Upgrading your home to a condo can be exciting. It is something many Singaporeans consider when they have the chance. In any case, it is a big decision to make, and it involves a considerable investment, so it’s crucial to take precautions. Here are some common mistakes to avoid when upgrading.
1. Not putting aside funds for unexpected delays
When upgrading to a condo, you need to prepare for unseen delays. There are instances where developers will take longer than anticipated to complete a unit. Even during a resale, there can be delays.
For example, your interior design firm may experience subcontractor issues. You may also find that the previous occupants of the home left a lot of junk that might require an extra few days to clean out.
Either way, never assume that your transition will be smooth and that you will move in on your expected completion date. For this reason, set aside money for unforeseen circumstances. Even if you do not use that money during your upgrade, you can keep it aside for emergencies.
2. Not understanding the difference between bank loans and HDB loans
If you are seeking to upgrade to private property or an Executive Condominium, you will need to use a bank loan. The major difference is that the loan-to-value ratio when using a bank loan is much lower than that of the HDB loan.
With an HDB loan, you can borrow up to 90% of your flat’s value with CPF covering the remaining 10%. This means that you do not need to have upfront cash when using HDB loans.
Bank loans, however, only cover 75% of your property if it is the only outstanding property loan you have. The remaining 25% should be covered as follows: a minimum of 5% in cash and the remaining 20% either CPF or cash.
Remember to calculate the overall impact of the upgrade on your finances to see if you need more savings before signing the deal. Something else to note is that bank loan interest rates fluctuate a lot, unlike HDB loans.
Varying interest rates mean your loan repayments may change often depending on your package, so plan for the fluctuations.
3. Taking huge loans before an upgrade
Keep in mind that when applying for your new home loan, you will need to meet the Total Debt Servicing Ratio (TDSR). The TDSR restricts your total debt repayments to 60% of your monthly income.
Failing to meet the ratio means that you may have to pay a larger down payment or you will risk not affording your dream house.
Ensure you do not pile up massive debts in the 12 months preceding your upgrade but if you already have existing debts, clear as many as possible.
Note that banks will also check your credit score in addition to the TDSR. Taking large loans within a short period can lower your credit rating and could result in the bank giving you less money.
4. Extending the timeline on Additional Buyers Stamp Duty (ABSD) remission
You will still have to pay the ABSD within two weeks after the property transaction if you buy your new home before you sell your old one.
However, if you are a married couple with one of you being a Singapore Citizen, you can apply for ABSD remission. This works only on the condition that you sell your previous property within six months of purchasing the new one.
Some homeowners, however, extend the timeline for up to the maximum of six months as they try to pursue a better price for their old home. Do not be tempted to do this, as it can make you lose your ABSD remission.
5. Selling your house and handing your proceeds to your children to purchase a bigger condo for you to move in with them
This may look like you are upgrading from your home while still providing for your children, but it might turn out to be a terrible idea.
It is especially worse if you are nearing retirement, or you are already a retiree. You might assume that you will get along with your children and in-laws once you move in with them, but what if you don’t get along? It could escalate to a bigger problem.
Only consider the option of moving in with your children if you have the means to leave and get your own house should you not get along in the future.
Before upgrading your home, ensure that you are ready by doing the following:
- Checking your income against the total price of the property. The cost of the property should not be more than seven years of your total annual household income.
- Ensuring your monthly loan repayment does not go beyond 40% of the monthly income of your household,
- Ensuring that after factoring in the mortgage, you can save up to six months of expenses
If you do not meet the above, you may still be able to upgrade to a condo, but you will be taking a considerable risk. Any emergencies that may come your way could result in you having to sell your home, which might lead to a loss or cause other financial implications.