Post-MOP Upgrading: Should You Sell Your HDB First?

It’s finally happened. Five years have passed, and your HDB’s Minimum Occupation Period (MOP) is officially over. You’ve also made progress with your career (and your personal life), and you think now would be a great time to upgrade.

See Also:

• 6 Ways to Upgrade from your HDB to a Private Condo or EC in 2020
• HDB Flat to Private Property: How Much Must You Save To Upgrade Right After MOP?

But as you browse through PropertyGuru’s for-sale listings searching for your dream home, one question lingers at the back of your mind. Should you sell your current HDB first? 

As you might expect, this cannot boil down to a simple yes-or-no answer. There are many aspects to consider – and we will explore all of them in this article. But first, let’s look at the general benefits you might get from both selling your HDB first and holding on to it.

5 Reasons You Might Want to Sell Your HDB First

Most people would default to this option. And to be sure, there are legitimate reasons for doing so. In general, they are:

#1: Funding the downpayment on your next home

Upgrading usually means a heftier downpayment – especially if you’re taking a bank loan. Selling your HDB first could help fund that downpayment, meaning you don’t have to rely so much on your cash reserves or CPF monies. Remember, there are significant opportunity costs to tapping your CPF account.

#2: You don’t need to pay ABSD

If you want to hold two properties, you must bear a 12% ABSD cost on your second one. Yes, if you plan to sell off one (such as in the case of upgrading, where you sell your HDB flat once you get your new condo), you can get a remission. However, 12% on top of a property price is a significant cost to pay upfront even if you do eventually get it back. 

See Also: Is It Time for Singapore to Remove ABSD?

#3: It’s less complicated (from a regulations perspective)

Selling your HDB first is just simpler all-round. For one, you can’t own two HDB flats anyway. If you’re going to upgrade to a private property and rent out your HDB, you need to apply for permission. And even if you plan to sell your HDB off some time after buying your new property, you must apply for ABSD remission to avoid bearing the 12% ABSD (which you must pay upfront first) on your second property. Plus, you still must sell it off within six months anyway.

#4: You’re not constrained by LTV caps and CPF Withdrawal Limits

If you intend to hold two properties, banks are only allowed to give you a 45% LTV ratio on your second – a severe financial constraint. One top of that, the amount you can withdraw from your CPF to pay for the second property is also lower. It is capped at 100% of the Valuation Limit (compared to 120% for the first property), and you must also first set aside the Basic Retirement Sum.

#5: You can get greater clarity on your financial position first

If you sell your HDB first, you will be in a better position to assess your financial position and gauge how much property you can afford. This is thus a lower risk option, as the chances of you overextending yourself are much lower.

See Also: 7 Reasons to Use PropertyGuru’s Online Mortgage Affordability Calculator

3 Benefits to NOT Selling Your HDB First

Now, let’s look at the flip side of the coin. Most people would not even consider this option, but it does have its benefits. Here are the three main ones.

#1: You have a place to stay during the transition period

Closing on a property can take months. And what if you want to renovate your new place first? Or what if it hasn’t finished being built yet? You’re going to need a place to stay during this transition period (which can be quite lengthy). Keeping your current HDB here can be extremely useful.

#2: Rental cash flows from your HDB

Straightforward. If you keep your HDB and rent it out, you can benefit from the rental cash flows. Of course, keep in mind that, because of the lower LTV on your second property, the higher monthly home loan payments will eat into said rental income.

However, consider that for a $1,000,000 property, the difference in monthly payments for a 45% LTV vs. 75% LTV (assuming a 30-year tenure at 2%) is less than $1,200. As such, the net additional cash flows from the rental are still likely to be positive.

#3: The additional capital appreciation could more than compensate for the additional ABSD

If you buy a second property without first selling your HDB, you will have to pay the 12% ABSD. If you want a remission on that ABSD amount, then you must sell your HDB within six months. However, consider that if you hold on to HDB for a few more years, the additional capital appreciation could more than compensate for said HDB. In the meantime, you could also enjoy rental cash flows.

Which Option is Better for You?

Those were the general benefits. But personal finance is never general. This means you must dive deeper into your own financial situation to determine which is the right choice for you. To help with that, let’s also bring in a hypothetical per looking to upgrade – Mr and Mrs Lim. Here are some simplified “stats”:

Should Mr and Mrs Lim sell their HDB first before upgrading? Note that because of their combined monthly income, their second property cannot be a BTO. Let’s look at some guiding questions, bringing them in as examples.

Do I want to upgrade to a private property or Executive Condominium?

As we said, unless you are upgrading to a private property, you are legally required to sell your current HDB. Not much to say about that here.

How much cash on hand plus CPF OA funds do I have?

This will determine how much you have for a downpayment. Looking at Mr and Mrs Lim, if they don’t sell their HDB, they have a total of $150,000 available for a downpayment. However, if they don’t sell, then they are also limited by a 45% LTV, meaning they would only be able to afford property with a maximum price of $223,881. And that’s not including the various fees.

Therefore, just by looking at their cash on hand and CPF OA funds, we can see they would most likely have to sell their HDB first.

But if we assume that Mr and Mrs Lim have a total cash and CPF OA amounting to $500,000, the situation changes. Including ABSD, their maximum property price is now about $746,269 for a second property. If this is the case, then they may be able to keep their HDB and get a private property.

How comfortably can I bear the additional monthly cash outlay?

In most cases, the “limiting factor” that requires people to sell their HDB first is the amount of upfront cash and CPF OA balances they have. However, the secondary limiting factor – the additional monthly cash outlay, must also be accounted for. 

If you decide to keep your HDB, you will have to service both the original HDB loan (if there are any outstanding balances) as well as the new home loan.  

Now, let’s assume that covering the higher downpayment and ABSD on the second property is no issue for Mr and Mrs Lim. They purchase a $1,000,000 property with a S$450,000 loan. Assuming an interest rate of 3.5% (for bank loan approval purposes) and a 30-year tenure, this equates to $2,021  a month in repayments. 

But they still have an outstanding balance on their HDB of $300,000 for a monthly payment of $1,250. In total, servicing both home loans plus their other debt ($1,500 per month) will cost them $4,771 in total monthly repayments.

Given their joint income of $15,000, they would have a TDSR of 31.8% – a highly manageable amount and well within regulatory limits. In this case, the monthly repayments will not be the limiting factor (but the upfront cash required is – the most common scenario).

How much do I think I can sell my HDB for?

The previous questions are more about whether you can upgrade without selling your HDB first. This one is more about whether you should. For example, in our 2021 Singapore Property Market Outlook, we note that “sellers in the secondary market are likely to price resale properties in accordance to the market and be willing to negotiate”.

In other words, if you can, it might be worth holding out until economic conditions improve and you can get a better price. Of course, keep in mind the six-month window for ABSD remission.

How much do I think I can rent out my HDB for?

Similarly, if you want to keep your HDB as an investment and rent it out, it is worth evaluating how much you can rent it out for. For example, in the case of Mr and Mrs Lim, since their HDB loan repayments are only $1,250 per month, the rental income may be worth it. Again, this is assuming they have the upfront cash required to hold two properties at once.

See Also: Not Just Rental Yield vs Mortgage Rates: 6 Other Considerations When Investing in Property

For more property news, resources and useful content like this article, check out PropertyGuru’s guides section. 

Are you looking to buy a new home? Head to PropertyGuru to browse the top properties for sale in Singapore.  

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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.