After 5 or more years of living in your first HDB flat which was bought directly during a Build-To-Order (BTO) exercise, you and your spouse have finally decided that it is time for a change, perhaps even, an upgrade to a bigger flat to cater to your growing family. That’s great.

All Singaporean couples have two chances to purchase a brand new flat directly from HDB. Design Built and Sell Scheme (DBSS) Flats (which has been suspended ever since its negative publicity came to light) and Executive Condominiums (ECs) fall within these two chances.

Buying a flat is a big financial commitment. Before you dive straight into purchasing your second subsidised HDB flat, there are a few things you need to know and consider first.

1. Resale Levy Payable

When you sell your first subsidised HDB flat and purchase a second subsidised HDB flat, you would need to pay a resale levy. The amount to be paid would depend on the size of your first subsidised HDB flat.

For example, a couple who has the intention to upgrade from their current 4-room flat, which was purchased directly from HDB, to a new 5-room flat would need to pay $40,000 from the sales of their 4-room flat.

Do note that if you took a CPF Housing Grant while buying a resale flat from the open market, you will also be required to pay this resale levy.

You do not need to pay the resale levy if your next property is a private residential property, a DBSS Unit (assuming they are still around) or a HDB resale flat.

2. 5 Years Minimum Occupancy (Again)

By now, most HDB homeowners would know that HDB flats purchased come with a minimum occupancy period (MOP) of 5 years. During this time, you are not allowed to buy any new residential properties, public or private. Neither are you allowed to sell your unit.

Having already waited 5 or more years before being allowed to purchase a new home, couples would now need to decide if they would want to buy another flat from HDB, and be required to wait another 5 years again before being allowed to sell and buy another property.

In particular, if you have intentions to purchase a second private property for investment purpose in the next few years, you should think thoroughly on what your plans are first before making this decision.

3. A New Home May Not Be Cheaper Even Though It Appears So

In Singapore, it is common for homeowners to sell their existing subsidised HDB flat in the open market at a profit and then buying a second subsidised flat at a cheaper price. Because of that, homeowners may feel it makes economical sense to exercise that option. However, that is not always the case.

Loan Repayment In Existing 4-Room Flat

Let’s assume Alex and his wife bought a 4-room flat at $330,000 took a housing loan of $300,000 for 20 years at 2.6% per annum. His monthly repayment would be $1,604 per month (or $96,240 over 5 years).

After 5 years, Alex would have an outstanding loan amount of $238,920. In other words, Alex would have repaid a principal of $61,080 over the past 5 years. This does not tally with the amount he has actually repaid ($96,240) because the remaining amount is used to cover interest cost.

Option A: Alex and his wife remain at their current home

At this point in time, Alex would have 15 years remaining on his loan period. Alex will continue to repay $1,604 per month (or $96,240 over the next 5 years).

After 5 years, Alex’s outstanding loan amount will be reduced to $169,370.

Option B: Alex and his wife buy a new 5-Room Flat

Let’s assume Alex sells his current flat for $450,000 and purchases a new 5-room flat at $440,000. On paper, this appears to be a good move. Alex makes a sizeable profit on his 4-room flat and is able to buy a bigger 5-room flat, which also costs less than what he is getting for his old 4-room unit.

However, after taking into account his existing loan ($238,920) and the $40,000 resale levy, Alex would get back $171,080 from the sales of his home. Assuming a renovation cost of $30,000 for his new flat, Alex would have about $141,080 left. That means he may need to take a loan of about $298,920.

If Alex takes a 15-year loan at 2.6% per annum, he will now need to repay $2007 ($403 more per month than his previous mortgage). After 5 years, his outstanding loan amount would be $211,904, which is $42,534 more than if he had chosen not to upgrade.

The numbers we used are arbitrary and there may be other reasons to justify the upgrade. For example, a 5-room flat is bigger and may provide better potential for appreciation in the long run. We are not discounting that. It may also provide a better quality of life for Alex, his wife and their children now.

However, the point we are trying to raise here is that just because you are selling your current home at a higher price than what your next flat costs you doesn’t necessarily mean it is cheaper. You need to take into consideration other types of costs you will incur, such as resale levy and renovation. There will also be agent commissions and legal fees to take note of.

4. Cash Over Valuation (COV) For Your Flat

Since each Singaporean couple can only own one HDB flat at any point in time, you will need to sell the existing HDB flat that you own to the open market.

The HDB resale market works on a willing buyer willing seller principal. If you can find a buyer willing to pay the price that you are asking for, a transaction can take place.

However do note the following. Once both buyer and seller have agreed to a price and the seller has issued an Option to Purchase (OTP) to the buyer, an official valuation will be given by an independent assessor appointed by HDB.

This valuation is important because it determines the amount that a buyer can borrow for the mortgage. If both buyer and seller agree for the transaction to be at $400,000 and the valuation only comes up to $370,000, it means that the buyer would have to pay an additional $30,000 Cash Over Valuation (COV). This is only payable by Cash, and not CPF or bank loan.

As a seller, it is important for you to understand this because the valuation and the subsequent COV would directly impact the ability of the buyer to purchase your house. There is no point in being able to get a high selling price only to have the valuation report quoting far below it and then realizing that the buyer does not have enough cash to complete the transaction.

Also remember that the transaction made between you and the buyer would need to stay within HDB Ethic Quota.

Do Your Homework Before Upgrading

In some ways, buying your second flat can actually be much more complicated than buying your first flat. There are more considerations such as resale levy, selling your existing flat and COV that you need to take note of, in addition to the actual purchase your second flat.

Remember to do your sums carefully before making any decisions because the transaction costs incurred when buying and selling homes can be a lot higher than what most people realize.

Share with us your thoughts on upgrading on our Facebook page or drop us an email if you like us to share your story on DollarsAndSense.sg. We will love to hear from you.

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