With HDB resale prices at sky-high, there may be more and more HDB homeowners contemplating moving or upgrading to a private property. For first-time private property purchasers or those thinking to move from a HDB flat to private housing, there are some sums to work out first, starting with the cash outlay.

Cash Outlay

Purchase of New Launches (Under-Construction)

For new launches or private properties under-construction, the payment is progressively done.

You will pay the full 5 per cent deposit upfront in cash at the point of booking the unit where the developer grants you the option. You will be given three weeks to exercise from the date of receipt of the Sales and Purchase (S&P) agreement. Should you fail to exercise, you will lose an option fee of 1.25 per cent.

After exercising the S&P agreement, you will need to pay the balance of 15 per cent in cash or CPF within eight weeks from the date of the option. The next payment will be according to the progressive payment schedule when foundation works for your unit are finished, which is usually within 9-12 months after launch.

Purchase of Resale Completed Units

For resale private properties, you have to give a 1 per cent (on the purchase price) consideration to the seller in order to secure the unit.

What comes after that are the three cheques that the law firm will ask you to bring along when you head down to exercise the option:

• a 4 per cent option exercise fee payable to the seller’s law firm CVY account (a conveyancing account, or an escrow)
• Stamp duties cheque payable to IRAS (this can be paid from CPF, but you will need to first pay in cash and seek reimbursement later, as it’s due within two weeks from exercise)
• Legal fee of about S$2,500 (for private condo up to S$3 million) upwards, which can be paid from CPF

At this point, you would have paid in cash 5 per cent of the purchase price, excluding taxes and transaction costs.

The balance 95 per cent of the purchase price will be due on completion, which is typically 12 weeks after exercise.

With the maximum loan at 75 per cent (see next section on LTV), make sure you have that 95% minus 75% = 20% in cash or CPF to complete the purchase. Another smaller cost item is valuation fees which can range from S$300 to S$600 for a condominium (depending on size of the unit and the valuation price itself). Valuation for landed properties will cost a lot more typically from $1,000 up to $2,000.

Then there are two sets of stamp duties: BSD (buyer’s stamp duty) of up to 6 per cent progressively and ABSD (additional buyer’s stamp duties) if applicable.

Buyer’s Stamp Duty (BSD)

BSD is now progressively charged for residential properties as follows:

Purchase PRICE	BUYER’S STAMP DUTY
First S$180,000	1%
Next S$180,000	2%
Next S$640,000	3%
Next S$500,000	4%
Next S$1,500,000	5%
Amounts > S$3,000,000	6%

For ease of computation, you can simply take the purchase price in the corresponding tiers below and less out the following amounts:

Purchase PRICE	BUYER’S STAMP DUTY
Up to S$1,000,000	3% less $5,400
Up to S$1,500,000	4% less $15,400
Up to S$3,000,000	5% less $30,400
Amounts > S$3,000,000	6% less $60,400

For a Singapore Citizen first-time private property buyer, there is no ABSD. But if you bring in a Singaporean co-owner who already owns an HDB or private residential property, an ABSD of 12 per cent for a second property will be levied on the entire transaction (not according to the shares of ownership).

You may want to visit IRAS website for the various BSD and ABSD calculators.

So as a general rule-of-thumb for a first-time buyer of a condo up to S$3 million purchase price, set aside funds of 30 per cent (25% + 5%, with at least 5% in cash), before you commit to any deal to buy a condo.

Loans

Once you are ready with the budget for purchase, the next part is the financing – can you get the maximum loan? There are two determinants on how much loan you can get – LTV (loan-to-value) limits and TDSR policy. For LTV, the maximum loan for a first residential mortgage in Singapore is capped at 75 per cent of the current market valuation or purchase price, whichever is lower.

This means if you buy above the highest possible valuation in a seller’s market like today, you’ll need to fork out even more cash on top of your equity portion of 25 per cent of the purchase price.

TDSR stands for total debt servicing ratio which is set at 55 per cent – your total monthly debt including the new mortgage repayment calculated at 4 per cent interest (or the thereafter interest rate, whichever is higher) cannot be more than 55 per cent of your total monthly income. It’s an assessment on how much you can borrow based on your “qualified income” (any income that is not fixed in nature will be cut by 30 per cent).

