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A while ago, I met up with a long-time friend, Jane and her husband, Peter.
Jane and Peter bought their first HDB flat in 2002. It was an easy decision to get a resale flat in the estate where they grew up. It is a location with which they are both familiar, and their parents can help take care of their children while they keep a look-out for their parents too.
After a few viewings, they decided on a 5-room flat that was 26 years old at the time.
Fast forward 22 years.
They are at a cross road, undecided whether to sell or to keep their HDB flat.
Many friends have asked them to sell as the flat is already 48 years old. Others told them to keep as it is not easy to get a younger flat of this size.
Jane and Peter love their flat. It is near the MRT station, and their children’s school is also nearby. This is their matrimonial flat, thus it holds high sentimental value.
As a long-time friend and an experienced real estate agent, I want to give them my honest opinion to help them make the best decision.
Reasons To Keep Existing Flat
(1) No need to take on a bigger loan
Jane and Peter bought this flat in 2002. It was a time when prices of HDB flats were relatively low. They do not have a huge outstanding loan, and the monthly instalment is serviced using their funds in their CPF.
They do not need to take on a bigger loan if they continue to stay in this flat.
(2) Newer flats' sizes are smaller
Older flats are more spacious. It would be challenging and more expensive to find a newer flat as spacious as their current one if space is their priority.
(3) Familiarity and sentimental value
As Jane and Peter have lived in this flat for 22 years, there is great sentimental value to them. They have spent significant time here and created memories, which is a compelling reason to stay.
Additionally, they are very familiar with the environment and have forged great relationships with their neighbours. This is also one of the factors that make them hesitant to sell the flat.
Reasons To Sell Existing Flat
(1) Value depreciation
It is hard to determine at which point of time a flat starts to depreciate at a faster rate. However, we can try to understand from the graph below (published in Straits Times on 12 April 2017) how an HDB flat might depreciate over time.
From the graph above, we can see that there are 3 points during the 99-year lease that cause the flat to depreciate significantly.
i) Balance lease less than 35 years
Banks require a balance lease of 30 years at the end of the loan tenure; it also has a minimum loan tenure of 5 years. With a balance lease less than 35 years, buyers will not be able to secure a bank loan.
Example:
Mr Tan purchased an HDB flat with a remaining lease of 34 years. Banks mandate that the property has a remaining lease of 30 years at the end of the loan term, so Mr Tan can only get a loan for 4 years. Unfortunately, banks also require a minimum loan term of 5 years, so he is unable to secure a bank loan for this property.
CPF usage is still applicable for down-payment and HDB loan servicing.
ii) Balance lease less than 30 years
CPF usage is no longer allowed for down-payment and HDB loan servicing.
iii) Balance lease less than 20 years
No loans are available for the purchase of HDB flats at this point.
Regulations that limits the demand of ageing HDB flats
i) Financing Limits for Buyers Taking HDB Concessionary Loans
The Government closely monitors the HDB resale market. Earlier rounds of cooling measures and the ramped-up Build-To-Order (BTO) flat supply have helped to moderate the increase of HDB resale prices. HDB resale prices grew by 4.9% in 2023, down significantly from 10.4% in 2022.
However, resale prices still rose by more than 4% in the first half of 2024. This was driven by strong, broad-based demand, coupled with some supply tightness, as fewer flats reached their Minimum Occupation Period this year.
To further stabilize the HDB resale market and encourage flat buyers to borrow prudently, the Loan-To-Value (LTV) limit for HDB housing loans will be lowered by 5 percentage points from 80% to 75%.
Example:
A newly married young couple wants to purchase a 4-room flat in Marine Parade estate. The husband is 30 years old and the wife is 27 years old. The flat they intend to purchase is 48 years old (with a balance lease of 51 years).
They are eligible for an HDB Concessionary Loan, however at a pro-rated loan limit.
You can use HDB calculator to calculate the amount of loan you can take.
They can also use their CPF to pay for the downpayment and service the monthly loan instalment. However, the amount they can used is also pro-rated based on the remaining lease of the property that can cover the youngest buyer to the age of 95.
You can use CPF calculator to calculate the amount of CPF you can used.
