Can your HDB flat still be used as a retirement plan?

Is your HDB Flat your only retirement plan?

Avoid making this mistake before it's too late.

I felt compelled to write this post after reading this post on PropertyGuru about a 64 year old Singaporean who would not have much cash for retirement even after selling his Tampines Court Apartment. This is even though he bought the unit before privatization i.e. it experienced a substantial increase in price from the time he purchased it.

The owner was appealing to buy a BTO from HDB, most likely for the lower prices, which would free up more cash for his retirement.

Reactions on the Propertyguru FB post showed that most people were not convinced that this could happen and accused him of lying to get special privileges from HDB.

Tamp Court FB Pic Singapore

However, as a practicing agent, I feel that it is important for the general public to know that this type of scenario is NOT an exception.  It is increasingly becoming the norm, and it is especially sad for those who want to retire but then realise that they will NOT have much cash proceeds from the sale even though their flat price has appreciated substantially. 

By that time, you won't have sufficient time to start a proper retirement fund and most would have to resort to working for the rest of their lives. 

If you are still confused about how this might happen, I've included a case study below from a Singaporean couple who I have recently spoken to. Details have been made generic for educational purposes. 

CASE STUDY

Mr and Mrs XYZ are in their late 40s and have 3 children who are still in school. They bought a resale executive flat in Tampines for $443 000 in 2001. They took a HDB loan with a 2.6% interest rate.  Currently the selling price of that flat (as well as the estimated valuation from SRX) is around $620 000. 

They have been monitoring the market and since prices of flats have been falling, they would like to cash out and downgrade to a fully paid 4 room flat before their CPF gets compulsorily diverted into the Retirement Account.

Outstanding Loan : $195 000

They do not have much CPF in their ordinary accounts (OA).​

MR XYZ : CPF Usage for property + Accrued Interest = $ 230 712 +$61 379 =$ 292 091

MRS XYZ : CPF Usage for property + Accrued Interest : $83 642 + $23 130 = $106 772

Total to be returned to CPF = ​$292 091 + $106 772 = $398 863

Cash Proceeds  = Selling Price of the Flat  minus (-)  the existing loan minus (-) the amount you need to return to CPF. 

Therefore for this couple , the cash proceeds from the sale of their flat would be a mere $620 000 - $195 000 - ​$398 863 = $26 137.

This also means that they are only able to use $398 863 from their CPF funds for their next flat, without even considering additional factors like renovation costs etc. 

If they delay their decision, we predict that the HDB ramping up supply would lead to a further dip in prices, and with interest and accrued interest still accumulating, they might have a negative sale further down the road.

Alternatively, they might want to wait until their children are all grown up, and move into a studio apartment so that they can pocket more cash from the transaction. 

Why were my parents able to retire on the funds from their HDB flat? 

  • ​Prices of HDB Flats were extremely low 30 - 40 years ago and it is a norm to see prices of flats appreciate by 3-4 times. In contrast, the prices of flats of flats purchased about 10 years ago have only appreciated by less than half. 
  • The previous generation most likely paid for their flats by cash (instead of CPF) and this reduces the amount of CPF and the accrued interest to be refunded back into the account.
  • The minimum sum for couples increase according to inflation  which means you will be paying more.

Will the prices of HDB go up? 

There will definitely be an increase based on inflation but we don't forsee double digit growth or a doubling of prices like that in 2008 - 2015. If you look at the HDB Price Index Below, you'll see that the growth did not occur in history and probably would not continue, especially with Ministers promising to keep public housing affordable. 

HDB Price Index 2016

What does this mean for you? 

We are not fortune tellers and we cannot predict how the market would be like when it is time for you to retire but this is some advice that we would like to give so that your situation won't be so tight 20 - 30 years down the road. Of course, you have to carefully consider each one with regards to your own risk appetite and financial situation.

  1. Plan for retirement early and don't depend on your HDB flat as a retirement p​lan. 
    • Just to understand how much interest you will be paying ( believe me it can be a shocker) , find a free mortgage calculator app or online. The total amount of interest you pay will be based on your the interest rate, your total loan amount, and the number of years you are taking the loan for.  Unfortunately there are no calculators online to estimate accrued interest, so you can estimate it using a 2.5% interest rate. 
  2.  If you are the type who allows excess CPF to just sit in your OA, you should consider paying of your home loan early.
    For HDB loans, this reduces the total amount of interest and accrued interest you have to pay. Making Partial Capital Repayment  on HDB loans is extremely easy to do and there are no penalties for early repayment. 
    For bank loans, you need to check with your banks if there are any penalties for early repayment.
    • NOTE : We understand that there multiple point of views about paying off a mortgage loan early. From our point of view, paying off mortgage loans early works well if it is for your own residence. For properties that you rent out, the strategy should be different since it is the tenants who pay for the interest and the principal. 
    • We also know about the argument that a person shouldn't pay off their home loan early because if you die, your home would be covered by insurance and your spouse will get both your existing cpf and the insurance payout ( instead of nothing since you used up your CPF to pay for the loan) . Well we can't argue with that, but we also hope that you have a plan in place if both of you live long and healthy lives. 
  3. Look into other forms of retirement plans or purchasing another private property  to fund your retirement as the rent that your tenants pay will contribute towards your equity. Once the tenants fully pays off your mortgage for that property, it can be a source of monthly income for you. 

