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Should second-timer HDB homebuyers buy first, then sell? Or sell first, then buy?

· Thinking of Selling

Buying first and selling after

Buying your flat first means you don’t have to worry about scrambling to find a place to live before you have to move out of the flat. It is, however, a risky and expensive proposition.

6-Month deadline to dispose of flat

If you’re buying a new flat before selling your current one, you’ll have 6 months from the date you take possession of your new flat to dispose of your existing one. If you don’t manage to sell your old flat within those 6 months, you can usually appeal to HDB for more time. HDB has traditionally been quite generous to sellers in this predicament, granting them extensions of up to 12 months to sell their flat, or allowing them to push back their key-collection date. Legally however, HDB has the right to force you to surrender your brand new flat and provide you with compensation they deem appropriate. So while it might be somewhat reassuring to have the option of an extension, it’s still not a good idea to put yourself in such a vulnerable position when there’s such a substantial investment on the line.

Financial costs of owning two properties

If you’re opting to buy a new flat before selling your current one, you need to be sure that you’re financially able to juggle the costs of owning two properties at the same time. Not only will you be paying two concurrent mortgages, you’ll need to shell out for ancillary costs like legal fees, Buyer’s Stamp Duty, not to mention potential renovation or repair costs. Your ownership of a second property also affects how much you’re eligible to borrow for your new purchase.

Loan-to-Value Ratio

Under the new cooling-off regulations, the maximum bank loan you can get will be affected by the number of outstanding loans you have – in this case, having 1 outstanding loan means you’ll only be able to get a loan of between 25 to 45 percent (depending on the tenure of the property and the borrower’s age). Not only that, you’ll be required to put a down payment of at least 25 percent of the purchase price in cold, hard cash! 

Total Debt Servicing Ratio and Mortgage Servicing Ratio

The Total Debt Servicing Ratio (TDSR) and Mortgaging Servicing Ratio (MSR) regulations apply regardless of whether you buy or sell your flat first, but in the former case, if you’re still servicing your outstanding loan on your current flat, the TDSR and MSR restrictions may effectively block you from obtaining the loan amount that you desire.

TDSR and MSR were introduced to control the amount that borrowers could loan, to prevent them from over-extending themselves and ending up unable to afford their monthly obligations.

Under current TDSR regulations, a person may only use a maximum of 60 percent (70 percent if they’re self-employed) of their monthly earnings to pay off any loan obligations they have – this would include home loans.

Under the MSR regulations, a borrower may only use up to 30 percent of their monthly earnings to service a loan. This applies to borrowers looking to finance their HDB flat or EC purchase, in addition to the existing TDSR restriction.

If you intend to service two loans concurrently, you’ll need to have a very healthy monthly income (or incredibly low monthly debt obligations) to be able to come out the other end with a substantial loan.

Higher interests rates on HDB loan

If you’re taking a second HDB loan for this purchase, you can also expect to be charged a higher interest rate than the standard concessionary rate (we go into more detail on this below.

Additional Buyer’s Stamp Duty 

Regardless of the fact that you’ll be selling your current flat later, you’ll still be liable to pay an Additional Buyer’s Stamp Duty (ABSD) on the second flat – depending on the citizenship of you and your co-applicants, this can run anywhere between 17 to 25 percent of the purchase price of the flat. 

The good news is that you can claim a refund for the full amount paid if you manage to sell your first property within 6 months of your new purchase. On the flipside if you can’t sell in time, you’ll end up forfeiting your ABSD instead – something we’d be wary of in today’s soft market. 

If you’re thinking you can avoid ABSD by transferring your share of the flat to your spouse or immediate family before buying, think again. HDB’s since plugged that loophole and as of April 1 this year, HDB flat owners are only entitled to transfer ownership of the flat under six special circumstances (marriage, divorce, death of an owner, financial hardship, renunciation of citizenship and medical reasons).

Selling first and buying after

Having read through the horror list above, it might seem like a no-brainer that selling your flat first is the way to go for second-timer HDB homebuyers.

Not so fast though – this option comes with its own set of challenges, all centred primarily around the danger of not being able to find a new place in time.

It takes an estimated 8 to 10 months to sell your flat on the open market, though this can be longer depending on whether there’s interest in your flat in the first place, and how motivated the buyer is to complete the transaction.

Rental and storage costs

If you aren’t able to buy a new flat in time, you may have to find yourself alternative lodging in the interim. This might mean moving in with kind relatives willing to take you in, but for most, it’ll mean having to rent an apartment until you’re able to find your own home.

Even in today’s depressed market, that can get pretty expensive very fast.

Depending on the space, you might even need to rent a storage unit to hold your furniture while you settle on your eventual home – in land-scarce Singapore, that’s not going to come cheap.

Stress and Compromise

With costs mounting, second-timer HDB homebuyers might find themselves compromising on their wants and choosing a flat that’s there and available, rather than a flat they’re genuinely excited about, just to stem the flood of funds streaming out the pocket.