However, If they purchase a newer flat that can cover the youngest buyer to age 95, they can get up to a maximum of 75% loan. They can also use maximum CPF. Thus it makes more sense for this couple to get a newer flat.
To find out more about HDB loan options, click here.
(Source: HDB)
So what's the implication of this?
The pool of buyers for older flats gets smaller since younger buyers will not be able to secure the required loan amount to buy older flats.
ii) Financing Limits for Buyers Taking Bank Loan
Under the current policy, banks require the balance lease to be at least 30 years at the end of the loan tenure. This means a shorter loan tenure for younger owners.
Example:
We refer back to the above example of the young couple intending to purchase a 4-room flat in Marine Parade.
They now consider to take a bank loan.
However, the loan must be repaid over 18 years (instead of 25 years if they buy a newer flat) since the balance lease at the end of the loan tenure must be at least 30 years.
This results in a higher monthly instalment for the couple.
HDB buyers will have to fulfill both the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR).
For TDSR, your monthly debt obligations cannot exceed 55% of your monthly income. MSR is capped at 30%.
With the loan tenure shortened, monthly instalments will be higher. Buyers will need to have a higher income in order to fulfill TDSR and MSR if they were to choose an older property vs a younger one.
So what's the implication of this?
The pool of buyers for older flats gets smaller since younger buyers might not be able to fulfill the TDSR and MSR to secure the required loan amount to buy older flats.
iii) Restrictions to CPF Usage
There are limitations to using CPF in purchasing HDB flats with decaying lease.
With effect from 10 May 2019, the total amount of CPF that can be used will depend on whether the remaining lease can cover the youngest buyer to age 95.
If this criteria is met, a buyer can use their CPF funds to pay for a property up to its valuation limit. Otherwise, the use of CPF will be pro-rated.
Example:
Using the same example as above, the balance lease of 51 years is not sufficient to cover the wife, who is 27 years of age now, to age 95.
If they buy the 4-room flat in Marine Parade which is approximately $600,000, they can only use a total of $384,000 from their CPF.
If they buy a similarly priced 4-room flat with a younger lease that can cover the wife to aged 95, they can use $600,000 from their CPF to finance the property.
To find out how much CPF you can use for the purchase of a property, please go to CPF Housing Usage Calculator.
So what's the implication of this?
Demand for older flats will be affected as buyers will have to use more cash for their down-payment or when servicing their monthly loan instalment once their CPF limit is met.
iv) Value of HDB Flat When 99-year Lease Expires
All HDB flats come with 99-year lease. Therefore, it is fair to say the value of the flat runs down to zero at the end of the lease.
Some might be hoping for Selective Enbloc Re-development Scheme (SERS).
However, many panicked when this headline came out in Straits Times on 24 March 2017:
“Don’t assume all old HDB flats will become eligible for SERS.”
Then-Minister of National Development Lawrence Wong cautioned this. He said only 4% of HDB flats have been identified for SERS since 1995.
For most HDB flats, leases will eventually run out and the flats will be returned to HDB, which in turn surrenders the land which the flats are on to the State.
Therefore, it is important to consider this when deciding whether you should sell your old HDB flat.
Recommendations
After a long discussion, Jane and Peter decide to sell their old HDB flat.
They plan to upgrade to a condominium under the wife’s name and buy a smaller condominium for investment purpose under the husband’s name.
You might want to read more about how they derived this decision in my article "Is Your Home An Asset?".
If you are also staying in an ageing HDB flat and would like to discuss your options, book an appointment with me for a non-obligated discussion! See you soon!
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About The Author
Vivian joined the real estate industry in 2002.
Over the years, she has transacted numerous property deals, including HDB and private properties. She is well-versed in policies and regulations involving selling and purchasing residential properties. She has also handled complicated transactions like contra, divorce, administration/probate cases, and decoupling / part-share purchases.
Aside from her professional achievements, Vivian is a dedicated mother to 2 boys. Her role as a real estate mom has allowed her to strike a balance between her career and family, spending quality time with her children as they were growing up. Both boys are passionate footballers, and she takes great joy in supporting them at their school and club games.
Vivian is an active real estate salesperson and team leader. Call her at 98577714 for your real estate matters or if you are looking to join the industry.