The HDB resale market is on fire. It has been rising for 16 consecutive months and has surpassed the previous peak recorded in Q2 of 2013.
This is good news if you are a seller. However, if you are a shopping around for a resale HDB right now, will you be faced with a negative sale when you become a seller?
Firstly, let's examine what a negative sale is.
A negative sale happens when the value of your property is lesser than your loan amount plus accrued interest.
If you had bought the property during a buyer’s market, in other words, a down market, then it is highly likely that the property price has appreciated and you will not be faced with a negative sale.
However, if you had bought a resale HDB during the previous peak of 2013 and sold after the MOP period (5 years), it is likely that you will be facing a negative sale. HDB resale prices dropped quite drastically after 2014 until the recent run-up.
If you had used your CPF monies to pay for the flat, you will need to repay the principal amount used and the accrued interests.
When your sale proceeds from selling the property are not enough to cover the CPF funds, it is a negative sale.
Generally, if you had bought a flat directly from HDB, the price appreciation is the highest.
Most negative sales occur during the second or third ownership, depending on the market condition at the point of transaction.
Buyers in a seller's market may face some challenges in terms of market appreciation and may face negative sale situations when they decide to sell in the future.
Below is an example of a negative sale:
You just sold your 4-room flat for $420,000. You have an outstanding housing loan of $250,000. You need to refund to your CPF OA a sum of $150,000 plus accrued interest of $40,000.
Sale price of flat
Outstanding housing loan
Sale proceeds (after payment of housing loan)
$420,000 - $250,000 = $170,000
Refundable CPF OA monies
(principal + accrued interests)
Balance of sale proceeds
$170,000 – $190,000 = ($20,000)
The above example clearly shows how, after the outstanding housing loan has been paid off, the proceeds of the sale of an HDB flat is insufficient to cover what is owed to your CPF OA.
The good news here is that you do NOT have to make up the $20,000 shortfall to the CPF OA if you had sold the property at market value or higher, in other words, in a healthy market and not a fire sale.
So how do we avoid a negative sale situation?
Firstly, pay for the housing loan in cash instead of using CPF funds.
The government has been paying an interest rate of 2.5% for CPF OA funds and you will face the accrued interest if you opt to use CPF OA funds for the housing loan.
By using cash now, you avoid having to refund the proceeds when you sell your flat in the future.
If you have to take a housing loan, take a bank loan (especially one with a lower interest rate) and refinance once the lock-in period is over. That way, your CPF OA funds are earning good interest and there is less refund when you sell.
Of course, the best way to avoid a negative sale is to buy low and sell high, which is easier said than done.
When your property has appreciated quite substantially, consider selling instead of waiting for it to go up further.
If you hold the property for too long, the CPF accrued interests will continue to accumulate and that may lead to smaller sales proceeds, resulting in a negative sale.
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