Moving from one home to another can be a cumbersome process.
Besides the obvious inconvenience of having to renovate, pack and shift home, it’s also a process that has to be treaded carefully because any financial missteps can potentially cost homeowners thousands of dollars and create unnecessary stress that could have been avoided in the first place.
As an existing homeowner, some of us might mistakenly think that shifting home isn’t going to be difficult since we already have prior experience in buying a property.
However, the process of having to move from one home to another, presumably with a much bigger family now including kids and elderly parents, is going to be a lot more challenging as compared to just buying a property and moving in with our spouse from our parent’s place.
For this article, we will assume that the reason for moving home is to upgrade to a private property. However, even if you are upgrading from an HDB flat to another HDB flat, most of these decision criteria would still apply.
Why are most homeowners better off selling their property first?
There are some key advantages why you should sell your existing HDB flat first before buying a new one.
#1 Buying is easy; selling is harder
The first reason is that it’s generally much harder to sell as compared to buying. It will take time for you and your agent to find suitable buyers for your property, unless you want to sell it at a high discount.
Even if we are in a property bull run , selling a property is going to take some time, especially if you want to achieve your ideal asking price. You and your agent may need time to spruce up your existing place, take some nice photos and to market the property.
On the other hand, buying a new property is easier, especially once you have the proceeds from the sale of your existing property. With the funds on hand, all you need to do is shortlist a few properties you like, negotiate an attractive price and make your purchase.
#2 Once you sell, you know how much you can afford
Assuming you have a loan of $200,000 on your current HDB flat and are eying a private property worth $1,000,000. You may think that your HDB flat is worth $500,000, which would allow you to net a proceed of $300,000.
This may lead you to believe that you only need a property loan of $700,000 to buy your next property. You will also be comfortably above the minimum down payment required of $250,000, which is 25per cent of the property purchase price.
You commit to the $1,000,000 purchase first, thinking that you will be able to sell your existing flat for $500,000. After that, however, you are only able to get $440,000.
This means that your net proceeds will be $240,000, which isn’t enough for the minimum down payment required of $250,000. You will need to cough up the remaining $10,000 on your own and take a much larger home loan than you initially expected.
By selling your existing property first, there will be lesser uncertainty over how much you can afford for your next property purchase.
# 3 You have 6 months to sell your existing property once you make your property purchase
If you are buying a private property, you will need to sell off your existing property (whether it’s HDB or private) within six months to avoid incurring the 12 per cent Additional Buyer Stamp Duty (ABSD).
Do note, this is via the ABSD remission. It means that you have to pay the 12 per cent ABSD first before getting the ABSD refund if you are able to sell your first residential within 6 months after the date of purchase of the second property for completed property.
This puts time pressure on you if you buy your new property without selling your existing property.
If you are buying an HDB flat, you will need to sell off your existing HDB flat within 6 months, since you can’t own two HDB flats concurrently anyway.
#4 Even if you intend to sell your existing property, you still need to cough out a huge large sum of cash first
This is an important point to note.
Even if you are confident of selling your existing property within 6 months at a good price and get your ABSD remission, you need to carefully calculate your ability to afford a new private property, without needing to sell existing property first.
Here’s an estimated amount of cash (or CPF) you will need to buy a $1,000,000 property.
|Type of Fee||Cash/CPF||Amount|
|Option to purchase (usually about 1per cent for private properties, negotiable) – Cash only||Cash Only||$10,000|
|Exercising the option to purchase (usually about 4per cent or 9per cent) – Cash only||Cash Only||$40,000|
|Buyer Stamp Duty (payable within 14 days once you exercise the option or sales and purchase agreement)||Cash (can seek reimbursement from CPF account||$24,600|
|Additional Buyer’s Stamp Duty (ABSD) (payable within 14 days once you exercise the option or sales and purchase agreement)||Cash (can seek reimbursement from CPF account)||$120,000|
Upfront payment can be 5 per cent or 10 per cent (e.g. 1 per cent + 4 per cent, or 1 per cent + 9 per cent)
One critical point to note is that while you can apply for a reimbursement of the stamp duties from your CPF account, such reimbursement would not likely occur in time for you to pay the stamp duties within 14 days of exercising your option or sales and purchase agreement.
This also means that you need to have the cash on hand ($194,600) to complete the transaction. If you are unable to, you risk losing your 1 per cent option to purchase fee.
Also, as stated in point 3, while you will get your ABSD remission if you sell your existing property within 6 months, you are still required to pay for it first.
If you already sold your existing property, you will 1) Not be required to pay the ABSD ($120,000) and 2) Would have more cash on hand. Both of these factors would make it easier for you to complete the transaction with lesser stress and time pressure.
Having to sell and buy a new property can be a very challenging process even for those of us who are generally knowledgeable about properties. This is because you are balancing two major transactions at the same time.
As much as you want to find your ideal new home at the right price that you can afford, you also need to ensure that you can get a reasonable price for your existing property and have enough cash on hand to complete the transaction.
This article was first published in Dollars and Sense.