In Singapore, owning your own home is a significant milestone. Not only do we finally get our own space and privacy, we’ve proven that we are financially independent. The satisfaction and pride we feel when receiving our keys (most likely to our BTO flat) is probably comparable to all our other achievements combined!
With over 80% of Singapore’s population living in HDB flats, most of us feel set for life and intend to live in our flats all the way until retirement.
However, that’s not what happens. For many of us.
The reasons may vary: having a baby, experiencing a growth in income, staying and taking care of elderly parents or reaching the end of MOP. Whichever it is, a sizable number of that 80% will move to a new home.
Having already gone through the process of buying a HDB (most likely BTO) flat the first time, many upgraders would think that the second go around would be a similar process. Unfortunately, it’s completely different, not just because we would have to sell a property for the first time, but because of the various laws in Singapore regarding property transactions.
Having been asked multiple times, we decided to create this list of common pitfalls and their causes to help readers understand and avoid them.
The 5 Common Pitfalls That Upgraders Meet
- Emotional Buying
- Hidden Costs
- Using Alternate Loans to Fund Your Property
- Unsustainable Mortgage Payments
- Inability to Sell the Property
Impulse decisions are always driven by emotions. In the case of property purchases, this is often caused by fear and greed. Many are driven to make impulse purchases in the hopes of growing their wealth through property, or what they thought was a greatly discounted price.
Emotional buying is the starting point of many other pitfalls, and thus the most important factor that we consider when assisting our clients in selecting properties.
The consequences of emotional buying are numerous and grave. They include:
- Overleveraging your finances and taking on a larger debt in order to buy a house out of your budget.
- Stretching your cash unreasonably, giving yourself little to no buffer or emergency reserves.
- Losing the house entirely due to being unable to sustain the loan and maintain a comfortable standard of living.
Three years ago, a young couple approached us intending to upgrade from their newly MOP 4-room BTO flat to a 3-bedroom resale condo. Their reasoning was that they needed a move-in ready place that was also near their parents. The unit that they decided on was actually overvalued, with any potential capital appreciation exhausted by the original seller.
However, it was very conveniently located just opposite the local MRT station and shopping hub, so they decided to go ahead with the purchase with the expectation that they would be living there for the rest of their lives.
Fast forward 3 years later, and the same couple has welcomed a new addition to the family. They quickly realised that they needed more space. When contacting Rain or Shine Property, they also put forward the requirement to be near a ‘good’ primary school.
Unfortunately, despite attempts to balance figures, we realised that the sale of the condo would result in a negative sale of around $70,000. This left them with no cash proceeds for the down payment of any unit bigger than their own, resulting in them having to save up for a few more years and being unable to upgrade in time for the child’s entry into primary school.
This is why at Rain or Shine, the first step of our Umbrella Approach is to confirm all our clients’ affordability and risk profiles. This is to prevent showing houses that are beyond their budgets that may cause them to seek features that cannot be found within that price range.
If this is not your first time shopping for a home, then you would definitely have stumbled over various miscellaneous fees, costs for fixtures and furnishings, stamp duties and so on. These are all mandatory costs that have to be paid on top of the property price.
However, being aware that there are additional costs is very different from knowing exactly how much these costs…cost.
Older resale properties may come with hefty renovation or maintenance costs while saving buyers a little on fixtures and furnishings (if the seller agrees to leave the buyer some of their old furniture and white goods).
New launch condos only come with certain fixtures and white goods from the developer. They rarely require extensive maintenance and defects are covered up to a year under the Defects Liability Period (DLP).
It’s no easy task keeping track of every potential hidden cost (and avoid confusing them with fees that you don’t actually have to pay) whilst juggling other things you need to do while upgrading like decluttering your home, arranging and attending viewings and more. However, this is essential to getting an accurate estimation of your budget.
One of our clients decided to find her own conveyancer to complete the Sale and Purchase Agreement for her home in May. As she had already paid up the property tax for a year and requested only for a month’s Temporary Extension of Stay, she intended for the tax to be apportioned and the remaining six months to be paid by the buyer.
Unfortunately, this was not communicated to the conveyancer (she had assumed that it was automatically included in the contract) as it is a private agreement and had not been included in negotiations. The buyer was not obligated to pay, resulting in an unnecessary loss of about $1,200.
