You would have seen plenty of ads about upgrading from HDB to a condo in your FB newsfeed.
If you ever wondered what it takes to upgrade – then you should read further.
The Upgrading Dream
For as long as I’ve been in the real estate industry, buying a private property is an aspiration of many HDB homeowners.
The idea of living in a condo with full facilities where the whole family can enjoy together is an attractive dream and aspiration.
That’s why you see all those condo developers creating these magical ads which sells the lifestyle.
But beyond the lifestyle – is it financially a good idea to upgrade to private property?
The answer is: It depends on how you view your home.
Your Home = A Roof Over Your Head or An Investment To Leverage On?
This is a question where you need to sincerely ask yourself. As an agent, I have met 2 groups of home owners.
Group A – the home is simply a place to stay. It is a cost and an expense to maintain.
Group B – the home can be a potential investment which can provide returns. Since I am parking money inside the property, I might as well get some returns from it.
For those in Group A, they will be content to stay and view the money parked in the property as illiquid and fixed.
But if you are in the second group who views the home they stay in as a potential investment – then I invite you to read on.
Do You Qualify To Upgrade?
If you read my case studies of actual transactions I’ve helped my clients with – you will notice that I share certain important figures to take note of.
- Selling price of the existing HDB flat
- Cash proceeds from the sale of the flat
- CPF monies available in the OA accounts
These numbers above can be easily estimated based on recent transactions of your HDB flat and logging into your CPF accounts.
Your combined household income will be the set the size of the loan you can get.
This will then determine your budget and the potential properties you can buy.
Rule of Thumb
As a general rule of thumb, it is safest to proceed if you have a combined household income of at least $10K per month. You also plan to sell your HDB and use the proceeds to pay for the next property purchase.
(If you hold on to your HDB flat, then 12% ABSD kicks in – which totally negates any potential gains you can make.)
For employees, a combined household income of $10K means a monthly contribution of at least $2000 per month to their CPF OA accounts.
This means their monthly installment payments can be financed by their monthly CPF OA contributions.
That is why it is possible for some people to upgrade without touching their take-home pay or having to do a cash topup.
Using CPF Monies to Pay For My Home? Then No Money For Retirement Leh!
Actually, the majority of Singaporeans have opted to pay for their monthly installments from their CPF OA monies. This applies for both HDB and private properties.
If you are self-employed who has no CPF contributions – then usually you pay for your housing monthly installments using cash.
The opportunity cost of using your CPF monies to pay for your property is being unable to earn the guaranteed 2.5% interest by the CPF Board. This is because you have funnelled it towards paying for your home.
- Now – if your property appreciates at least 2.5% per year – you would have broke even.
- If your property appreciates by 5% per year – this means parking your monies in your property was a more profitable choice than parking it at CPF.
- But if your property depreciates by 2% per year – this means you would have incurred an opportunity cost of negative 4.5% per year! Losing money every year!
Now do you see why people choose to park their monies in a better performing property?
If your property appreciates and you decide to extract your gains by selling – that gains can be your future retirement nest egg.
Property Appreciation – HDB vs Private Property
So you realize that upgrading from HDB to private property is not merely about upgrading a lifestyle.
It can actually be a smart financial move.
As someone who deals with HDB transactions virtually every single day – I have observed that buying a HDB as a first property can be a good choice. This is especially so if you bought a HDB unit that has a fresh new brand new lease.
But HDB – being public housing will always be strictly regulated.
Some of the well-known restrictions imposed on HDB flats:
- 5-year Minimum Occupation Period (regardless whether is it BTO or resale)
- Ethnic Quotas restrictions which limits your pool of buyers
- Unable to do cash-out refinancing unlike with private properties
On the other hand, private properties:
- not subjected to MOP. They can be sold freely – although they are still subject to 3-year Seller Stamp Duty (SSD)
- can be freely sold to anyone
- Cash-out refinancing is possible (gearing)
Here are some examples of private properties that has provided significant returns and profits for their owners:
<insert table of past transaction figures>
Buying A New Launch Private Property
A new launch condo or private property usually refers to developments that has yet to be constructed. They are also known as BUC (Building Under Construction) projects.
You can consider BUC project if you do not need a place to stay urgently. Usually for such BUC projects – the key collection (TOP date) is about 2-3 years later.
For such projects, there are payment schemes known as progressive or deferred payment. This basically allows for smaller upfront installments based on the construction phase.
The loan is not fully disbursed by the bank until the TOP date. Hence the monthly installments is still small and manageable for at least the first 2 years.
The beauty of purchasing a BUC project is that it makes it easier to upgrade as monthly payments required are still smaller.
Buying Resale Condo
Resale condo requires to take the full loan upfront – which results in a larger monthly installments immediately.
Upgrading is the dream of many but should be done only when one’s finances has been assessed.
Upgrading is not suitable for everyone.
Check if you can upgrade safely without any serious drawbacks by going through a detailed financial check.