People say that sometimes ignorance is bliss but for this couple, ignorance was not something that they could live with. James and Rose are married and they have a beautiful daughter. This nice couple has been living in their HDB 5 room flat in Redhill for 12 years. They have fully paid up their HDB. I met up with the couple on a casual basis and the topic of real estate came up. They were keen to understand more about what are their options after hearing about the market talk about upgrading.

HDB Flats in Punggol

They have always wanted to move to a condominium but just did not get down to doing it and they were very unsure about whether it was possible for them to do it. They casually spoke with friends about it but all they have gotten back form their friends were just outdated information and bits and pieces of broken information and half-truths.

We got down to work on the numbers and it turns out that they are more than qualified to upgrade comfortably to not one but 2 condos! Let us have a look at the numbers as per below.

Current Situation

Name James Rose
Nationality Singaporean Singaporen
Employment Status Employed Employed
Annual Income $105,000 $50,000

Assets

Cash $500,000
CPF-OA $165,510 $66,753
Total $665,510 $66,753

As we can see from the table, the couple are working and have the following assets in their overall cash reserves in both CPF and cash savings. They do have a substantial savings, with the help of heating service cherry hill nj on hand in view of the previous employment and business activities.

Property Details

Type

HDB

MOP

Yes

Outstanding Loan

$0

Amount withdrawn from CPF-OA

$140,829 $165,694

CPF Accrued Interest

$35,958 $44,599
CPF-OA + Accrued Interest $176,787.00 $210,293

Please take note of the amounts that were withdrawn for housing from their CPF accounts. Please take note of the accrued interest as well. Rose’s accrued interest is almost $45,000, Table above shows the accrued interest amount of $44,599.

They both have decided to look into buying a 2nd property. They have intentions to keep their HDB in view of the location because of convenience. This situation may not be the best option as they may have to incur ABSD because it is a 2nd property.

After studying the numbers, they may have an opportunity to upgrade to a condo and yet have spare cash and CPF funds to purchase a 2nd unit for investment purpose. The below tables shows the simulated numbers for the couple.

Sale of Existing Property Proceeds

Estimated Selling Price $880,000
CPF-OA + Accrued Interest $387,080
 Professional Fees $18,832
Outstanding Loan $0
Cash Proceeds $354088

From the above Table, we can see that when the sale was done at $880,000, the cash proceeds less of the CPF funds to be returned to CPF, the fees and outstanding loan to HDB works out to be a positive cash amount of $354,088. The CPF balances have also been increased in view of the return of the CPF funds that was previously used for the HDB.

The CPF balances are as follows:

Bruce :        $342,297

Rose:          $277,046

Total Cash Savings: $854,088

The situation at that point was to decide between a new launch condo or a resale condo. Unless there were alternative options like new launch condo projects that were ready to move in or near to TOP. That was their preference. The project of choice was chosen in view of the price and location. The details of the purchase is as follows in Table below.

Purchase of 1st Property for own use

Purchase Price $1,555,000
5% Downpayment (Cash) $77,750
15% Balance (Cash/CPF) $233,250
Available CPF $342,297
Cash Portion for 15% $0
Stamp Duty (Cash +CPF) $41250
ABSD % $0
Legal Fees $3.500
Loan Amount $1,166,250
Interest Rate 2%
No. of Years 17
Monthly Loan Repayment $6,748

After making the purchase for the first property, the balance of the finances are as follows:

After purchase of 1st Property

Balance of CPF-OA $386,093
Cash Balances $776,338
Estimated no of months of reserve based on housing loan repayments 172
No. of Years 14

The number of years of funds that is available for the payment of the mortgage is approximately about 14 years. This is an assumption that in the event that both James and Rose does not earn an income.

As the 1st property was concluded, they proceeded to consider the 2nd property purchase, a smaller unit for investment purpose. They decided on a 2 bedroom unit in a new launch, valued at $1,017,000. Please see the table below for the purchase details.

Purchase of 2nd Property for investment reasons

Estimated Purchase Price $1,017,000
5% Downpayment (Cash) $50,850
15% Balance (Cash/CPF) $152,550
Available CPF $386,093
Cash Portion for 15% $0
Stamp Duty (Cash +CPF) $25,110
ABSD % $0
Legal Fees $3.500
Loan Amount $762,750
Interest Rate 2%
No. of Years 17
Monthly Loan Repayment $4,413.63

Based on the finances as per the above table, Rose was able to use her finances to make the payment for the initial 20% payment for the purchase for this 2 bedroom unit. As this is a building under construction project, the monthly payments are smaller as this is based on the progressive payment structure. The full mortgage payment will only take effect when the project achieves CSC but for calculation purposes, we will assume the mortgage payment to be at the full amount at CSC as shown in the above Table.

After purchase of 2nd Property

Balance of CPF-OA $233,543
Cash Balances $725,488
Estimated no of months of reserve based on housing loan repayments 85
No. of Years 7

From the above Table, we can see that the couple still has a strong cash flow position of funds amounting to approximately 7 years. This is taking into consideration of the CPF balances and cash savings on hand. As mentioned earlier, these are assumptions made on the basis that both James and Rose are not having anymore income.

In reality, this is not the case as both are still working and generating an income. To explain further on the possible outcomes during the TOP period, Rose may have the option to rent out this 2 bedroom unit to generate an approximate rental income of about $2,500 per month. That will further reduce their monthly mortgage payment. Please the below table illustration.

Rent Scenario

Estimated Monthly rent from 2nd Unit $2,500
Nett Mortgage Repayment $1,913.63
If based on the assumption that the rental income is approximately $2500/mth, the number of months of reserve will be approximately 110
No. of Years of reserve 9

Based on the above Table illustration, we can see that with the rental income of $2500, the reserves are further stretched to about 9 years compared to 7 years previously. (This also taking into consideration of the mortgage payment for the 1st property as well.) Please bear in mind that the future income and current income from both of the clients are not considered in the calculation. This would mean that the actual numbers will be a more prudent number in view that both are still working.

In summary, not all HDB dwellers are in a position to upgrade or to buy 2 condominium units. It is still safer to be prudent when it comes to real estate purchasing. As real estate purchases are big ticket items, it pays to exercise prudence with proper planning and calculations to ensure that affordability is priority. An earlier article explains about the process of asset progression.

In some cases, it just advisable to just to upgrade to a condo and not buy 2 properties. Age is another consideration when taking a loan to finance the property.

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