Buying a HDB resale property: Does $0 COV really mean no cash upfront?

Resale HDB Prices : $0 COV

Do you need cash to buy a HDB Resale Flat? 

Since HDB ramped up the supply of BTOs and on 10 March 2014, revised the procedures to purchase a resale HDB property from the open market, prices of HDB flats have been going down. One very obvious change has been the drop in the asking COV prices.

With the change in procedure, Sellers are no longer able to dictate how much COV they want but instead have to decide on the total selling price of the flat, based on recent transactions of flats in the area.

What does this mean for buyers? Does this mean that there will not be any COV Payable? Does this mean that buying a resale flat does not require any cash up front?

Not quite. There might be COV involved AND there is still some cash involved in the purchase.

Before we explain the COV portion, the other fees and cash involved in the process, buyers should first understand the old and new HDB resale procedures, and how it will affect how much cash you need for that resale HDB.

Old Resale Procedure

Prior to 10 March 2014, when the seller of a flat decides to sell, they would purchase a valuation report from a valuer through HDB. The valuation report will give the seller the ‘starting price’ of the flat, and the seller would add on to it by placing a cash premium on top of the selling price.

This cash premium was known as Cash over Valuation or COV and you cannot take a loan to cover this amount. Note that the banks or HDB will only grant buyers a loan based on the official valuation of the flat.

It got to a point where COV went up to $100 000 and finding a flat with low COV was almost like hitting the jackpot.

New Procedure

When a seller decides to sell his home, he can no longer get an official valuation of the flat. Instead, he can review HDB’s recent transaction of flats in the area or use various tools available online for example on SRX online to make an estimate of the value of his flat.

He then invites buyers to view his flat based on a starting selling price.

If the buyers are interested in the flat, they will put in an offer.

The negotiation process starts and once both buyers and sellers arrive at a mutually agreed price, the seller will grant the buyers an option to purchase (OTP). The buyer will then put a deposit (also known as option money), of up to $1000.

With this option to purchase, buyers will proceed to apply for a valuation of the flat via the HDB website. HDB usually doesn’t disclose to the valuers the agreed selling price of the flat.

The valuation company will then send the report directly to the buyers, which means the Seller will not be informed about the valuation of the flat. Whether or not the Seller finds out about the valuation, he will not be able to adjust his selling price.

Only with this valuation report, will the buyers be able to determine if they need to top up any cash for the flat based on the following scenarios.

  • If the valuation matches the agreed selling price, the flat is considered to be sold at valuation . Buyers They do not have to top up any cash for the flat)

  • If the valuation is more than the selling price of the flat, the flat is considered to be sold below valuation. Buyers do not need to top up any cash for the flat.

  • If the valuation is below the selling price of the flat, the flat is considered to be sold above valuation. Buyers would have to top up cash to make up the difference between the loan granted (i.e. the valuation) and the selling price.

However, at this stage, the buyer has not confirmed the purchase. If they find that the COV is too high, they are still allowed to back out of the deal but they will not be able to get back the initial deposit made to the sellers.

What are the other costs involved in buying a resale flat?

Apart from the Cash over valuation (if any), there are also other costs, which you would need to pay when purchasing a resale flat.

Costs Payable by CPF

(If your cpf is insufficient, you would need to top up by cash.)

  • Stamp Duty (This is about 3% of the value of the flat)

Costs Payable by Cash only

A) Option fee

This is the ‘deposit’ you pay the seller to kickstart the buying process. 

This amount is between $1 to a maximum of $1000. The current market practice is $1k but this is negotiable.

B) Exercise option fee.

This is the fee you pay to the seller to confirm your purchase. after you have received the valuation report and have arranged for a loan with either HDB or a bank. This amount is also negotiable but the current market practice is $4000, which is also the maximum amount legally.

C) Valuation Cost

  • $140.40 for 1-2 room flats and
    • $199. 25 for 3 room and bigger.

D) Resale Application Fee

  • $40 –for 1-2 room flats and
  • $80 for 3 room and bigger

E) Property Agent’s Commission.

For a HDB flat, the market rate is typically 1% of the flat price excluding GST.

In contrast, buying a BTO from HDB is substantial cheaper but has disadvantages like a long waiting time.

