Here's what you need to know about the latest changes to CPF usage and HDB housing loans when buying residential properties

Here's what you need to know about the latest changes to CPF usage and HDB housing loans when buying residential properties
PHOTO: Pixabay

Starting from today (10 May 2019), new rules regarding the use of CPF for purchasing residential properties and HDB loan limits will take effect - for both HDB flats and private properties.

DollarsAndSense explains what these new rules are - and how they might affect you.

OLD RULES REGARDING CPF USAGE AND HDB LOANS

In the past, how much CPF you can use to pay for your residential property and HDB loan amount depends on the length of lease remaining on your property.

OLD SCENARIO 1: If your property has a remaining lease of at least 60 years:

CPF Usage: You can use your CPF up to the Valuation Limit (VL).

HDB Loan: You can loan up to 90 per cent of the Loan-To-Value (LTV) Limit.

OLD SCENARIO 2: If your property has a remaining lease of less than 60 years:

CPF Usage: You can use CPF up to the pro-rated Valuation Limit (VL) if lease of the property covers the youngest co-owner until their age of 80 and remaining lease is at least 30 years.

HDB Loan: You can loan up to 90 per cent of the Loan-To-Value (LTV) Limit if lease of the property covers the youngest co-owner until their age of 80 and remaining lease is at least 20 years.

To recap, the Valuation Limit (VL) is the assessed property or property purchase price, whichever is lower. Further usage of CPF monies beyond the VL is allowed - up to the Withdrawal Limit (WL) - if property owners have set aside the Basic Retirement Sum. You can refer to this article for a more in-depth discussion of VL and WL.

The majority of Singaporeans who purchase new BTO flats, resale flats, or private property wouldn't be affected by this rule regarding properties with less than 60-year leases, since the oldest HDB flats were built in the 1960s and their leases would just be reaching 60 this year.

The CPF Board also shared that the majority of Singaporean homeowners are already living in a property that will cover them till age 95 and beyond.

Thus, the changes to CPF usage and HDB loans on short-lease residential properties are made pre-emptively to cater to future homebuyers who wish to purchase the (increasing) stock of properties with shorter remaining leases.

NEW RULES ON CPF USAGE AND MAXIMUM HDB LOAN AMOUNTS FOR PROPERTY PURCHASES

The first change is the move away from using the purchased property's remaining lease as the sole criterion that determines how much CPF can be used and what the maximum HDB loan amount is.

Instead, the criteria is now whether the property can cover the youngest buyer to at least the age of 95. This is meant to encourage Singaporeans to buy a home that can last for their lifetime by giving more flexibility for CPF usage and access to HDB loans.

NEW SCENARIO 1: If property covers youngest buyer to at least the age of 95:

CPF Usage: You can use your CPF up to the Valuation Limit (VL).

HDB Loan: You can loan up to 90 per cent of the Loan-To-Value (LTV) Limit.

NEW SCENARIO 2: If property does not cover youngest buyer to at least the age of 95:

CPF Usage: You can use your CPF up to a pro-rated amount from the Valuation Limit (VL).

HDB Loan: You can loan a pro-rated amount from the 90 per cent Loan-To-Value (LTV) Limit.

The CPF Board has not published tables that illustrate the pro-rating calculations, but they have provided the updated CPF Housing Usage Calculator to help you gauge the pro-rated Valuation Limit you can use.

To help you have a better idea of what to expect, here are some sample lease coverage periods and their corresponding pro-rated limits:

Photo: Dollars and Sense

ADDITIONAL RULES THAT APPLY TO ALL SCENARIOS:

- No CPF usage and HDB loan is allowed for the purchase of any property with remaining lease of 20 years or less.

- For any application to pledge your property to meet the Full Retirement Sum and withdraw additional CPF savings above the Basic Retirement Sum, your pledged property must last you until age of 95. Otherwise, you can just withdraw the first $5,000 from age 55 and 20 per cent of your Retirement Account savings from your Payout Eligibility Age.

WHO WOULD GET AFFECTED BY THESE NEW RULES?

As mentioned earlier, the changes are not expected to affect the majority of homebuyers today. However, one can imagine a group of Singaporeans for whom the new changes would be disadvantageous: young Singaporean co-owners buying older resale flats or private properties.

In the case of a young couple (in their twenties) or a parent and child (who is in their twenties) who are buying an older property (with a remaining lease of 74 or less) would now not be able to use their CPF to the full Valuation Limit.

In the past, their purchased property only needs to cover the younger co-owner to the age of 80 and have a remaining lease of at least 60 years.

For the future though, the new changes are a welcome one, since it gives more homebuyers more flexibility to use their CPF to pay for their property. Under the old rules, they would be limited to choosing from residential properties with leases of more than 60 years if they wanted to use their CPF.

NEW RULES, EVERGREEN PRINCIPLES

As always, rules governing usage of CPF and HDB loans seek to strike a balance between giving Singaporeans the flexibility to tap on their CPF to pay for their homes and securing financing while ensuring Singaporeans' retirement adequacy is safeguarded.

CPF and HDB have assured Singaporeans that those have made purchases or signed Option To Purchase (OTP) agreements before 10 May 2019 can continue to use their CPF based on the old rules. Those who are in the midst of their property purchase can approach the CPF Board or HDB for assistance.

This article was first published in Dollars and Sense

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