Knowing your true budget will prevent you from overestimating or underestimating your affordability. While the consequences of overestimating your budget are well-known (strained finances that force you to lower your standard of living and cause emotional distress for you and your family), the results of an underestimated budget should also be considered.
Opportunity losses are one major result, while the other is forcing yourself to compromise on your dream home when you did not have to, eventually settling on an ‘upgrade’ that’s not really an upgrade.
This is why one of the first parts of our consultation process includes a checklist to get an accurate estimation of your true affordability with reference to your unique upgrading scenario. With this, you’ll have a clear idea of what is within budget and be more confident on your boundaries when negotiating.
Using Alternate Loans to Fund Your Property
As mentioned in Emotional Buying, many home buyers take risky actions due to greed or fear. One such way is by taking alternate loans like personal loans to fund your housing purchase.
This is an extremely risky move. Alternate loans have much higher interest rates than housing loans (the average personal loan interest is 9.41% compared to current home loan rates of 1.29%). They also have much shorter terms (12 – 60 months).
In addition, you’ll need to make sure that you have enough cash each month for daily expenses like food, utility bills and transport. The TDSR is for your gross monthly income. This is inclusive of your CPF contributions which you can only use to repay your housing loan. Factoring in other financial obligations like giving a sum of cash to your parents, or paying for your child’s education, the amount of cash leftover will become distressingly small.
At Rain or Shine, we strongly discourage our clients from taking alternate loans to pay for their property purchases. Instead of overleveraging yourself to afford your dream home now, you can take half a step back and work towards achieving your goal later by taking a smaller upgrade. Not only will you still enjoy a better quality of life, you will do so with much lower risks and stress.
Unsustainable Mortgage Payments
As previously mentioned, unsustainable mortgage payments can be a result of taking alternate loans or big financial risks (like pledging or taking a home loan on top of existing loans) that stretch your balance sheets. By overleveraging your finances, you are straining your monthly cash flow, causing you to need to compromise on other financial obligations like parents, bills, children’s education, groceries, etc.
Unsustainable mortgage payments are unsustainable not only because of the decrease in your quality of life, but also because they prevent you from saving and doing anything else with your money except repaying the loan.
Even if you can technically afford the payments because your income is greater than them, the need to lower your lifestyle will lead to stress both personally and at work. There may be tensions within the household and the pressure to maintain a steady income no matter what.
In addition, any negative change to your finances (like an unexpected hospitalisation, new baby, etc) will immediately push the numbers into the red. When that happens, it is very possible that you may lose the house completely through a bank foreclosure. Don’t even think of getting much returns from the auction of the house, as distressed sales are very likely to be below your buying price. This means that you won’t even get your full investment back after so many years of stress!
A few years ago, we were approached by a client who was interested in upgrading as a way to grow his wealth. He was a sole breadwinner with approximately $8,000 monthly income.
After assessing his risk profile, we concluded that the amount he could borrow from the bank would not allow him to upgrade to a private condo unit that would provide his family with enough space. Instead, we recommended a resale HDB which would provide his family with not just an upgrade in space, but also better connectivity to schools and his workplace.
Unfortunately, he was adamant on pursuing a private condo as he had heard that it was the most profitable type of property. Despite our advice, he took a personal loan to fund the down payment and pledged a loan with the bank to increase his leverage. Such an act put his finances at great risk.
During the recent COVID-19 period, he thankfully did not lose his job, however he suffered a paycut and his TDSR went beyond the allowable 55%. He needed to pay down the loan and was seeking alternate ways to fund that last we heard. We assisted him in refinancing his loan and extending the loan term, however he still needed to pay quite a large sum.
Thankfully, he managed to keep his property, but due to the stress both financially and emotionally, he is now considering downsizing.
At Rain or Shine, we don’t ever encourage our clients to overleverage themselves. Get an accurate assessment of your affordability including existing debts like credit cards, car loans, etc. Be aware of how much your current lifestyle costs each month, and whether it can remain comfortable after reducing it and by how much.
Inability to Sell the Property
You’ve probably heard stories of houses that have been on the market for many months without a single offer. The reasons may vary, but they are often old, cluttered with the owner’s things, have many defects or simply presented in an unappealing manner.
