Buying HDB, DIY (II): Budget

(Update: Go here for the Q2 2012 estimated initial payment.)

Second installment of multiple posts on buying HDB. We are going to talk about the budget for the initial payment now, as you need to make sure that you are buying within your own means (a tragic confession, though: we need to borrow our parents’ money, so we are not really buying within our means — in fact, we can’t buy anything within our means, as we shall see later. The solution is to wait for another year or two, actually. My rough estimate is it should be enough if the total combined working years of you and your partner is at least 10 years, e.g., both of you and your partner have worked for 5 years each. It used to be enough for the total combined working years of 8 years, also by my rough estimate, before the hyper-inflation in the recent years. It means marrying later, which will have further repercussions — child-bearing age, and so on and so forth.)

By the way, we better get used to the way these HDB districts/estates/towns are defined. We are used to categorize locations in Singapore by its nearest MRT station. For example, if people asked where I live now, I would answer Boon Lay, referring to Boon Lay MRT. But it’s not accurate, actually, since Boon Lay refers to a specific area around St. Francis of Assisi church. The more appropriate answer is Jurong West. Another example is Commonwealth area, which is in the Queenstown district, or Bukit Gombak, which is in the Bukit Batok township.

HDB Towns by Area (West, North, Central, Northeast, East)

If you go to the HDB website, they will provide you the median resale price by town and flat type for the latest quarter. The resale price consists of the valuation price and the cash over valuation (COV). For convenience, let’s call this price as the purchase price (PP), with PP = VP + COV. The HDB website will provide you the table for median PP and COV, and by these two tables, you can roughly estimate the initial payment that you need to fork out.

Median Purchase Price by Town and Flat Type in Q1 2012

(-) means no resale transaction was recorded in that quarter for that particular flat type in that particular town, and (*) means that the numbers of resale transaction for that particular flat type and township are less than 20 such that the median value is not shown as it might not be statistically meaningful (i.e., it does make sense that those people staying in Bukit Timah and Marine Parade don’t sell their houses).

And here is the table for median COV for Q1 2012. (They might no longer show this in the future so enjoy it while it lasts.)

Median COV by Town and Flat Type in Q1 2012

The trend for COV now is downwards. For example, the median COV for Queenstown in Q4 2011 is $30,000 but not it’s $25,500. It’s important to incorporate the trend when you are bargaining with the owner (or his/her agent). If you are looking for a house now (i.e., Q2 2012) in Jurong West, let say, you would want to argue for a COV of $20,000 instead of the current Q1 2012 median at $24,000.

But, there are other factors as well aside from COV trend when it comes to real life. For example, our story. We knew that the median COV for Queenstown in Q4 2011 is $30,000 and we figure it would go down in Q1 2012, when we looked for our house, although we didn’t know by how much. The owner wants a premium of $35,000 and a previous bid of $20,000 has been rejected. So we figured that the number should be around $25,000-$30,000. Based on the trend, we wanted to make a bid of $25,000. But the problem is there are other people who are interested in the unit as well and we really love the unit. So we made a bid of $30,000. The bid was accepted, but then the median COV did go down to $25,500 in Q1 2012 (the value was released in April 2012, one month after the end of Q1 2012 and after we made the purchase). You want to use your “head”, but sometimes in the end your “heart” will win out. In a ideal situation, where we don’t have any competitors, we will start by a bid of $25,000. But we didn’t have so much time left to look for a house (another factor to consider, indeed; the more time you have, the better deal you would get), and we do love the house, so we immediately went for the upper limit. (We try to console ourselves by saying that we didn’t pay any agent fee since we take care all things by ourselves, but then money lost is still money lost.)

Back to the tables. From the purchase price and COV, you can calculate back the median valuation price by subtracting the amount of COV from the purchase price. (I know that you can’t simply subtract median from median like that, but for simplicity sake let us assume that the resulting value is still representative.)

“Median” Valuation Price by Town and Flat Type in Q1 2012

What I like about getting the “Valuation Price” (VP) from the overall purchase price is VP should be a more reliable indicator of your house’s “value” since it is not influenced by a more subjective and seasonal COV. COV will go up and down (in fact, we know that we won’t be able to recover all of that $30,000 premium that we paid for the purchase since we were buying in a still insane era), but the VP should be more objective and stable. You could see the difference between townships in the VP. Naturally, central estates (e.g., Bukit Merah, Central, Queenstown) and suburb-but-mature estates (e.g., Clementi, Tampines) will cost higher. What is also interesting is the huge difference of $265,500 between the median VP for 3-room flat and 4-room flat in Queenstown. This is basically because the 3-room flats in Queenstown are old. By old I mean really old, as they are roughly around 40 years old already.

Now we can start calculating the initial payment. First, you need to pay 20% of the valuation price + any COV. At least the 5% of the resale price/valuation price (whichever is lower) must be paid by cash and the remaining 15% can be paid by your CPF Ordinary Account or cash. So, in our case, the valuation price is $335,000 and the COV is $30,000. So at least we need to pay 5%*$335,000 = $16,750 by cash and the remaining 15%*$335,000 + $30,000 = $50,250 + $30,000 = $80,250 can be paid by your CPF OA

(By the way, do not transfer the money from your CPF Ordinary Account to Special Account if you want to buy a house. I was enticed with the higher interest of SA and moved some of my money from OA to SA. Duh.)

“Median” Initial Payment Excluding Legal Fees (Q1 2012)

Then the legal and other fees. The assumption is both of you are Singapore PRs, you can’t take the HDB loan and must take the bank loan and appoint your own solicitor for the purchase and mortgage (more on that legal matters on subsequent posts).

