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Good News for HBD Owners-Singapore Govt ready to Relax CPF rules by May

ZUU Online SG logo ZUU Online SG 18/3/2019 Molly Joshi
a close up of a building © Shutterstock

The National Development Minister Lawrence Wong on Thursday,March 7, 2019, stated that they would announce changes in the Central Provident Fund (CPF) loan rules on buying of older housing resale flats for implementation come this May. The minister referred to the restriction in CPF usage particularly for flats with less than 60 years of lease remaining. This is because 90,000 of stock worth one million is about 40 years old.

“Some banks take reference from these CPF restrictions when assessing how much loan to extend. As a result, both the CPF and loan quantum may be reduced for the purchase of such flats. The CPF rule is intended to safeguard the retirement adequacy of buyers who purchase older flats, but its design has led to some unintended consequences. For example, if a buyer would like to buy a 39-year-old flat, he can use full CPF; but one year later,because you hit this less-than-60-years requirement, the amount of CPF will be restricted. And there is no good reason why this should be so just because the flat became one year older,” Mr Wong pointed out.

He also mentioned that he has outlined and explained how the ministry intends to change the CPF restrictions. He said that the Ministry of Manpower and the Ministry of National Development have been studying and discussing the issue. The CPF rule is intended to safeguard the retirement ease and adequacy of those who buy older flats. Other benefits include boosting the liquidity of older flats as they would no longer face adverse limitations of housing loans. What other advantages and effects does the CPF rule relaxation bring to the table?

Reduce fear of expiring leases

Among the concerns that many Singaporeans face when looking to purchase HBD, flats are the expiring leases. The new rules aren’t there to just change the numbers but mark a psychological shift which the government would like everyone to adopt. Residents should now focus less of the 99-year leasehold but more on having their own homes without really thinking about what will happen to them when the flat lease expires so long as they have a roof for the rest of their lives.

Of course, it will also mean dropping the thoughts of HDB flats as investments. There won’t be much of a legacy or any substantial big pay at the end of it. Your children will be grateful to have a home but not get some profit from it. This is an inevitable consequence that Singaporeans must grow fond of and accept, given the high number of ageing population as well as the decreasing birth rate in the little island.

Rather than a sharp decline, a gradual fall

When the lease fell to 40 years or less previously, flat prices faced a sharp plummet. This however wasn’t just due to the CPF restrictions but also due to the bank policies. Banks reduced Loan to value (LTV) range once a flat is over 60 years old, which could result in down payments that were high than 40 per cent or even more. This would eventually result in a double whammy,whereby a buyer for an old flat would face restricted financing as well as very little access to CPF.

The aftermath is that old resale flats will get a more gradual slide in the prices, instead of a sharp drop. However, appreciation is not expected as it is unlikely given the awareness of the short lease.

Banks and their loan policies

Like we have already mentioned, banks play a significant role when it comes to financing housing loans. Banks currently dropped LTV ratios for the old flats. In fact, some banks no longer finance such purchases at all. Since prospect buyers can now use their CPF, there is a likelihood that there will be renewed interests in old flats. We should also expect that some banks will be willing to cater to the new demands, by being less picky on a flat’s age.

A few aggressive buyers are already into rental yields

It is expected that there will be buyers with dollar signs flashing right in their eyes. Buying those old flats and renting them out at a reasonable fee (after the Minimum Occupancy Period) is unquestionably going to be a lucrative business. For instance, let’s say your buy a three-room flat with only 30 years left on the lease as it will soon depreciate, meaning that you will get it at a low price maybe; S$300,000. You can move in for the five-year MOP and later on move back to your previous home and rent this one out.

As the flat is in an already developed estate, given its old age, you will still get a chance to rent it out for a good sum of money every month, say S$30,000 a year. Since the cost of the flat is low, that’s a potential yield of about 9.6 percent. You will be able to make up for the value of the flat through collecting income until the lease runs out in about 25 years. Well, there are rules with regards to this, but many money-minded individuals will surely make money through this strategy.

It’s not for the money-hungry but the wise

Singaporeans want to own houses so bad that they would risk their retirement funds on an asset that is a few years away from getting worthless. The same people will again realize that their HDB flat won’t pay their electricity bills, their broken fridge nor pay for bus fares when they age. Remember that your CPF savings are the most crucial savings as they will financially boost you when you go on retirement. If you decide to spend all of it in an old building, then you will surely have a problematic retirement period.

Let’s hope a vetting process will be put in place to ensure that no one surrenders all their retirement money in exchange for a depreciating flat. Owning a flat can turn out meaningless fundamentally when you have nothing left for back up.

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