New CPF Usage & HDB Loan Rules: A Boon or Bane?

The announcement comes after much public uproar and concern over the depleting leases of old HDB flats, following a particular blog entry in March 2017 by National Development Minister Lawrence Wong. As the nation is now reaching a more matured age, he reminded flat owners that not all old flats will be offered the Selective En Bloc Redevelopment Scheme (SERS). Prime Minister Lee Hsien Loong also addressed the issue in last year's National Day Rally and mentioned that the Ministry of National Development is looking at how to "improve the liquidity of the resale market, making it easier for people to buy and sell old flats."

Previously, older buyers are at a disadvantage if they buy any flat with a balance lease of less than 60 years.

In my opinion, the new policy is much welcomed and fairer to older buyers. Those looking to buy older properties near their parents will also benefit. This helps older buyers use their CPF for their property purchase as some may prefer to set aside cash for future expenses or retirement.

Real estate agents and owners of older flats can rejoice as it will further help flats to sell in the already slow resale market. However, some buyers in the middle of transactions are stuck as the following examples will show.

EXAMPLE 1: CAUGHT IN THE MIDDLE

Rizal and Liza (not their real names), both 31, are in the midst of their transaction in purchasing a '4A' flat in the mature estate of Woodlands where the balance lease is 62 years old (or the age of the flat is about 37 years). The total of their age and balance lease (31 + 62 years) only comes up to 93 years.

In the previous policy, they would have no usage limits on the use of CPF monies and HDB loan. In the new policy, the maximum CPF monies they can use will be capped and their HDB loan may be reduced.

At the time of writing, the buyers and their real estate agent are appealing to HDB for the purchase to be considered under the old scheme as they had placed the deposit and entered the Option to Purchase (OTP) contract before the day of the announcement.

EXAMPLE 2: NEW RULES IN THEIR FAVOUR

Nor and Hana (not their real names), 41 and 42 respectively, are just about to purchase a five-room corner flat in the pioneer HDB town of Toa Payoh. The unit has a balance lease of 57 years (or age about 42 years).

They truly wish to live in this neighbour­ hood as it is near the desired school for their children and close to the home of Nor's elderly parents. The couple and the sellers have agreed on the price of $465,000, which is also the formal valuation of the property. In the old scheme, they may only use CPF monies up to 75°/o of the property price which works out to be $348,750. Once their CPF payments have accumulated to reach the said limit, the balance unpaid amount of $II6,250 will have to be forked out in cash.

The sellers have also listed the house on the market with their housing agent for over eight months with only a few viewers and zero offers.

Fortunately, with the new policy in place, the buyers are eligible to fully pay for the flat with CPF monies. The age of the youngest buyer (41) and the balance lease (57) add up to 98 years. It has fulfilled the requirement that the purchased flat reaches the age of 95 years.

In this example, both the buyers and sellers benefit from the new announcement.

EXAMPLE 3: YOUNG BUYERS TO BUY YOUNG FLATS

Newly married young couple Zul and Nadiah (not their real names), both 2 5, wish to buy a four-room HDB resale flat that costs $330,000 with a remaining lease of 65 years (or age 34 years).

Based on the old regulations, they can use CPF monies up to 100% of the property valuation limit as the balance lease of the flat exceeds 60 years and they can be eligible for a HDB loan up to 90% of the property's value.

With the new regulation, they do not fulfil the requirement as their age and balance lease only total up to 80 years and very much short of the 95 years target. The couple can only use CPF monies up to 90% of the property value, which amounts to $297,000. The remaining portion of $33,000 will be in cash. The HDB loan amount that is allowed is reduced to 81%.

As their real estate agent, I helped them to avoid this huge cash trap and advised them to go for much younger four-room flats of about 20 years in age. They will not face this problem by purchasing younger flats as it will accommodate them past the age of 95.

This change will also set the younger generation thinking about their old age. The message is clear: when buying a home, consider the balance lease and whether there is a chance you or your spouse may outlive it. If you still wish to buy a home with a shorter remaining lease, do weigh the financial consequences that come with it.