If you’re upgrading from a flat to a condo, you will probably see many advantages in quickly securing your private property first. Apart from the convenience of moving in right away, you won’t run the risk of losing your desired property (by the time you’re done selling your flat, the unit you’re interested in might be snapped up by someone else!)
Regardless, the majority of upgraders (but not all) tend to be better off selling their flat first. In this article, I’ll explain why it’s the preferable approach for the average upgrader – I’ll also provide some alternative solutions, if you absolutely have to get your private property first.
What are the main challenges of buying your private property, before selling your flat?
The key challenges are:
- Limitations on CPF use
- Having to pay the ABSD first
- Restrictions on ABSD remission
- The risk of missing the deadline for ABSD remission
- Settling your outstanding loan issues can be complex
1. Limitations on CPF use
If you choose to buy the condo unit before selling your flat, you must have sufficient funds in your CPF to meet your Basic Retirement Sum before you can make the purchase. The BRS varies according to your age (check the CPF website to find the amount applicable to you).
For example, if you have $300,000 available in your CPF, and your BRS is $90,500, you would only be able to use up to $209,500.
Consider that, when buying the condo unit, the minimum down payment is 25 per cent. The first five per cent must be paid in cash, and the remaining 20 per cent can come from cash or CPF.
So if you were to purchase a condo unit at $1.5 million, you would need to pay $75,000. You can usually use up to $300,000 from your CPF to complete the down payment; but because you must set aside enough for the BRS, you can only use $209,500 from your CPF. This means you need to top up the difference in cash.
This would not be an issue, however, if you choose to sell your flat first and then buy a condo (at which point you would have a lot more in your CPF, from the sale proceeds of your flat).
2. Having to pay ABSD first
If you haven’t sold your flat yet, then you count as buying a second property when you purchase a condo unit, or any other private property. This will incur the Additional Buyers Stamp Duty (ABSD).
For Singaporeans, the ABSD on the second property is currently 12 per cent of the purchase price or valuation (whichever is higher). For Permanent Residents, the ABSD rate is 15 per cent.
(Bear in mind that, if your co-borrower is a Permanent Resident, you will have to pay the higher ABSD rate even if you’re a Singapore Citizen yourself).
The ABSD is payable within 14 days of completing the property transaction. You may be able to apply for ABSD remission later (see below); but it doesn’t help the fact that you have to pay for it first.
You can use your CPF to pay for stamp duties like ABSD – but remember that you would have already used most of your CPF to pay for the usual Buyers Stamp Duty, and the down payment (see point 1).
3. Restrictions on ABSD remission
Upgraders must be mindful that not everyone can get ABSD remission. It is available to married couples, in which one spouse is a Singapore citizen (and you must remain married at the time you apply for ABSD remission).
If you wouldn’t qualify for the ABSD remission, it’s almost always better to sell your flat first, and buy the condo later; the ABSD cost is hard to justify when all you’re doing is upgrading.
4. The risk of missing the deadline for ABSD remission
Assuming you qualify for ABSD remission, you will have a time limit of six months to sell your flat. While this is a lot of time, you should be aware that it’s not completely risk-free.
There are, for instance, some horror stories of buyers who have pulled out of the deal, with less than a month before the sellers’ ABSD remission deadline. Even if these buyers forfeit their deposit, it’s not nearly enough to compensate you for the 12 per cent ABSD.
5. Settling your outstanding loan issues can be complex
There is additional paperwork and red tape involved, when the home loan for your flat is still outstanding.
For example, the bank may need to see proof that you’re definitely going to sell your flat (e.g. the option is already signed), before they will grant you full financing. Otherwise, you may only get financing of 45 per cent or less, due to your outstanding loan.
Likewise, if you used a bank loan for your flat, you need to check the terms and conditions. Some banks impose penalties, such as 1.5 per cent of your outstanding loan amount, if you try to settle the loan early (but this is not a factor in HDB loans).
It’s generally simpler to sell your flat and settle the outstanding home loan first, before moving on to another property and mortgage.
Due to the above, buying your new condo before selling your flat can result in higher cash outlays, and some tense periods
If you don’t like to worry about the time limit to sell your flat, or want to minimise the amount of hard cash you need, do consider “selling before buying.”
It is a bit inconvenient, as you may require temporary accommodation while the new home is built, have to move an additional time, etc. But it’s often worth the peace of mind.
That being said, I do acknowledge that some upgraders must acquire their new properties before they sell the flat.
There are a number of ways to approach this situation.
One method is to buy an Executive Condominium (EC) instead of a private condo. If you purchase an EC, you’re not required to pay the ABSD, as it’s understood that you’ll definitely sell your flat (you can’t own two HDB properties).
Another method is to look for properties in which there is a Deferred Payment Scheme (DPS). This is available for completed properties, which are bought direct from the developer. A DPS scheme can give you as long as 24 months to sell off your flat. Follow me on RonChong.net, as this is an issue I’ll cover in a future article.
(Using DPS does mean you’ll pay more for your property though!)
Perhaps the most efficient method is to make the move “in contra”. This is when we time the sale of the flat and the condo purchase, such that no ABSD is necessary (and you’ll even be able to move in, assuming the property is completed).
This is not always possible; but if you wish to buy your condo right away, drop me a message on Facebook. I can help you to work out the timeline, and review if it’s possible in your case.