Hassle and Cost of Moving Multiple Times

There’s also a tremendous amount of work and expense that comes with moving for second-timer HDB homebuyers.

Whether you’ve moved in with family, or rented a space, you’ll have to repeat the whole packing endeavour once you’ve finally found your new flat.

That’s hard enough to do if you’re single, let alone if you have young children or elderly parents to think about!

Check if the finances add up

With the government’s cooling measures kicking in, today’s sellers are getting far less for their flats than they initially projected.

Add to that the stricter borrowing restrictions and other levies that have been put in place, and you might find that the new home you wanted might be costing you more than you budgeted for.

It was estimated that in 2014, about 10 percent of second-timer HDB applicants pulled out of successful applications. Property analysts have attributed this surge of dropouts to the applicants’ fear of not being able to sell their flat, or having to sell at a considerable loss.

Be conservative with your estimates at the outset so you can save yourself the pain of pulling out of an unfavourable transaction down the road. This is because the further down the process you go, the more you stand to lose.

Your HDB loan will be affected (if it’s your second HDB Loan)

If you’re taking a second HDB Loan, note that your total loan amount will be reduced by taking into account your full CPF monies, as well as a portion of the cash proceeds from the sale of your first flat.

You’ll basically be allowed to keep $25,000 or half of the sales proceeds from the sale of your flat (whichever is greater) – the remainder will go straight towards paying off the cost of your home.

HDB’s motivation in doing this is to cut down the loan amount you’ll be taking on, thereby reducing the possibility of you over-extending yourself and going into arrears. 

If you haven’t sold your first flat yet, HDB will still grant you a loan for the larger amount, but will charge you a commercial interest rate rather than the lower concessionary rate. 

The commercial interest rate is pegged to the 3-month average non-promotional interest rate for purchase of HDB flats offered by the 3 local banks (currently that’s at 3.38 percent). It’s only when you’ve sold your flat and redeemed your loan with your CPF and sales proceeds that the interest rate will be adjusted to the standard concessionary rate (presently about 2.6 percent).

Additional Notes for second-timer HDB homebuyers who are BTO Owners looking to Buy a Resale Flat

Enhanced Contra Facility

The Enhanced Contra Facility (ECF) is a relatively new scheme introduced by HDB and the CPF Board to help second-time buyers. It allows for the sale of the current flat and purchase of the new flat to run concurrently so that the proceeds and refunded CPF monies from the sale can be immediately used for their flat purchase.

While the refunded CPF monies cannot be used to pay stamp duty or conveyancing fees, the ECF can help to reduce the cash outlay required for the flat purchase, thus reducing the mortgage loan amount needed and consequently the monthly repayments as well.

It’s a pretty complicated process for second-timer HDB homebuyers since it involves the coordination of 3 parties (you, the buyer of your flat, and the seller of the flat you’re interested in), so we would recommend hiring an agent if you’re attempting this.

The upside to this complicated process for second-timer HDB homebuyers, however, is that you have a home that’s ready to move as soon as you’ve concluded your sale!

Conversion Scheme

If you’re looking to upgrade to a larger flat, you might be interested in HDB’s Conversion Scheme.

Under this scheme, owners of 3-room (or smaller) flats are entitled to purchase an adjoining 3-room (or smaller) flat, and convert both flats into 1 unit.

This is a great way for second-timer HDB homebuyers to avoid the stress and work of shifting houses, while still allowing them to ‘upgrade’ to a larger flat.

Resale flat owners may not move out right away

Unlike BTOs, resale flats are often occupied at the point of sale. Once the sale of the flat has been officially completed, the owners or inhabitants are expected to vacate the premises to give way to you, the new owner.

In some instances, however, the resale flat owner may require more time to get their affairs in order and might not be ready to move out.

If you’re lucky, they’ll be amenable to entering into a lease with you – you’ll need to apply to HDB for a Temporary Extension of Stay, which will allow the sellers to remain in the flat for up to 3 months. The exact financial details of the extension can be worked out privately between yourself and the seller.

If you’re unlucky, a flat owner might decide they no longer want to go through with the sale and just….stay put. Once the Sale and Purchase Agreement is signed, the seller is legally obligated to go through with the purchase. You can, therefore, take the seller to court, and ask that he be compelled to go through with the sale.

Court proceedings, however, are a lengthy and expensive process – take the case of Madam Herni Fadhillah Saad for example, who had to wait 5 years before she was finally able to take possession of the resale flat she’d bought. In these cases, it might be more worth your time to speak directly to the seller and see if you can work things out, before resorting to taking them to court.

It’s understandable that a home that once seemed just right, might not fit your needs down the road. Buying a new home is, however, a serious financial endeavour, so be sure you’re mindful of the above before you start the process to avoid any unnecessary mishaps.

 

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