My wife and I have been house-hunting for the past few years and recently just decided to purchase an Executive Condominium (EC). The desire to upgrade to an EC is because of the new addition to our family. With the arrival of my boy, we need a bigger space. But the key motivation behind this move is basically I want my children to grow up in a better environment. I always feel that people living in HDB three room flats come from “challenging” backgrounds – drug addicts, ex-convicts, etc. I know it is too sweeping to make this sort of statement as I have been living in HDB three-room flat for more than 30 years. But as parents we all want the best for our kids. So in today’s article, I shall note down how to manage CPF proceeds from the sale of HDB flat to build your wealth.
Selling your existing HDB and buying another resale HDB
Firstly, if you are buying EC, you can only apply for bank loans. HDB don’t offer loans to EC owners. Nevertheless, before I touch on the financial aspects for buying EC, I will like to touch on the finances for buying a second resale HDB flat. We toyed with the idea of upgrading to a resale HDB 5-room flat last year but decided not to do so after much consideration. We don’t find it worth-while to pay $500,000 to $600,000 for an HDB resale 5-room flat. For slightly more, an EC with condominium facilities is more value for money. The payments involved are as follows:
- Standard $1000 for option fee. $4000 for exercising the option fee.
- If you are buying the flat at prices above the valuation, then you need to pay the Cash-Over-Valuations (COV)
- Initial payment to HDB which is 10% of purchase price (if you are taking HDB loan)
- Legal fees and buying stamp fees
One of the plus points of buying resale HDB is that the down-payment is really affordable and you can utilize all your CPF OA account savings to make the initial payment in full. If you have insufficient CPF OA savings, then the balance has to be paid in cash.
Each Singaporean is entitled to a maximum of two HDB concessionary loans which are pegged to the CPF interest rates. Given a choice, many Singaporeans will opt for a HDB loan because of its stability. So from a risk management perspective, even though current HDB loan rate is still slightly higher than most bank loans, it is more prudent to go for the HDB concessionary loan because the rate fluctuations are very minimal. The tricky part for upgraders like us is that there are conditions to comply when buying another resale flat after selling current flat.
In 2010, the Singapore government implemented a new housing cooling measure that requires you to use up to half of the cash proceeds from the sale of your current or immediate past HDB flat, and all of the CPF balance to finance the purchase of your next flat. This applies regardless of when you sold your previous HDB flat. You may keep $25,000 or half of the cash proceeds, whichever amount is more. At the peak of the property fever, many Singaporeans had sold their properties for explosive profits and so, this policy is meant to prevent Singaporeans from taking larger second concessionary loan than necessary, and can help to reduce the likelihood of subsequent mortgage arrears.
This new policy effectively reduces the cash-flow from the proceeds of your HDB flat. To circumvent this, the only other way is to apply for bank loans, which is quite prone to fluctuating market interest rates. However, with bank loans, more cash would be free up after settling your outstanding housing loan and returning your CPF savings back to your OA account (with accrued interest). With more cash on hand, there are opportunities to invest and make more monies. Alternatively, you may choose to renovate your new home and enhance your asset.
Selling your existing HDB and buying a new EC
For new EC, the payment process is also very straight-forward, except that there are a few things that you need to take note:
- You must first get an in-principle approval from the bank to assess how much you can loan. If the loan amount is less than 80% of the EC unit you are purchasing, you must ensure that you have sufficient cash/CPF savings to top up the differences
- 5% (of purchase price) booking fee in cash is required
- 15% (of purchase price) down-payment fee in cash or CPF to be paid 8 weeks after option is exercised
- Buyer stamp duty (First $180,000 costs 1%, next $180,000 costs 2% and remaining amount costs your 3%)
- Resale levies
- Legal fees
One thing that house-owners need to be mindful is the Seller Stamp Duties (SSD). Normally for HDB dwellers, they need not pay SSD if they fulfil the Minimum Occupation Period (MOP). But for me, my first resale HDB flat was sold before the MOP, henceforth, I fork out quite a substantial amount of SSD to IRAS.
My wife and I decided that after selling our existing flat, we will not use the CPF-OA savings to do partial payment for our new EC. Instead, we will use our CPF OA savings to pay the monthly instalment loans. In doing so, we estimated that there is no need to fork out any cash for 15 years. After that, we would have built up sufficient wealth to settle the remaining loans. Most Singaporeans tend to repay housing loan as soon as possible because of the anxiety to reduce debts. But just think about it, the CPF interest rates is 2.5% while a typical bank loan is about 2.1%. By using your CPF savings for partial payment, you are forfeiting a lot of interests. If you compound the interests, they can add up to a lot of monies, especially for a few hundred thousand of CPF OA savings.
Having a good cash flow is important for wealth builders, especially during downturns. It is always good to have cash on hand because you never know when you may be retrenched from your job. Don’t be so anxious to use up all your CPF savings to settle your housing loans.
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