5 things you must know before buying your first HDB BTO

Most Singaporeans live in HDB flats. Buying a HDB Build-To-Order (BTO) flat is usually the first, and often, only, big financial decision that Singaporean couples have to make. As such, it is an important topic that everyone needs to understand.

Browsing the HDB website is an important step to gaining information. However, it isn't exactly the most fun or easy thing to do. The HDB website is filled with a massive amount of information and regulation that may or may not be relevant to a first-time homebuyer.

We decided to pick out the 5 most important things that you need to know.

(1) 5 Year Minimum Occupation Period (MOP)

When you purchase a brand new flat from HDB, you will need to stay there flat for a minimum of five years.

This 5-year period starts from the day you collect your keys from HDB. If we assume that a flat takes about three years to be built, that would mean it takes close to eight years from the day you purchase your BTO for your MOP to be over.

In addition to having to stay in the flat for five years, you are also restricted from purchasing private properties, both locally and overseas, during this period. Common sense would suggest you are not allowed to sublet your entire home (because you need to stay in it), though you are able to rent out individual rooms.

The 5-year MOP rule is an important one that most people fail to consider when they buy their flats. We know of people who have done well in their careers but were not able to invest in private properties during the last recession because of this rule.

Do note that even if you buy a resale flat from the open market with the use of a CPF Housing Grant, the MOP would still apply to you.

(2) Resale Levy Payable

This is one of the important conditions that many first-time HDB homebuyers completely miss, and which they end up complaining about in the future.

When you purchase a BTO flat, it is considered a subsidised flat. There is a resale levy, which you have to pay if you sell your flat and then subsequently buy another subsidised new flat from HDB.

The resale levy depends on the size of your flat.

We think you should bear this in mind for any upgrading plans you may have for the future. For example, a couple may think that a 3-room flat is sufficient space for them in the next 5 years. They may rationalise that they can always upgrade in the future if they need more space.

This type of planning is perfectly sound. However, some couples may not realise that there is a resale levy payable should they sell and buy another new HDB flat. Had they realised this earlier, they might have very well chosen a different option from the outset.

(3) Bank VS HDB Loan

For the past few years, bank loans have been the talk of the town. Everyone thinks taking a bank loan is better because of the lower interest rates offered.

While that has been true over the past few years, it is important to bear in mind that interest rates offered by banks for home loans are usually subjected to macroeconomic factors. If the Singapore Interbank Offered Rate (SIBOR) increases, the interest rate on your home loan (and hence, your mortgage payment) will increase.

We did a comparison in a previous article of the historical rates of SIBOR. You might be interested to take a look.

Typically, homeowners will need to pay a downpayment of 20 per cent when they take a loan from a bank. However, if you take a HDB loan, you would only be required to pay a downpayment of 10 per cent instead.

(4) HDB Grants

You want to maximise the amount of grants that you are entitled to when you are buying your first BTO flat. Let's get straight into it.

Additional CPF Housing Grant

What You Need To Know:

- Maximum income ceiling of $5,000

- Grant amount varies depending on actual income

Additional CPF Housing Grant

- Maximum income ceiling of $8,500

- Grant amount varies depending on actual income

- Only available for 2-room, 3-room or 4-room flats in non mature estate

Source: HDB

The thing to note is that to be eligible for these grants, either you and/or your spouse/fiance(e) must have been in continuous employment for the past 12 months, and be employed at the time of submission.

So for example, if either of you are still studying, or have started working for a period of less than one year, then you would NOT be entitled for the grant even if your household income falls below the income ceiling.

If one of you have already started working for a period of more than one year while the other is still in school, you would be entitled to the grant. That means HDB would see the income of the one individual as the total household income.

(5) No Backing Out

Probably the biggest risk that anyone takes. Once you have paid the downpayment for your BTO, you cannot back out of the purchase without forfeiting your deposit.

This is a common practice for all properties, but unlike private properties, being unable to complete the purchase may not necessarily be something you can control. For example, you or your fiancee may eventually decide not to get married. Along with that decision, this will not only imply that your deposit will be forfeited but you will not be able to get your HDB flat even if either of you decide to get married to someone else.

DollarsAndSense.sg is a website that provides bite-sized and relevant articles to help Singaporeans make better financial decisions.