New sale vs resale condo: Which is better for your cash flow?

By Elizabeth Choong

/ EdgeProp Singapore |

January 26, 2023 11:27 AM SGT

Sceneca Residence is the first condominium launched in 2023 (Picture: MCC Singapore)

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SINGAPORE (EDGEPROP) - Floating rate mortgage loans from banks in Singapore are based on the Singapore Overnight Rate Average (SORA), which is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singapore dollar cash market in Singapore.

Prior to adopting SORA as the benchmark, the Singapore Interbank Offered Rates (SIBOR) was often used. However in August 2019, the Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee recommended SORA as the most suitable replacement due to the discontinuation of London Interbank Offered Rates (LIBOR) after 2021.

Based on data from the Monetary Authority of Singapore, the three-month compounded SORA surged from 0.1943% at end-2021 to 4.21044% at end-2022. As such, interest rates for mortgage loans are more than 4% p.a - a record high in the past decade. On January 10, the three-month compounded SORA was 4.24011%.

Progressive payment scheme for uncompleted condominiums

According to the Housing Developers Rules, the progressive payment scheme for new condominiums allows buyers to pay for their property purchase only when certain construction milestones are met. However, the estimated timeline in the table below are mere guidelines and developers may make adjustments for their projects.

Under the progressive payment scheme, banks disburse funds to developers only when they receive notice that certain construction milestones are met.

The interest payable is based on the amount disbursed and not the full loan amount. As such, the buyer’s mortgage payment to the bank will increase gradually according to the amount that the bank has disbursed to the developer upon the development reaching certain construction milestones.

No progressive payment for resale condominiums

In comparison, buyers of completed condominiums do not have the option of progressive payment. They have to pay 1% of the purchase price as the booking fee to obtain an Option to Purchase (OTP) for the property and another 4% of the purchase price when they exercise the OTP. The monies paid so far (5% of purchase price) will make up the buyer’s down payment, which will be part of the 25% of purchase price that buyers must pay by cash, according to the latest property cooling measures.

The remaining 75% of the purchase price can be financed via a mortgage loan from a bank if the buyer is a first-time buyer. The loan-to-value (LTV) drops to 45% of purchase price if the property is the buyer’s second one. The bank will disburse the full loan amount to the seller and the buyer will service the mortgage loan via monthly payments to the bank. The total amount payable will depend on the contracted interest rates between the buyer and the bank.

Pros and cons of both payment schemes

Many buyers of new condominiums, such as Sceneca Residence - the first condominium development launched this year - opt for the progressive payment scheme because the mortgage amount payable is less in the beginning before gradually increasing in tandem with the construction progress of the development. This is because the interest payable is based on the loan amount disbursed by the bank. In view of the current high interest rate environment, it might be a wise decision.

Additionally, buyers under the progressive payment scheme pay only 20% of the purchase price after signing the Sales and Purchase (S&P) Agreement and do not have to make further payments until they receive notice that the first construction milestone has been reached. This gives them a little extra time to shop around for the most favourable loan package. Despite the grace period, buyers of new condominiums are advised to confirm their bank loan shortly after signing the S&P Agreement.

For a resale buyer, the bank will disburse the whole loan amount upon signing the S&P Agreement for resale properties. Hence, the interest payable by the buyer will be based on the full loan amount from the start of the loan tenure.

However, owner-occupier buyers of resale properties can move in their new home immediately, unlike buyers of uncompleted properties who will have to rent in the interim or move in with friends or family.

Estimated cash flow for both types of payment schemes

Let us take a look at the cash flow buyers may have for a resale property compared to an uncompleted one. For the purpose of this example, we assume that the purchase price for the condominium unit is $2 million, and the owner-occupier buyers are first-time Singaporean buyers so they can borrow up to 75% of the purchase price.

We further assume a mortgage tenure of 30 years at a fixed interest rate of 4% for the first five years; maintenance fees and sinking fund for the unit are $500 per month; and the development takes 43 months to obtain Temporary Occupation Permit (TOP) and 60 months to obtain Certificate of Statuary Completion (CSC).

We also assume that the unit will attract rent of $6,000 per month which gives it an estimated annual value (AV) of $72,000. According to the Interactive Property Tax Calculator on the Inland Revenue Authority’s website, residential properties with such an AV will attract property tax of $4,210 per year for owner-occupiers.

This example is limited by our assumption that interest rates, rents, property tax, maintenance fees and sinking fund will remain unchanged for five years. This example also does not take into account the buyer’s stamp duty, additional buyer’s stamp duty, agent’s commission and any other property-related expenses.

Using EdgeProp’s mortgage calculator, we found out that buyers of the resale property will have to pay an estimated $7,161 per month to service their mortgage loan. After taking into account maintenance fee, sinking fund and property tax, owner-occupiers will have to pay an estimated $8,012 per month.

The situation is very different for buyers of uncompleted properties. Expenses for owner-occupiers of new condominiums tend to be front-loaded because they may have to pay rent for interim housing while waiting for their property to be completed.

Before TOP, they will have to pay between $6,477 and $9,436 per month for rent of their interim home and progressive mortgage payments for their new home. If the estimated monthly rent of $6,000 is excluded, they have to only service their mortgage payment which is estimated to be only $477 to $3,436 per month before TOP.

Conclusion

A progressive payment scheme allows buyers to delay making mortgage payments based on the full loan amount, which could be a wise decision due to the current high interest rates. Moreover, interest rates are widely expected to decline in the next couple of years.

Unfortunately, resale buyers have to start servicing their loan based on the full loan amount upon signing the S&P Agreement so they have to face the full brunt of the current high interest rates. Their mortgage payment is much higher than buyers under the progressive payment scheme at the start of the loan.

Buyers of resale condominiums also have to start paying property tax and contribute to the development’s maintenance fee and sinking fund immediately, which adds to their financial obligation. Buyers of uncompleted properties have to start paying property tax, maintenance fees and sinking funds only after the development obtains TOP.

As such, owner-occupiers benefit from progressive payment schemes, which allows them to enjoy a more affordable monthly mortgage payment at the start of the loan tenure. However, both types of owner-occupier buyers will end up paying about the same amount for their mortgage loan after the new development receives CSC and the bank has fully disbursed the loan.

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