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Your Second HDB Loan for Your Next Flat May Not be As Much As You Think


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Right Sizing Policy


Introduction

When you are taking a 2nd HDB loan, you will be subjected to the right sizing policy. It reduce the loan quantum from the sales proceeds of the sale of your previous HDB flat. While it is not a cost, it will reduce the amount of cash that you will receive from your sale proceeds. If you are cashing out by downsizing, you may realize you do not get as much as you expected.


Right Sizing Policy

These are the main elements and characteristics of Right Sizing Policy:


  • Applies when you are taking HDB loan 2. It can either be from HDB loan 1 or bank loan previously
  • Sales proceeds above $50,000, there will be a 50%-50% split between client and HDB loan 2
  • Sales proceeds below $50,000, client keep $25,000 and the balance goes to HDB loan 2
  • Objective is to minimize HDB loan 2
  • You can keep the greater of $25,000 or 50% of the cash proceeds (including the $5,000 option fee and exercise fee)
  • Manner of disposal includes sales, transfer, surrender or compulsory acquisition
  • If you sell first then buy, up to half of the cash proceeds and all CPF balance have to be used to finance the purchase of the next flat
  • If you buy first then sell, HDB will grant you a loan at commercial rates first after client deplete CPF account to finance the purchase. When the sale proceeds come in, you need to redeem the loan with the CPF refund and part of the cash proceeds. Upon redemption of the loan, the HDB loan interest rate will apply

If you sell your HDB flat and stay at a relative or family member house or rent a place to stay for the time being, the Right Sizing Policy will still apply when you purchase a flat with HDB loan 2 a few years later. We strongly suggest that you find out how much money is needed for the Right Sizing Policy and keep that amount of money liquid.


When Does Right Sizing Policy not Apply

If you use bank loan or HDB loan, and take another HDB loan on the next house, then Right Sizing Policy applies.

However, if you take a bank loan for the next HDB flat, regardless of which type of loan you take for your previous HDB flat, the Right Sizing Policy will not apply.

As long as HDB loan 2 is not taken, the Right Sizing Policy will not apply.


Others

As we know that generally Right Sizing Policy applies when a HDB loan is taken for your 2nd flat. In addition, HDB loan requirements still apply as well. This means that for the 2nd HDB loan, you will need to use your sale proceeds from the previous sale of HDB flat, and empty your CPF Ordinary Account (CPF OA) to reduce the loan quantum, which may result in a small HDB loan.


Conclusion

The Right Sizing Policy is not very widely known by the general public. If you have engaged a Real Estate Salesperson, you can ask them more about the Right Sizing Policy and let them help you plan your next housing and seek advice from them. If you simply want more information about it, you can ask a HDB Officer. Regardless of which route you choose, it is important to be aware so that you will not have an unpleasant surprise when you are asked to fork out so much cash for your next HDB flat with a HDB loan.



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Right Sizing Policy


Introduction

When you are taking a 2nd HDB loan, you will be subjected to the right sizing policy. It is actually encouraging prudence in borrowing by reducing the loan quantum from the sales proceeds of the sale of your previous HDB flat. While it is not a cost, it will definitely reduce the amount of cash that you will receive from your sale proceeds. If you are targeting on cashing out your previous HDB flat and downsize to a smaller HDB flat, you may not get as much cash as you think.


Right Sizing Policy

These are the main elements and characteristics of Right Sizing Policy:


  • Applies when you are taking HDB loan 2. It can either be from HDB loan 1 or bank loan previously
  • Sales proceeds above $50,000, there will be a 50%-50% split between client and HDB loan 2
  • Sales proceeds below $50,000, client keep $25,000 and the balance goes to HDB loan 2
  • Objective is to minimize HDB loan 2
  • You can keep the greater of $25,000 or 50% of the cash proceeds (including the $5,000 option fee and exercise fee)
  • Manner of disposal includes sales, transfer, surrender or compulsory acquisition
  • If you sell first then buy, up to half of the cash proceeds and all CPF balance have to be used to finance the purchase of the next flat
  • If you buy first then sell, HDB will grant you a loan at commercial rates first after client deplete CPF account to finance the purchase. When the sale proceeds come in, you need to redeem the loan with the CPF refund and part of the cash proceeds. Upon redemption of the loan, the HDB loan interest rate will apply

If you sell your HDB flat, and subsequently stay at a relative or family member house or rent a place to stay for the time being, and decide to buy another flat with a HDB loan 2 a few years later, the Right Sizing Policy will still apply. We strongly suggest that you find out how much money is needed for the Right Sizing Policy and keep that amount of money liquid so that you can purchase a flat with a HDB loan later on without an unpleasant shock.


When Does Right Sizing Policy not Apply

If you use bank loan or HDB loan, and take another HDB loan on the next house, then Right Sizing Policy applies.

However, if you take a bank loan for the next HDB flat, regardless of which type of loan you take for your previous HDB flat, the Right Sizing Policy will not apply.

If you did not take any loan on your previous flat, regardless of which type of loan you take for your previous HDB flat, the Right Sizing Policy will not apply. Similarly, if you are not intending to take a loan for your next flat, then obviously Right Sizing Policy does not apply because there is no loan to reduce.


Others

As we know that generally Right Sizing Policy applies when a HDB loan is taken for your 2nd flat. In addition, HDB loan requirements still apply as well. This means that for the 2nd HDB loan, you will need to use your sale proceeds from the previous sale of HDB flat, and empty your CPF Ordinary Account (CPF OA) to reduce the loan quantum, which may result in a small HDB loan.


Conclusion

The Right Sizing Policy is not very widely known by the general public. If you have engaged a Real Estate Salesperson, you can ask them more about the Right Sizing Policy and let them help you plan your next housing and seek advice from them. If you simply want more information about it, you can ask a HDB Officer. Regardless of which route you choose, it is important to be aware so that you will not have an unpleasant surprise when you are asked to fork out so much cash for your next HDB flat with a HDB loan.



Date first posted on 18 June 2019; Last Edited on 18 June 2019

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