It has been a while since many of us last heard of Cash Over Valuation, but in 2021, COV has returned for a rousing encore. Cash Over Valuation, colloquially known as COV, is now back under the spotlight, especially after HDB resale prices rose for the ninth straight month.
What exactly is COV? And why is it happening now? For the uninitiated, here’s the complete guide to COV, from what it means to why there’s a COV phenomenon to how it impacts every homebuyer and home seller in Singapore.
What is cash over valuation (COV)?
As a homebuyer, when you purchase your home (either HDB or condo) from the resale market, the final price that you will pay is a negotiated sale price between you (buyer) and the seller.
Since most homebuyers will be taking a loan from HDB or banks to finance your home, the bank or HDB has to decide the how much money they will loan to you. The loan quantum from the banks or HDB is usually pegged to the valuation of the home.
In cases where the negotiated sale price between you and the seller is higher than the valuation for the home as determined by HDB or the bank, the difference (or premium) that you will need to pay is known as COV.
The reason why it is called "cash over valuation" is because you need to pay for it in cash, on top of the home’s existing valuation. You cannot tap into your CPF Ordinary Account (OA) or include it in the loan amount you borrow from HDB or a bank.
Why is cash over valuation (COV) making a comeback?
For years up until 2014, COV has been a common phenomenon in Singapore’s resale market. Observers point to the government’s regular publishing of the COV statistics for resale HDB flats that contributed to such phenomenon.
Because the COV statistics were published, buyers and sellers were using the COV as a base price for the flat.
The eventual transacted price was even above the COV prices, which led to inflated prices since COV itself is already an overvaluation on the property.
To curb this practice of negotiating on the COV price, the government decided to stop publishing COV statistics in 2014.
The COV phenomenon slowly dissipated together with the rounds of cooling measures that were introduced following 2014.
However, COV is now making a comeback once again as the demand for resale flats continues to rise.
We think that there are two key reasons why COV is making a comeback after disappearing from the market for almost seven years.
1. Longer waiting time for new flats like build to order (BTO) flats due to construction delays is pushing up demand for resale flats. For some families that can’t afford to wait, they have no choice but to purchase a resale flat instead. This pent-up demand for homes is leading to homebuyers that are willing to overpay for homes and fork out the COV.
2. The government appears to be making resale flats as affordable as BTO units. This is evident from extending grants such as Family Grant, the Enhanced Housing Grant and Proximity Housing Grant, which subsidises resale flats by as much as $160,000 for first time owners, depending on income.
3. A first-timer applicant earning a modest $6,000 combined income and buying a resale four-room flat, for example, can enjoy $50,000 in Family Grant, $35,000 in Enhanced Housing Grant and up to $30,000 from the Proximity Housing Grant if they live with or near their parents.
How does cash over valuation (COV) affect homebuyers and home sellers?
For any homebuyer or home seller out there, note that the COV phenomenon is not just any market phenomenon. It can have serious implications when you are making the next property decision for your home.
Impact of cash over valuation (COV) on homebuyers
Should you be paying COV?
For homebuyers, there are a few questions to ask yourself when you meet with a scenario where you need to pay COV.
1. Are you in a such a hurry to get your home that you are willing to pay above what the home is worth?
Is the COV worth paying for?
For some resale flats, the COV is worth paying for because of the great location and unparalleled access to amenities. But if you are just paying to get your home faster, then you need to ask yourself whether it is worth paying for.
2. How much COV should you pay?
The typical range for COV is between $10,000 and $50,000. But COV can and has gone as high as $200,000 for homes that are in prime locations and have great access to amenities (think Pinnacle @ Duxton).
Can you afford the COV?
The other impact of COV is on affordability. While you are willing to pay COV, the real question is whether you have the financial means. Thus, besides asking yourself whether COV is worth paying for, the more important question to ask is how it affects your affordability.
As explained above, COV is the cash you need to fork out above the home’s valuation. Because of that, you can’t loan the amount from banks/HDB nor use your CPF OA.
If you do not have any cold hard cash on hand, then you can’t afford the COV even if you are willing to pay for it.
Mortgage Master Pro Tip: To know your COV affordability, you first need to know how much COV you need to pay.
One way to get that is to get a preliminary valuation for the home you are interested in buying.
With the preliminary valuation, you can match it against the seller’s asking price and check how much COV you need to pay.
Not sure where to get the preliminary valuation? Simply engage the help of our mortgage consultants from Mortgage Master to gauge your affordability. We can help you get the process started, including getting an approval-in-principle for a loan and your property valuation.
Impact of cash over valuation (COV) on home sellers
Should you ride this COV phenomenon to sell your home at a good price?
For home sellers, the COV phenomenon is a godsend if you have been looking to sell your home. Who knew that Covid-19 could actually be a boon for your home selling? By riding the COV trend, you will likely be able to fetch $10,000 to $50,000 above your home’s current valuation by conservative estimates.
But before you start celebrating, do note that if you are planning to sell away your primary residence, then you will also need to buy another home for own stay.
While you are thinking of selling yours at a premium (i.e. with COV), others are also thinking of doing so.
Thus, you will need to take this into consideration as well.
Mortgage Master Pro Tip: If you choose not to sell your home and stick with it, there are other ways which can help you leverage on the current property sentiments.
For instance, you can still leverage on the low interest rate environment to reduce the interest payment on your home loan by refinancing to a cheaper home loan package.
This article was first published in Mortgage Master.