Upgraders can offset condo mortgage with HDB rent

By Lin Zhiqin
/ The Edge Property |
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Based on URA’s caveat data, buyers with HDB addresses accounted for 54% of private non-landed home transactions in Rest of Central Region and Outside Central Region last year. Demand from this demographic was higher in the primary market as evidenced by 60% of the transactions having buyers with HDB addresses, compared to just 43% in the resale market.
The Edge Property sought to identify the most ideal towns for upgraders who wish to use their HDB rental proceeds to offset the monthly mortgage payments for their new condo. The study is based on data as at Sept 8, 2015 and does not account for future fluctuations in price and rent. Assuming the flat is fully paid for, HDB towns with the highest rents would ease the mortgage load of their upgraders the most. The exercise also assumes that upgraders aspire to stay within the same region. For example, upgraders in Hougang, Sengkang and Punggol might be looking for condos in the Northeast Region.
In the East Region, Tampines flats commanded the highest rents of $2,350 per month for four-room flats and $2,500 for five-room flats in 2Q2015. Meanwhile, the median price for new condos and apartments in the region stood at $1,239 psf. Using the example of a 1,000 sq ft unit and an 80% loan with a 3.5% interest rate per annum for 30 years, the condo mortgage would amount to $4,451 per month. Four-room upgraders who rent out their flats would only need to fork out an additional $2,101 per month, and five-room upgraders another $1,951 per month if they use their HDB rent to offset their condo mortgage (see Table 1).
Towns with higher HDB rents would give their prospective upgraders higher purchasing power. In the Northeast Region, for example, upgraders who own HDB flats would need to fork out less than $1,500 when they upgrade to condos in the same planning region. Queenstown and Bukit Merah topped the rental chart in the Central Region, Clementi and Jurong East in the West Region, Yishun and Sembawang in the North Region and Serangoon and Ang Mo Kio in the North East Region.
Using HDB sales proceeds to finance a condo
We then sought the towns where upgraders will need to fork out the lowest mortgage payment if they were to sell their HDB flats instead of renting them out. The exercise assumes the HDB flat is fully paid for and all the resale proceeds can be used to finance the new condo.
For example, households who own a 4-room HDB flat in Tampines would need to top up $819,000 for a brand new condo unit in the East Region worth $1,239,000 after selling their existing flat for $420,000. This translates into a monthly mortgage payment of about $3,678 for a 30-year loan with 3.5% interest per annum.
Bukit Merah and Bukit Timah topped the chart in the Central Region, Clementi and Bukit Batok in the West Region, Sembawang and Woodlands in the North Region, and Serangoon and Ang Mo Kio in the North East Region.
Table 1

Source: HDB, URA, The Edge Property

Table 2

Source: HDB, URA, The Edge Property

Sell or rent?
Upgraders who are wealthy enough that they do not need to finance their new home with the resale proceeds or rental income of the existing HDB flat will have the luxury of weighing the potential returns between selling and renting.
Given that the gross rental yield for a resale HDB flat is relatively high at 5% to 7%, renting it out would likely be wiser from a financial standpoint. HDB rental income also serves as a hedge against potential loss in employment income. However, it must be noted that renting out an existing HDB unit carries regulatory risks. While the scenario is unlikely, the authorities could make HDB subletting illegal.
Interested in upgrading to a condo in the North East region? Click here to search now
This article appeared in The Edge Property Pullout of Issue 696 (September 28) of The Edge Singapore.
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