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Recently I met up with a long time friend and her husband.
Let's call them Jane and Peter. Jane and Peter bought their first HDB flat in 2002. It was an easy decision to get a resale flat in the estate where their parents live, as that was an environment which they are familiar with. Their parents can take care of their children and they can keep a lookout for them too.
After a few viewings, they decided on a 5rm flat which was 26 years old then.
Fast forward 18 years.
They are at a crossroad, undecided whether to sell or keep their HDB flat.
Many friends have asked them to sell their flat as it is already 44 years old. Others tell them to keep, as it is spacious and it's not easy to get another one of this size.
Jane and Peter love their flat. It is near the MRT station, and their children’s school is nearby. It is also their matrimonial flat, thus holds sentimental value.
As a long time friend and an experienced real estate agent, I want to give them my honest opinion and help them make the best decision.
Let's look at the reasons for them TO KEEP their ageing HDB flat
(1) No need to take on a bigger loan
Jane and Peter bought this flat in 2002. This was a time when the prices of HDB flats were relatively low. They do not have a huge outstanding loan, and monthly instalment is serviced using their CPF.
They do not need to take on a bigger loan if they continue to stay in this flat.
(2) Not easy to get another flat as spacious as this
Older flats are more spacious. It is not easy to get a younger flat as spacious as their existing flat. Jane and Peter will have to get used to a smaller area or pay a higher price for bigger flats with the newer lease.
Next, we try to understand why they SHOULD SELL their ageing HDB flat
(1) Flat depreciates faster as it gets older
It is hard to determine at which point of time flat starts to depreciate at a faster rate. However, we can try to understand from the graph below (published in Straits Times on 12 April 2017) how an HDB flat might depreciate over time.
From the graph above, we can see that there are 3 points during the 99 years lease of a HDB flat which caused it to depreciate significantly.
1) Balance lease less than 35 years
Banks require a balance lease of 30 years at the end of the loan tenure. It also has a minimum loan tenure of 5 years. With balance lease less than 35 years, buyers will not be able to secure a bank loan.
Example:
Mr Tan purchase an HDB flat which has a balance lease of 34 years. As banks require the property to have a balance lease of 30 years at the end of the loan tenure, Mr Tan can only loan for a tenure of 4 years. However, banks have a minimum loan tenure of 5 years. Therefore he cannot take a bank loan for this property.
CPF usage is still applicable for downpayment and HDB loan servicing.
2) Balance lease less than 30 years
CPF usage is no longer allowed for downpayment and HDB loan servicing. However, HDB loan is still available.
3) Balance lease less than 20 years
No loans are available for the purchase of HDB flats at this point.
Let us now look at the regulations which limit the demand of ageing HDB flats.
Financing Limits for buyers taking HDB Concessionary Loans
Buyers can take up to a maximum loan of 90% Loan To Value (LTV).
Example:
A newly married young couple wants to purchase a 4room flat in Marine Parade estate. The husband is 30 years old, while the wife is 27 years old. The flat that they intend to purchase is 44 years old, and thus have a balance lease of 55 years.
They are eligible for HDB Concessionary Loan.
Under HDB LTV limit, based on the age of the HDB flat this couple intends to buy vs the age of the youngest buyer, they can only get 66% loan.
If they purchase a newer flat, they can get up to a maximum of 90% loan.
Thus it makes more sense for this couple to get a newer flat.
To find out the maximum LTV you can use for the purchase of a property, please go to:
*** Implications ***
The pool of buyers for older flats gets smaller since younger buyers will not be able to secure the required loan amount to buy older flats.
Financing Limits for buyers taking Bank Loan
Under the current policy, banks require the balance lease to be at least 30 years at the end of the loan tenure. This means shorter loan tenure for younger owners.
Example:
We refer back to the example of the young couple who intend to purchase a 4room flat in Marine Parade.
They now look at the option of taking a bank loan since they can only take 66% LTV if they choose HDB loan.
In this situation, they can take a bank loan of 75%.
However, the loan has to be repaid over 25 years since the balance lease at the end of the loan tenure has to be at least 30 years.
This means higher monthly instalment for the couple.
If they choose a younger flat, they would be able to take the maximum loan tenure of 30 years.
HDB buyers will have to fulfil both the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR).
For TDSR, your monthly debt obligations cannot exceed 60% of your monthly income. MSR is capped at 30%.
With the loan tenure shortened, monthly instalments will be higher. Buyers will need to have a higher income in order to fulfil TDSR and MSR if they were to choose an older property vs a younger one.
*** Implications ***
The pool of buyers for older flats gets smaller since younger buyers might not be able to fulfil the TDSR and MSR to secure the required loan amount to buy older flats.
Restriction to CPF Usage
There are limitations to using CPF in purchasing HDB flats with the decaying lease.
With effect from 10 May 2019, the total amount of CPF that can be used will depend on whether the remaining lease can cover the youngest buyer to age 95.
If this criteria is met, a buyer can use CPF to pay for a property up to its valuation limit. Otherwise, the use of CPF will be pro-rated.
Example:
Using the same example as above, the balance lease of 55 years is not enough to cover the wife, who is 27 years of age now, to age 95.
If they buy the 4rm flat in Marine Parade which is approximately $500,000, they can only use a total of $365,000 from their CPF.
If they buy a similarly priced 4rm flat with a younger lease that can cover the wife to aged 95, they can use $500,000 from their CPF to finance the property.
To find out how much CPF you can use for the purchase of a property, please go to CPF Housing Usage Calculator.
*** Implications ***
Demand for older flats will be affected, as buyers will have to use cash for their downpayment or when servicing their loan.
(2) Value of HDB flat when 99 years lease expires
All HDB flats come with 99 years lease. Therefore, it is fair to say the value of the flat runs down to zero at the end of the lease.
Some might be hoping for Selective Enbloc Re-development Scheme (SERS).
However, many panicked when this headline came out in Straits Times on 24 March 2017:
“Don’t assume all old HDB flats will become eligible for SERS.”
Minister of National Development Lawrence Wong cautioned this. He said only 4% of HDB flats have been identified for SERS since 1995.
For most HDB flats, leases will eventually run out and the flats will be returned to HDB, which in turn surrenders the land which the flats are on to the State.
Therefore, it is important to consider this when deciding whether you should sell your old HDB flat.
Recommendations
After a long discussion and detailed financial planning, Jane and Peter decide to sell their old HDB flat.
They plan to upgrade to a condo under wife’s name and buy a smaller condo for investment purpose under the husband’s name.
You might want to read more about how they derived this decision in my article "Why Your Home Is Not An Asset".
If you are also staying in an ageing HDB flat and would like to discuss your options, book an appointment with me for a non-obligated discussion! See you soon!
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About The Author
Vivian is a highly experienced real estate agent who has been in the industry for 18 years.
Over the years, she has transacted numerous property deals including HDB & private properties. She is well-versed in policies and regulations involving the sale and purchase of residential properties. She has also handled many transactions involving complicated situations like contra, divorce, administration / probate cases, and decoupling / part-share purchase.
Vivian is also a mother to 2 boys. Being a real estate mom allows her to spend much time with her children as they were growing up. Both boys are avid footballers representing their schools and clubs. She loves watching their games and hardly misses a game whenever they play.
Vivian is an active real estate salesperson and team leader. Call her at 98577714 for your real estate matters, or if you are looking to join the real estate industry.