With HDB resale prices rising for 16 consecutive months, many buyers are paying above the actual valuation of the unit or cash over valuation (COV).
This leads us to the question - what is COV?
COV refers to the amount a buyer would pay above the actual valuation of a property.
This amount must be paid in cash, hence the term cash overvaluation. COV usually happens when it is a seller’s market, such as when buying interest outstrips supply.
In the 1990s and early 2000s, HDB would publish COV statistics for resale transactions. Those were the days when you did a valuation before selling your HDB. Sellers would then negotiate the selling price by asking for a COV, especially if the unit was in a good location or nicely renovated.
This practice led to resale prices climbing steadily until 2014 when the government reversed the process of valuation before selling.
Since 2014, buyers and sellers must agreed on the transaction price before getting an official valuation from HDB.
How does COV work?
In the following example, if you agree to buy a unit for $650,000 and the HDB official valuation is $620,000, then you are paying a COV of $30,000.
This $30,000 cannot be paid using a housing loan or CPF funds, but in cash.
Transacted Price of Flat | $650,000 |
HDB Certified Valuation of Flat | $620,000 |
Cash over valuation (COV) | $30,000 |
When taking a housing loan, either from HDB or banks/lenders, the loan amount is typically pegged to the valuation.
The maximum amount you can borrow for the housing loan is known as the Loan-To-Value (LTV), which is based on the LOWER value between the valuation and the transacted price.
In the above example, the LTV will be calculated using the lower valuation of $620,000 and not the higher transacted price of $650,000.
The previous LTV limit for HDB housing loans was 90% of the valuation or transacted price.
However, as of 15 December 2021, the LTV ratio will be reduced to 85%.
This will reduce the maximum amount a buyer can borrow and will increase the cash outlay if you do not have sufficient CPF funds to cover the 5% LTV reduction.
The new LTV ratio will only apply to completed resale applications received by HDB from 16 December onwards. If you are taking a housing loan from a bank/lender, there is no change to the LTV ratio of 75%.
Stamp duty
You will also be affected by the stamp duties as it is calculated based on the HIGHER value between the valuation and transacted price.
This is the opposite of the LTV calculation.
So, for the above example, you will have to pay the Buyer’s Stamp Duty (BSD) based on the higher transacted price of $650,000 and not the lower valuation of $620,000.
Lastly, COV is only valid for HDB resale flats and not BTO flats.
BTO flats are bought directly from HDB. Hence, the valuation is the same as the transacted price.
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