If your dream home is in the charming Tiong Bahru area or perhaps you plan to buy a flat near your parents in Queenstown, you might find yourself looking at flats in mature neighbourhoods that were built in the 1970s.
Since most HDB flats come with a 99-year lease, a flat built in 1970s would mean that today, only about half the lease is left. Before deciding to buy one of these old HDB flats, here are unique considerations you need to know about when buying flat with a lease of less than 50 years.
#1 You May Not Be Able To Use As Much CPF As For A Newer Flat
As most of us are using CPF to finance our HDB purchase, the limitations on CPF usage may restrict our ability to buy an older HDB with less than 60 years remaining on the lease.
You may use the full CPF amount if the remaining lease can cover the youngest buyer until the age of 95 and a prorated amount if the remaining lease does not.
For example, if you are 35 years old and the flat you wish to purchase is built in 1977, your CPF usage is pro-rated, since the remaining lease (56 years) will only cover the buyer until the age of 91 years. You can check the actual amount of CPF you can utilise using this CPF calculator.
#2 You May Not Be Able To Borrow As Much As For A Newer Flat
A major consideration before making an HDB purchase is how much you are eligible to borrow to finance your purchase. However, for older flats, banks may not be as willing to loan you as much as compared to if you are buying a newer flat. This is due to restrictions on loan-to-value (LTV) limits.
It is mandatory that the maximum that the bank can loan you, also known as the LTV limit, to be lowered when your loan tenure exceeds 25 years for HDB flats or when the loan period goes beyond your age of 65. However, most banks err on the side of caution and would reduce the LTV for older flats in general.
For example, for a $400,000 resale HDB, you would normally be eligible to take a loan of up to $300,000 with a 75% LTV. However, for an older flat, even if your loan tenure does not extend beyond 25 years and you are within the age limit, it is possible that the bank reduce your LTV and loan you less than the $300,000.
This could impact your financing plans and you may have to fork out more cash for your down payment.
#3 You Are Still Eligible For The Same Housing Grants For Newer Resale Flat Buyers
If you are eligible for the various housing grants, you can still apply for the housing grants even if the age of the resale flat is older. Thus, first-timers who choose to buy an older resale flat can still benefit from the Enhanced Housing Grant.
However, the grant amount will be reduced and pro-rated, unless the remaining lease can cover you (and your spouse) until the age of 99.
#4 You May Find It Difficult To Sell Your HDB
For obvious reasons, it would be more difficult to sell your HDB in the future. Due to the above-mentioned restrictions on financing options for older HDB flats, your pool of potential buyers might be more limited when you plan to sell. This might lead to you taking a long time to sell, or you needing to lower your asking price to make the sale.
In addition to the same considerations that you have as you are deciding to purchase an older HDB flat, your future buyers will have to contend with the same issues but with an even shorter remaining lease. Additionally, the aging estate conditions may have deteriorated with wear and tear, which may negatively affect your resale value, even if the flat interior is well-maintained.
#5 You May Not Be Able To Participate in HDB Lease Buyback Scheme
One scheme for seniors living in HDB flats to boost their retirement savings is the Lease Buyback Scheme, in which you sell back part of your remaining lease to HDB that you don’t need, while continuing to stay in the flat. This is a useful option for those who do not intend to leave their HDB flat to the next generation and allows them to unlock the asset value of their flats without moving out.
However, as the minimum conditions to participate in HDB Lease Buyback Scheme is a remaining lease of 20 years and being above the age of 65, it is unlikely that you would be eligible years later if you buy an older resale flat today with less than 50 years of lease while you are still in your productive years.
Buying An Older Resale Flat Could Limit Your Retirement Options
While it may be a reasonable choice to buy an older resale flat with a lease of less than 50 years based on your circumstances today, you should also consider how it may affect your plans in the future.
Even if you plan to make this flat your ‘forever home’ and have no plans to ever move out, the shortened remaining lease does limit your retirement options. In a pinch, you might have difficulties selling, and might not be able to participate in the HDB Lease Buyback Scheme to boost your retirement savings. Potential homebuyers need to be aware of these considerations when shopping for an older flat.
Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.