First, the stamp fees for purchase and mortgage (note that there are two components for this!). For purchase, the amount is as follow:

  • 1% for the first $180,000 of the purchase price
  • 2% for the next $180,000 of the purchase price
  • 3% thereafter

Since effectively all flats are above $180,000 anyway, the stamp fee for purchase is as follow:

  • If Purchase Price <= $360,000: $1,800 + 2%*(Purchase Price – $180,000)
  • Otherwise: $5,400 + 3%*(Purchase Price – $360,000)

For example, our flat’s purchase price is $365,000. So, the stamp fee for purchase is $5,400 + 3%*($365,000 – $360,000) = $5,400 + $150 = $5,550. If, let say, you buy a house at $300,000, the stamp fee for purchase will be $1,800 + 2%*($300,000 – $180,000) = $1,800 + $2,400 = $4,200.

For the stamp fee for mortgage, the amount is 0.4% of the purchase price and capped at $500. As now all flats are above $125,000, you will pay $500. So our total stamp fee amount is $5,550 + $500 = $6,050.

“Median” Stamp Fees based on Median Purchase Price and COV in Q1 2012

Next, the lawyer legal fees. The bank will appoint a lawyer for you and hence the lawyer fees might vary. Based on our experience, the range is between $2,000 – $2,500. For us, it is $2,350, with $350 earmarked for the disbursement of CPF monies fee (officially it is listed at $220, so we figure that we kena marked up by $130).

But, usually you will get some legal subsidies from the bank. Standard Chartered, for example, waive the legal fees entirely. We use DBS/POSB, and their subsidy is 0.4% of the loan amount (i.e., 80% of the valuation price, if you are taking maximum loan possible). The maximum subsidy that they give is $1,800. So, for us, our loan amount is 80%*$335,000 = $268,000, and the legal subsidy is 0.4%*$268,000 = $1,072. Hence, the total amount that we need to pay for our legal fees is $2,350 – $1,072 = $1,278.

The stamp fees and the lawyer fees can also be paid by CPF. For our case, the total amount of the stamp and lawyer fees is $6,050 + $1,278 = $7,328. Thus, the maximum amount of money that we can use from our CPF account to pay for the initial payment are $80,250 (the 15% of valuation price part) + $7,328 (the stamp and lawyer fees part) = $87,578.

Finally, miscellaneous fees such as valuation report ($185) and resale application fee ($60). In total, the estimated legal fees and miscellaneous fees are as follow (assuming a lawyer fee, before subsidy, at $2,250 and a legal subsidy similar to DBS/POSB):

Estimated Legal Fees by Lots of Assumptions (Q1 2012)

So, the total money that you should have for the initial payment, inclusive of the legal and miscellaneous fees, is as follow:

Estimated Initial Payment Inclusive of Additional Fees (Q1 2012)

There you go. So, for our case, the cash portion that we need to fork out is $16,750 (5% of valuation price) + $245 (valuation report, resale fee) = $16,995 while the maximum CPF money that we can use to pay for the initial payment is $87,578. But, as we don’t have that amount of CPF money, we need to add the cash portion. Ideally, you aim to use up the maximum limit of CPF money that you can use, such that you don’t need to pay more from cash. You will need those cash for your other purposes (wedding, house renovation, etc.), which you can’t pay with CPF money anyway.

Looking at the table, if you want to buy a 3-room flat, you should have around $85,000-$100,000, with the only outlier of Central area at $126,000. The story for 4-room flat is totally different, though. It could range from $102,500 in Woodlands to $185,000 (!) in Queenstown. The range for 5-room flat is even wider, from $115,000 in Woodlands (it’s safe to say that if you want to buy a cheap house, go for Woodlands) to $205,000 in Toa Payoh. It really depends on the location of the flat. Central and suburb-but-mature estates are expensive; suburb and not mature estates are cheaper. So, it will come to your priority. With the same money that you have, you could get a 3-room flat in Bukit Merah (great location) or 4-room flat in Woodlands (larger size for your house). For us, even with our parents’ loan (25% of the total initial payment that we need to pay), the most that we could afford to is a 3-room flat (after discounting the possibility of staying in Woodlands). And, looking at the 3-room flat data, the range is actually much smaller than those of 4-room and 5-room flats. So, we might as well find a house in a strategic location so that we can go anywhere else easily. That’s why we choose Queenstown, mindful that the price is more expensive there and the flats are old. But again finally it will come to your preference and need. You might not need to stay in the green line. You might not need to stay near MRT. You don’t mind changing trains in Jurong East daily. You might be working in a plant up north. So on and so forth.

Of all the components in the initial payment, the only thing that you can wait for to change significantly is the COV. The other components are more objective and stable (i.e., they will go up according to the inflation rate, or more). So, basically the number in the final table will just go up and down accordingly following the trend of the COV. So, if let say in one year time the COV will moderate further by $10,000, simply reduce the number in the final table by $10,000 as well to get the rough estimate of how much money you need to pay for the initial payment.

Realistically, you should prepare around $90,000-$100,000 if you want to get a 3-room flat (almost anywhere) and $115,000-$125,000 for a 4-room flat (in the suburb and not mature estates). That’s why I said in the beginning that realistically you need at least a combined 10 working years for you and your partner, assuming that each of you could save $10,000-$15,000/year (don’t forget that you still need to account for the cost of your wedding). And that’s why, if the situation becomes worse (hopefully it’s not, if the recent trend of COV can be used as a sign of things to come), buying HDB might simply become beyond reach for young immigrant couples who want to start a family here.

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