atans1

Old private flats’ value can also fall off a cliff

In CPF, Financial competency, Financial planning, Property on 10/05/2017 at 4:41 am

It’s all about using CPF to pay off the bank mortgage. And don’t count on an en bloc sale to keep the value of flat up. The older the group of flats, the more the developer has to pay to govt to top up to 99 years. He’ll bid accordingly. He’s not like Bill Ng, the ATM (or one-armed bandit that keeps on paying and paying.

Sometime back I featured this great graphic from ST on how the value of a HDB flat will fall over a cliff after the first 35 years. Extracted from http://www.straitstimes.com/opinion/will-you-still-love-your-hdb-flat-when-its-over-64.

No automatic alt text available.

But private 99 year old properties are different right?

The reasoning of the salesmen is that banks usually finance leaseholds if the property to have a remaining lease of 30 years on the maturity of the loan

According to OCBC, when it comes to financing of leasehold properties, the requirement is for the property to have a remaining lease of 30 years on the maturity of the loan. “The quantum of loan to be granted is dependent on the bank’s credit assessment, which includes assessment of debt servicing capacity,” says a spokesman in an email response.

https://www.theedgeproperty.com.sg/content/perils-owning-ageing-leasehold-properties

But what these people don’t say is that banks only do this if borrowers can use CPF monies.Banks generally provide financing for the purchase of a leasehold property if home buyers are able to use their CPF.

This is the tricky bit because according to the article I linked to above

CPF has several ways to calculate this [eligibility]…

The first formula is based on the sum of the age of the applicant and the remaining lease on the property. The total must be equal to or exceed 80 years, says Huang. For instance, if the buyer is 40 and the remaining lease on the property is also 40 years, the total is 80 years. This means that the buyer is eligible to use his CPF contribution for the purchase of the leasehold property.

If the buyer is only 30, however, and the remaining lease on the property is 40 years, the total equals 70 years. In this case, the buyer will not be eligible to use his CPF contribution towards the purchase of the leasehold property. “This implies that young people cannot use their CPF to buy old leasehold properties,” says Huang.

And

CPF also requires that a property have a remaining lease of at least 60 years. If the lease on a property is below 60 years, but more than 30 years, a valuation limit is set on the amount of CPF contribution that can go towards the payment of the property.

… the numerator in the ratio will be the remaining lease on the property when the purchaser turns 55. Assuming the buyer is 40 today and the remaining lease on the property he wants to buy is also 40 years, when he turns 55, the remaining lease will be 25 years. The denominator will be the remaining lease today, which is 40 years. The ratio of 25 years/40 years is equivalent to 62.5%.

This means if the property purchase price is $1 million, the buyer can withdraw from his CPF up to a limit of 62.5% of the value, that is, $625,000, explains Huang. “And that percentage is the valuation limit.”

What all this means is that there’s a restricted pool of buyers for older flats if there are problems using CPF monies.

So what? Can always have collective sale right? The article helpfully disabuses

JLL’s Tan advises owners of private residential projects on leasehold sites to be aware that, as the lease gets shorter, the differential premium that developers have to pay gets higher. “This will eat into their sale price,” he says.

Using a recent HUDC enbloc sale

For Rio Casa, if the differential premiums were included, the total land cost would amount to $649.8 million, according to SLP Research (see chart). SLP’s Mak points out that the differential premiums account for about 30% of the total land cost for some of these HUDC estates.

So don’t play, play. Think.

 

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  1. Finally!! someone who elaborates a bit on the restriction of CPF for leases less than 60 yrs, that I mentioned in your earlier article.

    However even for brand-new properties, if using bank loans, CPF already applies restriction, and regardless whether that property is freehold or leasehold. And that’s Valuation Limit & Additional Withdrawal Limit.
    VL = lower of approved valuation or actual sale price.
    AWL = 1.2 X VL

    This is to prevent people from emptying too much of their CPF into properties, and to prevent people from overpaying for properties.
    If your CPF payments have reached the VL, then you need to ensure your SA or RA has the Full Retirement Sum, before you can continue to use your CPF-OA to make mortgage payments. And you can continue only until your total CPF payments have reached 120% of VL (i.e. AWL).

    E.g. Property valuation = $1M
    Actual buying price = $1.1M
    VL = $1M
    If you got FRS, then you can use maximum of CPF-OA = 1.2 X $1M = $1.2M

    Basically if you have a long mortgage, towards the tail-end of mortgage, you will likely be barred from using anymore CPF-OA and need to service mortgage with cash.

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