How to upgrade from a flat to a condo in 2022

Ever since 2019, HDB upgraders have been a dominant force in the Singapore private property market. Through Property Wealth Planning (sometimes also referred to as property wealth progression), even properties with price tags of $1.7 million or above can become affordable to many regular Singaporeans. But why are some able to do it, whereas others are not?

The key term is Property Wealth Planning. If you make your first property purchase with an eye toward upgrading, and have a clear goal, you’re more likely to succeed. Here’s how you can make the move from a HDB to a private condo:

Understanding the numbers involved

Understanding the numbers involved

Most Singaporeans HDB upgraders cannot start with a private property, so please don’t feel left out if this is the case for you. In the majority of cases, Singaporeans enter the private property market via the sale of the HDB BTO flat after MOP. As such, it’s imperative to know the amounts involved, and whether the sale of your first home (the HDB flat) can finance your private property purchase.

Four numbers stand out above all others for HDB upgraders when aiming to buy / upgrade to a condo:

  • The maximum Loan To Value (LTV) ratio
  • Minimum cash down payment
  • Total Debt Servicing Ratio (TDSR)
  • CPF refund when selling your flat

1. The maximum Loan To Value (LTV) ratio

The LTV ratio refers to the percentage of your property purchase that a lender will finance. For example, most banks can grant a maximum LTV of 75 per cent, which means you can borrow up to 75 per cent of the property price of value, whichever is lower.

(Note that if you’re buying a new launch property, the property price and value are considered the same).

The LTV ratio can fall under some circumstances. The most common involves age and loan tenure: if your age, plus the loan tenure, would go beyond the retirement age of 65 years, your LTV falls to 55 per cent. Likewise, if the loan tenure would exceed 30 years, your LTV will fall to 55 per cent (which is why few people take the maximum loan tenure of 35 years, even though you technically can for a private property).

Some other factors can cause the LTV to drop, such as the location of the property, the lease decay, your creditworthiness, etc. This is too long a topic to cover here, but contact me if you face these issues, and I may be able to help.

For now, suffice it to say that the usual maximum LTV is 75 per cent. This means the sale of your HDB flat, when the time comes, should provide sufficient returns to make up the 25 per cent down payment; but this doesn’t have to all be in cash, as I’ll explain below.

2. Minimum cash down payment

The absolute minimum cash down for any private property purchase is five per cent. So if you get a 75 per cent LTV (as above), this means you need to pay five per cent in cash, the next 20 per cent can be in cash or CPF, and the rest is covered by the loan.

For a typical $1.7 million condo, this would mean:

  • $85,000 in cash
  • $340,000 in cash or CPF
  • Remaining $1,275,000 covered by bank loan

If you have co-borrowers, this can be split among you as you please (e.g. $42,500 in cash and $170,000 in CPF from each spouse).

It’s important to consider the cash component, as you cannot take a loan to cover this amount. Banks are not allowed to loan you more cash for the down payment, under directions by the Monetary Authority of Singapore (MAS).

The cash portion must also be paid first, and is part of the cost to secure the Option To Purchase, booking fee, etc.

3. Minimum Total Debt Servicing Ratio (TDSR)

Besides the LTV limit adobe, your monthly loan repayment amount cannot exceed 55 per cent of your monthly income. This is inclusive of other debts.

For example, if you and your spouse are co-borrowers and earn $12,000 per month, your monthly loan repayment cannot be more than $6,600. If you also have car loans that require $1,500 per month, this would impact your TDSR, and your limit falls to $5,100.

If for some reason you would exceed the TDSR, you must either take a smaller loan (i.e., make a bigger down payment), extend the loan tenure if possible, or buy a cheaper property.

Note that, for the purposes of TDSR calculation, variable income – such as income through commissions or self-employment – count as being 30 per cent less.

In my experience, most Singaporeans face a bigger challenge with the down payment, not so much the TDSR (not least because you can resolve TDSR issues by making a bigger down payment). But if this is an ongoing issue, contact me so we can find some possible solutions.

4. CPF refund when selling your flat

Based on the above three requirements, you can probably understand by now why the sale proceeds from your flat are important to HDB upgraders.

Now a key thing to note is that, when you sell your home (whether it’s a HDB flat or private property), you must refund what you used from CPF. This mainly is to prevent roundabout withdrawal of CPF monies; if not for this rule, people could “cheat” by purchasing a property with their CPF, and then selling it to pocket the returns in cash!

So when you sell the flat, you must refund the amount you used, plus any interest that would have accrued (this is a rate of 2.5 per cent per annum). Any remaining balance will be given to you in cash, and this is usually needed to cover the cash portion of the down payment – that’s the $85,000 mentioned in point 2.

The rest of it is usually not an issue, as you can use your CPF again for the purchase of your private property. The most important element is being able to cover the cash portion.

You can contact the CPF Board,to find out how much you’re obliged to refund if you sell your flat today.

One important risk to note here is a negative cash transaction.

This is when the amount you must refund to CPF exceeds the sale proceeds (e.g., if you must refund $480,000 to CPF, when your sale proceeds are only $450,000). While you don’t have to “top up” the difference – you just return $450,000 – it does mean you’ll have no cash in hand after the sale. This can make it hard to cover the cash portion of the down payment.

