Buying a home: HDB or Condo?
With more than 80 per cent of the resident population living in HDB flats in Singapore, there are many choices when it comes to public housing. But perhaps you also have the financial option to purchase a private property, such as a condominium unit. Here are four essential questions you should ask yourself before taking the plunge.
1. WHAT IS YOUR LONG-TERM GOAL?
The most important thing is to understand what your goals are, and how long you are prepared to take to attain them. For example, your plan may start with purchasing a HDB flat as a first home, before subsequently upgrading to a condominium after 5 to 10 years to fulfill your aspirations of having amenities such as a swimming pool.
Start by thinking about what you want, then plan towards it – this may help you to choose between a HDB flat and a private condo unit.
2. WHAT ARE THE RULES OF ENGAGEMENT?
It's important to know the current regulations that govern your eligibility to purchase either a HDB flat or a private condo, and the extra costs that you may be subjected to.
Minimum Occupancy Period (MOP) for HDB flats
If you purchase a HDB flat, you must own the flat for a minimum of 5 years. This means you are not allowed to sell the flat during this period, except under special circumstances. However, there are no such restrictions for private housing. In other words, should the market present a good opportunity to sell at a good price, it is not possible to do so for a flat that is still within the MOP.
Stamp Duty Fees
To reduce excessive speculation, the Singapore government has enacted measures which may affect your decision between a HDB flat and a private condo. Regardless of your citizenship or residency, you are required to pay a buyer’s stamp duty. Buyer's stamp duty is payable on the acceptance of an option to purchase agreement or sale and purchase agreement. Previously, buyers of residential properties paid a 1 to 3 per cent stamp duty that was tiered.
As a part of Singapore Budget 2018 announcements, the government has raised the top marginal buyer's stamp duty rate from 3 per cent to 4 per cent for residential properties worth more than $1 million. The new rate applies to all residential properties acquired from Feb 20 onwards. The 4 per cent rate will apply to the value of the property in excess of $1 million. There is also an additional buyer’s stamp duty (ABSD) that varies with your status. For Singapore Citizens, ABSD is not levied on your first property purchase. However, should you purchase subsequent properties, you are subjected to 7% for the second property and higher ABSD thereafter.
What about minimum down payments and loan financing?
If you are buying a HDB flat, you have the option of financing it with either a HDB concessionary loan or a bank loan. If you go with a bank loan at the point of purchase, you will not be eligible to switch to a HDB loan subsequently. If you are eligible for a HDB loan, you will only need to fork out a down-payment of 10% on your purchase price, whereas for a bank loan, the required down payment would be 20%. Purchase of private properties can only be financed by bank loans, with a down-payment of 20%.
Another point to consider is the interest rate. The interest rate on the HDB loan is pegged at 0.1% above the prevailing CPF Ordinary Account rate. This has been unchanged at 2.6% for some time and it is much higher than the bank loans. This is because most bank loans are 1.8% or less currently. However, interest rates may increase in the future.
Usage of CPF monies
Other than the down-payment, you will also need to consider how you plan to service the mortgage. The good news is that you can tap on your CPF Ordinary Account. But note there are restrictions on how much of your cash flow can go towards servicing your mortgage. As a part of the 2013 property cooling measures, the government has introduced a Total Debt Service Ratio (TDSR). There is also a Mortgage Service Ratio (MSR).
What is Total Debt Servicing Ratio (TDSR)?
Applicable if you wish to take a bank loan, the TDSR ensures that your household will not spend more than 60% of your gross monthly income on any outstanding debt which includes:
- Credit card balances
- Student, automobile and personal loans
- Credit term instalment plans with retailers
- Other outstanding mortgage loans
Do note that the interest rate used to calculate your monthly debt obligations is not the prevailing interest rate but a reference interest rate set by the Singapore authorities. The rationale behind this rate of 3.5% (at the time of writing of this article) is so you can service the loans even if interest rate rises in the future.
Your total gross income used to assess the TDSR can also be affected:
- If you are self-employed, there will be a 30% reduction in the eventual income used for calculation
- Both pledged and unpledged liquid assets can increase your total gross income. Note that there is a 70% reduction on unpledged assets.
- Non-liquid assets will increase the total income used for calculation of the TDSR, after accounting for a 30% reduction
This means that if you are prudent and have fully repaid assets, or have cash built up but do not wish to commit to your HDB or private condo down-payment, they can be used to boost your income used for calculation. If you fail to meet the requirements of the TDSR, you may have to borrow less and increase the down-payment.
What is Mortgage Service Ratio (MSR)?
Mortgage Service Ratio (MSR) is the proportion of your monthly gross income that is spent on mortgage repayment. This includes debt obligation secured by properties. The current limit is 30%.
MSR is applicable to:
- HDB flat
- Executive condominium (EC)
The main difference between the MSR and TDSR is that the former mainly affects HDB and EC purchases, and considers the mortgage loan you are applying for. It does not affect your outstanding loan because if you own a private property, you will not be able to buy a HDB flat or a EC.
3. WHAT MAY BE THE VALUE OF THE PROPERTY IN FUTURE?
From a capital appreciation angle, you may be thinking that a property’s value will only go up in land-scarce Singapore. Property can indeed hold value better than some other asset classes. However, if you are identifying properties for speculative appreciation, do note there are nuances to both private property and HDB units:
- Some property sizes fare better in particular locations as compared to others. For example, a 2 bedroom and studio might be more suitable if your plan is to purchase with the view of eventually renting it out.
- Some resale flats with a short land lease remaining, might provide better rental yields if they are in the rest of central region (RCR) as compared to a private condo in a suburban location outside of central region (OCR).
- Resale flats that are close to amenities and transport hubs may command higher prices than private condos located in more obscure locations.
4. WHAT OTHER NEEDS DO YOU HAVE?
For some home buyers, finances may take a backseat due to other important factors. For example, you might want to buy a condo unit in the same estate as your parents so that they can take care or visit their grandchildren every day. Or you might prefer a resale unit right beside the school that your child is studying in. Alternatively, you might wish for a smaller place because your spouse and you do not plan for kids. You could also desire a place that is near to your workplace. Ranking and evaluating these factors holistically may enable you to make the decision wisely.
What we do suggest is:
- Discuss your goals and aspirations with your partner if this is a co-purchase
- Think about your ideal home environment
- Attend talks or speak to trusted family members and friends who may be in similar seasons of life
In conclusion, there are numerous factors you should consider before deciding between a HDB flat or a private condo unit. You may wish to list down what you want and the trade-offs you are willing to take. After that is done, work out whether your cash flow allows you to comfortably service the loan in the future.
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