This is especially important to upgraders as it will greatly affect their planned timeline due to:
- The loan’s Loan-To-Value (LTV) (you can only borrow 45% of the property’s value when buying a 2nd property)
- The ABSD remission (six months after the purchase of the 2nd property or issue date of the Temporary Occupation Permit / Certificate of Statutory Completion)
- The expectation of using the cash and CPF proceeds* from the sale of the house to pay the down payment for their new home.
Failure to sell your old property in a timely manner may result in the forfeiture of not just the 17% ABSD, but also the 1% Option Fee that you’ll need to put down for your new home (if you were going to use the sales proceeds to fund the purchase). That’s a hefty 18% of the property’s value!
*Cash proceeds are calculated after subtracting the outstanding mortgage balance, CPF monies, accrued CPF interest and other miscellaneous fees from the total sales proceeds. They are a much smaller fraction of the sales proceeds.
If you’ve been considering an upgrade since the past year (given how low current mortgage interest rates are), you’ll most likely be aware of how tight timelines can be for upgrading.
This is why we have our own professional team of home stylists, home stagers, decluttering masters, photographers, videographers and digital marketers. Together, we ensure that the unit’s most appealing points are displayed to our wide network of online and offline buyers.
This enables us to market and sell your home in the shortest time possible, ensuring that our planned timeline is kept and our clients will be able to apply for ABSD remission and move forward with their upgrading plans.
Are You Ready To Upgrade?
With so many potential pitfalls, it may seem daunting to upgrade your property. However, all of them can be easily avoided with enough knowledge and planning. Having served over 300 clients, many of whom were successful upgraders, we know how smooth the process can be with the right strategy and process.
We hope that this information has helped you with your upgrade planning. If you have any enquiries or questions about upgrading, other pitfalls that you have encountered, or simply any other property questions, feel free to contact us here!
How many of these costs do you know?
1. Buyer’s Stamp Duty
Buyer’s Stamp Duty (BSD) is tax paid on documents signed when you buy or acquire property located in Singapore.
2. Additional Buyer’s Stamp Duty
Liable buyers are required to pay Additional Buyer’s Stamp Duty (ABSD) on top of the existing BSD. It is computed based on the valuation or selling price of the property, whichever is higher.
3. Seller’s Stamp Duty
Seller’s Stamp Duty (SSD) is payable on all residential properties and residential lands that are acquired on or after 20 Feb 2010 and disposed of within the holding period.
4. Resale Levy
You need to pay a resale levy when you:
i. Sell your subsidised flat and buy another subsidised flat from HDB, or;
ii. Sell your subsidised flat and buy an EC from a developer where the land sale was launched on or after 9 December 2013
5. Valuation Fee ($350 - $500 depending on the property type)
A valuation is an assessment of what your home is worth. Banks use professional valuation figures to qualify a loan.
Valuation fees can be paid with cash, CPF, or be absorbed by the bank issuing the loan as part of a loan package benefit.
6. Conveyancer Fee (HBD) ($2,500 - $5,000)
In Singapore, property buyers require the services of a conveyancing lawyer to execute the legal processes of private property transactions.
HDB provides legal services when you: Buy an HDB flat, sell your HDB flat, or refinance your HDB loan whether you are taking a loan from HDB or from the banks.
7. Mortgage Insurance Premium
Mortgage insurance, AKA Mortgage Term Reducing Assurance (MRTA), is a type of insurance designed to protect your mortgage loan against life changing events that affect your ability to repay your mortgage.
8. Fixtures & Furniture / Home Contents ($30,000)
Don’t be fooled by staged homes and showflats. When you buy an unfurnished property, it’s completely empty! Fixing it up with fittings, fixtures and furniture is definitely going to cost you.
9. Renovation Costs
Whether it’s brand new or a resale, you may still want to tweak it to your preference or convenience. Renovation costs can mean anything from installing extra sockets to hacking down a wall.
10. Maintenance Fee (Condo) ($300 - $700) / Service & Conservancy Charges (HDB) ($20 - $90)
11. Property Tax
If the seller has already paid the property tax for the year, the buyer may need to reimburse a portion of it. Apportionment of property tax liabilities is a private arrangement that can be assisted by your lawyer or HDB officers (for HDB flats).