your subletting application. Work permit holders from the construction, manufacturing, marine and process sectors must also be Malaysians.
You also have to ensure that your tenants adhere to the maximum number allowed in each flat type.
Total Number Of Subtenants
1-room and 2-room
Lastly, subtenants must also not be tenants or owners of other HDB flats unless they are divorced/ legally separated (only one party can be a subtenant) or owners who are eligible to rent out their whole flat (they must rent out their own flats within one month of renting the HDB flat).
You are also responsible for complying with subletting regulations, ensuring that
Only authorised tenants are staying in your HDB flat
The number of tenants do not exceed the maximum number
Tenants do not further sublet to others, create nuisance or misuse the flat
Your tenants are legally residing in Singapore
Your tenants comply with all the covenants in the lease and provisions of the Housing & Development Act. You are responsible for all infringements committed by them
You should also note that when you rent out your HDB flat, your property tax will be revised from the owner-occupier rates to residential tax rates of 10%, if your HDB flat does not exceed an annual value of $30,000.
The period you are allowed to sublet your flat out is also contingent on who you rent out to. You can rent your flat out to Singaporeans and Malaysians up to three years. This is reduced to one and a half years for PRs and foreigners.
Unauthorised subletting of your HDB flats may result in very serious consequences, including financial penalties and even acquisition of the HDB flat. Even if you have received permission to rent out your flat, you should check on it regularly to ensure rules and regulations are met.
#3 Buying An Executive Condominium And Selling Off Your HDB Flat
A third way to being able to live in a condominium is for you to purchase an Executive Condominium (EC). ECs are comparable to condominiums and can be sold on the open market after owners complete your MOP.
In this scenario, you can apply for an EC from HDB, which will take close to three years to be built. This also gives you good visibility knowing when you will likely receive the keys to your new home. You can plan to start marketing and selling off your flat just when your new home becomes ready.
For couples applying for ECs, you can present your bank a copy of a signed undertaking to HDB to committing to complete the sale of your existing property within a stipulated period. This will grant you treatment as a couple without existing home loans, or basically prevent you from being constrained by the LTV ratio or TDSR.
What To Expect After Moving Into Your Condominium
You may be very excited after moving into your new condominium, and could be swimming or playing tennis every few days. After a while though, you can expect this novelty to simmer down. You will find that you don’t use these amenities very often.
Time and again, we say that you have to plan ahead for this move. This is because when you finally move in, you will have to take on the burden of higher expense every month. This includes higher recurring costs such as mortgage payments, property taxes, home insurance, management fees of between $250 and $500, and utilities. You may also spend on renovations when you move in to beautify your dream home.
One last thing to note is that you have to be ready for prices to continue remaining weak. You should be choosing a home rather than an investment. As mentioned, private property prices have dropped for 15 consecutive quarters, and you should not expect a big swing from this trend.
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