Knowing the numbers, how can you properly plan to upgrade to a condo

Knowing the numbers, how can you properly plan to upgrade to a condo?

  • Pick a BTO or resale flat based on your timeline
  • Be aware of your CPF usage
  • Plan financially for the required down payment
  • Decide if you’ll buy before selling, or vice versa
  • Start to formulate a customised, personal plan right now

1. Pick a BTO or resale flat based on your timeline

When upgrading, should your first home be a BTO flat or a resale HDB flat?

On the one hand, a BTO flat would be cheaper; and “new” BTO flats that have just reached their five-year Minimum Occupancy Period (MOP) can see high demand. On the other hand, you’ll end up waiting much longer before you can upgrade.

This is because the five-year MOP begins from the time of the flat’s completion. So if you ballot for a flat now, and wait three years to get it, you’ll still have to wait another five years (total of eight years) before you can sell and upgrade.

With a resale flat, there’s no construction time; you know you can sell immediately after five years. However, you will almost always pay more for a resale unit.

As such, your decision comes down to your planned timeline. If you want to upgrade within five years, thus avoiding inflation in private property prices, then it may be wiser to start with a small resale flat (even if it’s 3-room or not in the most central location, you will be moving in five years anyway).

But if your concern is saving up enough money, and you need more time anyway, then a lower-cost BTO flat may be right for you. There’s no inherently correct choice; it comes down to your financial situation, and how soon you want to own a private property.

2. Be aware of your CPF usage

You can use your CPF for all of the following, whether for private or HDB properties:

  • Down payment (20 per cent for bank loans, 15 per cent for HDB loans)
  • Stamp duties (except Sellers Stamp Duty)
  • Legal fees
  • Home loan repayment

Note that, because HDB loans can cover up to 85 per cent of a HDB flat’s value, this means it’s possible to pay no cash for your initial flat (cover the remaining 15 per cent with CPF).

However, while it’s tempting to blow all your CPF without thinking about it, I would encourage HDB upgraders to plan ahead. Remember that what you take from CPF, you must later refund with interest.

As such, some HDB upgraders may use cash to service the home loan or down payment; this ensures they’re not faced with negative cash proceeds, when it comes time to sell the flat.

3. Plan financially for the required down payment

This is more properly within the scope of your financial advisor, wealth manager, etc., so I won’t delve too much into it here.

However, what we can do is work out your likely required down payment, and when you’ll need it. You can then consult your trusted financial professionals (e.g., unit trusts, endowments, and so forth) on how to meet the required sum; such as $80,000 in five years.

In any case, never rely on your HDB flat sale alone to fund your upgrade. This could happen, but it’s best to ensure you also have hard cash; just in case you need a bigger down payment to meet TDSR, private home prices spike at the wrong time, and so forth.

4. Decide if you’ll buy before selling, or vice versa

If you decide to buy your condo before selling your flat, you can reduce the need for temporary accommodation. You could, for instance, stay in your flat until it’s time to move.

However, doing so requires you to pay the Additional Buyers Stamp Duty (ABSD), as your condo would be your second property. This is currently 17 per cent of the second property’s price for citizens, and 25 per cent for Permanent Residents.

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You can apply for ABSD remission only if you’re a married couple, one of you is a Singapore Citizen, and you sell your flat within six months of buying a private property.

You could also end up servicing two home loans for a time – one for your flat, and one for your condo. As such, I don’t usually suggest this unless you’re financially well-off, and can handle the strain.

The simpler alternative is to sell your flat, get the sale proceeds, and then buy a private property. However, you may need somewhere to live in between. It’s better to make these plans early on.

5. Start to formulate a customised, personal plan right now

As you can see, the general concept is straightforward. It’s to buy a flat, let it appreciate for five years, and then use the proceeds to “step up” to a private property afterward.

However, there’s no way to have a plan that will apply to everyone. Not everyone will be ready to sell and upgrade in five years. This all depends on the value of your flat, the price of your desired property, fluctuations in your income, and so forth.

For this reason, it’s better to get a plan tailored to your specific situation, rather than follow generic approaches. With a bit of your time, I can help you to work out a smooth and realistic asset progression plan, based on where you are now. Book a online consultation with me to find out how I can tailor your Property Wealth Planning journey today.

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Finally, a quick note for those doing well enough to afford a private property from the start:

Don’t be under the impression that you must start with an HDB flat and follow this route. Property Wealth Planning provides a place to start: if you don’t have the budget to jump directly into the Singapore private property market, it’s your way in.

But if you already have the means to afford a private property, you can avoid a lot of risks by just going for a condo first. This is because you don’t bear the risk of private property prices suddenly spiking a few years from now, and your flat value failing to match it. You also spare yourself the stressful process of having to move, or having to sell your flat within six months (if you buy before moving).

So while Property Wealth Planning is a sound strategy, it’s not for every property buyer; and this journey does not look the same for everyone. Don’t feel that you have to approach it the exact same way as your successful relatives, friends, etc.

Drop me a note, and we can work out what’s smoothest and safest for you.

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