A 55 per cent cap is to ensure you do not borrow more than your ability to repay every month should interest rates rise. For self-employed or business owners, plan at least a year in advance and seek to draw more salary rather than director’s fee or commissions ahead of the purchase.

Mortgage structure

Mortgages are based on amortisation (reducing balance over time) where there are only four variables – loan amount (principal sum), interest rate, loan tenure, and monthly repayment.

Most of us are preoccupied with getting the lowest interest rate to the neglect of the other variables involved such as the loan tenure and repaying principal, which have even greater impact in terms of reducing interest costs.

There are two components in your monthly repayment – principal reduction amount and interest to the bank. Understand these principles when it comes to amortisation: the lower the interest rate, the less of the monthly repayment goes to interests; and the longer the tenure, the more of what you pay every month goes to the bank’s coffer. Knowing that, try to shorten the loan tenure (monthly repayment will go up) to an optimal length such that it’s in line with growth in your income over time.

Doing that amounts to “refinancing to a lower rate” as you are effectively reducing interest costs. Better yet, prepay 3-5 per cent of the outstanding every time you refinance with your year-end bonuses, and reduce the overall interest costs further.

Having said that, most people do not finish servicing the loan till the end (they sell the property or pay off early), so it makes sense to go easy on monthly cashflow in the initial years when your income is lower by stretching loan tenure to the maximum.

In other words, whether you take 30 years to pay off S$800,000 at a monthly of S$2,760 (using interest 1.5 per cent) or 15 years at a monthly of S$4,965, the difference in the total interests paid in the first five years of the loan is not significant ($56,006 vs $51,007). But it’s more significant when you look at total interests in the first 10 years (S$103,478 vs. S$82,742). What’s optimal in the tenure and outstanding loan for one may not work for another. The bottomline is to start thinking in terms of the entire mortgage amortisation structure, and not just interest rate per se.

the lower the interest rate, the less of the monthly repayment goes to interests; and the longer the tenure, the more of what you pay every month goes to the bank’s coffer.

Tenancy-in-common

This used to be more of a trivial decision in the past as most married couples would simply buy a property and hold it in joint-tenancy where, in the event of the death of one owner, the remaining spouse automatically assumes the share just like a joint-account in a bank. Legally, there is no right of survivorship of the share.

Contrast that with tenancy-in-common where the share owned by each spouse is explicitly-stated (for example 50:50, 70:30, or 99:1), unique, and non-transferable on death. There is a right of survivorship in the share as it does not automatically go to the co-owner, but as a bequest in accordance with the will of the deceased.

But with ABSD introduced since 2013, tenancy-in-common has become more commonplace. This is because there is a cost implication later on when couples plan to purchase more properties to leave behind as inheritance for their children. We see a rising trend of more couples “decoupling” their first property-holding so as to buy a second one.

This is part of tax planning where they buy first using tenancy-in-common with the view that the spouse owning 1 per cent of the share will later sell out when the remaining spouse is able to take over the loan financially. This frees up that spouse to acquire a second property without paying exorbitant ABSD.

However, there are three caveats here: First, do seek legal advice as IRAS has been coming down hard in recent years for those who make use of 1:99 tenancy-in-common structure as a way to get around ABSD or “evading taxes” with many reported cases ending in suits when these clients are wrongly advised. Second, purchases with such structures may find themselves being refused a mortgage by financial institutions who want to steer clear of all such “illegal practices” in the market; Third, there may also be huge financial implications when it comes to contests in a divorce proceeding.

Risk management

As a property and mortgage adds a huge liability to your family and loved ones, the last thing you want is to saddle them with this monthly debt should something untoward happen to you.

It makes sense to pay a small premium for a mortgage insurance especially when the consequence is huge if your beneficiaries are forced to sell and vacate the house out of their will, or worst be slapped with a high SSD tax (seller’s stamp duty from 4%-12%) if such forced sale happens within three years of the purchase.

This article first appeared in The Business Times on 26 Aug 2021, with further updates over the years

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