If you are still undecided, you might want to read our article comparing a BTO and a Resale HDB Flat .

HDB Resale Flats Property Singapore

You can read up on the costs involved when buying a BTO direct from HDB here. 

Good Luck with your home search!

First Timers Dilemma : HDB BTO or Resale Flat?

Should first -timers buy a HDB Build to Order (BTO) Flat or Resale Flats?

In Singapore, HDB (Housing and Development Board) is the main developer of public homes. High rise apartments, or better known to those living in Singapore as HDB Flats, is home to more than eighty percent of Singaporeans.

Each Singapore Citizen married couple (or Singaporeans within accepted criteria) is given 2 chances to purchase apartments directly from HDB. These apartments or flats are subsidized and are better known as Build-To-Order (BTO) Flats.

Which is better BTO or resale

For newly married couples excited to begin their lives, there’s always the choice between buying a new HDB BTO or a resale flat. Until recently, resale flats in the open market have been too expensive for most first timers, with COVs ( Cash Over Valuations i.e. the cash premium above and beyond the flat’s valuation) going for an average of $30 000 to highs of $100 000. It is not likely that these young couples have that amount of spare cash, especially if you consider wedding and other expenses. COVs have been falling to the point that it is no longer a norm, however it may still exist if you purchase a flat above the valuation price.

(Confused? Don’t worry, we break it down in this article. Does $0 cov mean no cash upfront?  If you need more info regarding the steps to buying a resale flat, read this, " Buying a HDB resale flat ")

However, for new couples, settling into your own home as soon as possible can be one of the single most crucial steps in life. Unless you’ve been living together prior to marriage, a practice not very common to Asians, you would treasure the privacy that a new home provides, allowing you and your new spouse the opportunity to negotiate simple things in married life (like who cooks and does the dishes) and slowly work on constructing your lives.

If you are one of those still undecided about if you should be buying a HDB BTO or a HDB Resale Flat, these are some facts you can consider.

HDB BTO 

Resale Flats

Waiting Time

The waiting times have an average of 2-4 years depending on the developer’s schedule.

Once you decide on a house and exercise the option to purchase, it would take about 3 months to the point you receive keys to the flat.

Privacy

Living with either set of parents can result in a lack of privacy, having to meet the expectations of the In-laws etc.

The privacy that comes with your own space, having a room with an en suite is most ideal

Flat Sizes

New Flats are typically smaller in size.

Resale HDB flats are much larger in size

Settling on one with an Size and Ideal Position.

Buying a BTO is similar to buying an item virtually or online. You view it on a screen, put in you order and be patient until its delivered.


Unfortunately for HDB BTO, there is no return policy if you are not fully satisfied with it.

When buying a resale flat, you would put in an offer to purchase the flat if you are totally satisfied with it. This includes being satisfied with the size, the location and the position of the flat i.e. the direction it is facing, the view, etc.

Cost

The cost of a Build to Order flat is subsidized by HDB which means that it is cheaper.



This means that you will not be able to utilize your first timer grants. ( $40k - $70 k )



However if the total income of you and your spouse is less than $6500, (depending on the size and location of the flat you select), you will be eligible for the

Additional Housing Grant and the Special Housing Grant.

Also, if your order for the BTO is not put in at the initial launch, i.e. you buy it at the SBF (Sale of Balance Flat) Exercise, the price may have risen substantially to be similar to flats in the resale market.

Resale Flats prices are pegged to the market rate of houses in the area and the current Real estate prices at that point in time.

For first time buyers, HDB provides a grant of $40 000 - $50 000 or more depending on your household income.

This is not inclusive of the $20 000 Proximity grant that you can get if you pick a flat close to your parents/ parents-in-law

You may also qualify for the Additional Housing Grant  of up to $40 000 if your combined income is less than $5k.







Additional Housing Grant

Renovation Costs

New BTO flats come unfurnished and you have to factor in renovation costs.



However, as they do not have existing floorings, cabinets etc, you can save quite a lot on hacking costs. You basically have a blank canvas to create your ideal living space.



Another positive point for new couples is that buying a flat that would only be ready in the future enables you to save up for renovation costs instead of paying additional interest on loans

With regards to Renovation Costs, there 2 are scenarios which can happen.

A) You can select an apartment in good condition and save time and effort and money.

B) If you want to redo the flat, you would need to spend more on hacking and tearing down the current furnishings.

Old homes may also come with defects that form over time, for example leakage in pipes, crack in ceilings etc.

Amenities

New flats in new estates usually do not have established amenities in the neighbourhood.

Mature housing estates have amenities conveniently within the neighbourhood

If you are ready to purchase a resale flat but you are not sure where to start, you may find this article useful : Buying a resale flat.

HDB Resale Flat - Where to start