Updated Policy On The Use of CPF and HDB Loans

The government rolled out new rules regarding the use of the Central Provident Fund (CPF) and housing loan with effect from 10th May 2019. This provides property buyers with greater flexibility, without compromising the duration of their lease and their retirement funds. It is a pivotal shift from just focusing on the remaining lease, to whether a property can last a homeowner for life. Some speculated that with these new rules being put in place, it will spark the demand in resale markets for older properties and encourage people to plan for their retirement.

There were many public debates with regards to the depleting leases of ageing HDB flats and this resulted in the change in rules for the use of CPF and housing loan in an effort to “increase the liquidity of the resale market, making it easier for people to buy and sell old flats” as mentioned by Prime Minister Lee Hsien Loong last August.

Below is a table which summarises the change in rules:

Old Rules New Rules (WEF 10 May 2019)
HDB flats must have at least 30 years left on their leases for CPF savings to be used for the purchaseHDB flats must have at least 20 years left on their leases for CPF savings to be used for the purchase
The property lease must cover the youngest buyer till the age of 80The property lease must cover the youngest buyer till the age of 95
CPF restrictions kicked in when a flat has between 30 years and less than 60 years left.The 60 years restriction is being removed
Can withdraw any amount above the Basic Retirement Sum (BRS), if they pledged a property with a remaining lease of at least 30 years.The remaining lease will be raised to at least 40 years, to ensure that their flat covers them to age 95.

 

CPF members had to set aside the BRS before excess Ordinary Account monies could be used to purchase subsequent properties.CPF members who do not have a property that covers them till age 95 will need to set aside the Full Retirement Sum – twice the BRS – before they can use excess OA funds to buy other properties.

Pros and cons of the new rules

There are always two sides to a coin, nothing in the world is perfect and same for these new rules. They do have their pros and cons as there is no one policy that can satisfy all.

Pros:

  • Increase demand for old flats

The new rules will help to widen the pool of buyers who are able to use CPF to purchase an aged property. This is extremely beneficial to those who wish to live near their parents who are living in a mature estate and those who are looking for a larger and more spacious apartment. This will, in turn, unlock the additional value of older properties and inject more liquidity into the resale market for older HDB flats and private leasehold properties.

With an easier transaction of older properties, the homeowners of aged properties will greatly benefit as they no longer faced the challenges of selling the property at a mutually acceptable price for both buyer and seller. However, the prices of these aged properties are not expected to spike now.

The new rules will also help buyers who previously face difficulties in financing their older properties due to the restrictions imposed for the usage of the CPF funds. With fewer restrictions in place with the usage of CPF for both the buyer and seller, the demand for aged properties might start to increase.

  • Stabilise prices

Since the new rules of CPF and housing loan are likely to drive up the demand for the older resale flats, hence this could help in reducing the price gap between the newer properties as compared to those aged properties.

The new rules also allow buyers to finance their older leasehold estates, this will help to support the valuation. Therefore with a smaller price gap and more convenience in financing their aged properties, this will, in turn, drive a stabilising effect on prices.

  • Allay fear of people owning ageing assets

Most of the owners of properties at Bedok Court, Horizon Towers and Mandarin Gardens (which are some of the aging 99-year leasehold properties in Singapore) have failed in their recent attempts at collective sales bids.

With these new rules in place, it will provide more convenience for such collective sales since they will be able to hold the value of their properties longer and this might actually alleviate the fear that Singaporeans have. This is especially the case for those who own properties with remaining leases of 30 years or less, where financing options were limited due to the shorter leases.

  • Help older buyers to plan for retirement

Under the new rules, older couples are able to withdraw more of their CPF savings to be eligible for a bigger loan on their older resale flat. Hence, this would encourage them to plan for their retirement, since they might want to make use of these new rules to use their CPF savings to finance their property purchases in order to have more future cash reserves.

Cons:

  • Discourage younger buyers to purchase older flats

Let’s compare the differences between a middle-aged couple and a young couple who both wish to purchase an aged property.

Let’s take for example, John (43 years old) and Jennifer (40 years old) who want to buy a 4-room HDB resale flat with a remaining lease of 55 years at a price of $450,000. The lease will be able to cover the youngest buyer, Jennifer till she is 95 years old.

Previously, they could only use their CPF to pay up to 80% of the valuation limit which is the property price or valuation, whichever is lower, which amounts to $360,000. They could also take an HDB loan of up to 90% of the property’s value, which translated to S$405,000.

With the new rules, the couples would be able to tap on the CPF to pay up to 100% of the valuation limit, if they have not set aside the Basic Retirement Sum. The HDB loan cap still remains the same.

For a younger couple (assuming both aged 25) who want to purchase an aged property with 65 years of lease remaining can use their CPF to pay only 90% of the valuation limit, down from 100%. They would also be entitled to a smaller loan limit of 81%, compared to 90% for the HDB loan cap.

Therefore, these new changes are disadvantageous to the younger generation purchasing aged properties since they are unable to use their CPF to the full valuation limit. Thus, this discourages them from buying older leasehold properties as they would not be able to own the property for a lifetime which is the new benchmark age of 95.

  • Limited pool of buyers

Since the new rules will discourage younger buyers from purchasing old resale leasehold properties, prospective buyers for such properties will therefore be limited to those older ones.

However, the pool of buyers of such leasehold properties will still be limited to older buyers, as they now have fewer restriction on their CPF usage when it comes to purchasing aged leasehold properties.

  • Might not be the same for all

Though commercial banks are likely to follow the steps of the government’s change in policy to extend the home loans for aged leasehold properties, this is still subjected to the individual banks’ terms and conditions. However, in the private housing market, the loan-to-value (LTV) limits that were imposed as of 6th July 2018 still exist.

Conclusion

With the new rules rolled out by the Ministry of National Development (MND) with regards to the usage of CPF and housing loan, some are bound to benefit from this while others may not. However, according to the ministries, majority of Singaporeans will not be affected by these changes since 98% of HDB households and 99% of private property households own homes that will cover them till they are 95 years old.

Therefore, these new rules provide home buyers with greater flexibility and help to ensure that more Singaporeans will be able to have a roof to live under for a lifetime.

Lewis Tang

Lewis Tang

Reading many Self-Development Financial Books, property investment has always been one of the topics that piqued Lewis's interest. He observed that many of his peers like him have limited knowledge on this topic as well. This drove Lewis to leave his comfort zone of engineering and technical industries, and to pursue more knowledge through his degree in Finance. Specialising in mortgages at Redbrick, it enables him to provide sound advises to the people around him when it comes to one of the biggest assets and liability in people's lives – property and mortgage.
Lewis Tang

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