I’ve been getting queries from readers who are keen on the idea of purchasing an EC instead of a private condo.
Some of them believe that purchasing an EC in the resale market that had just fulfilled MOP is a good idea as it is considered a cheaper option as compared investing in a private property.
There is also a belief that an EC is a better stepping stone towards private property ownership.
There are definitely advantages of upgrading to an EC over a private property:
- Lower entry price
- You don’t have to pay Additional Buyer Stamp Duty(ABSD) even if you stay in your HDB flat till your EC apartment obtain Temporary Occupation Period (TOP)
While the housing system is designed to make you believe that – do consider all the various scenarios and consequences that might not have crossed your mind.
Let’s explore some of the important issues you might be unaware of about owning and selling an EC.
By understanding these issues well – we can formulate a strategy to ensure financial success and good returns for your future.
#1: Owning or Buying a New EC is Subject to HDB rules and regulations
Unlike buying a private property, you have to form a family nucleus if you are planning to buy a new EC apartment. This is as per HDB regulations.
A common family nucleus formed will be both husband and wife – which also means that the new EC will have to be both under husband and wife’s name as owners of the EC apartment.
You can only sell your EC apartment when it reaches the Minimum Occupation Period (MOP) which is 5 years starting from the day that you had collected your keys at Temporary Occupation Period (TOP).
Following the 5th-year mark – it will be considered under a private treaty agreement.
This also means you are able to remove one of the owners’ names.
This way – you are able to free up one of your partner’s name to obtain another private property for investment to avoid paying ABSD.
If you are in your early thirties, having a good career, ready to start a family, it’s still a good option to get a new EC for your own “consumption” or your own stay.
The lower entry price.
#2: Mortgage Servicing Ratio (MSR) Framework for EC Mortgage Loans
Do take note that EC mortgage loans are subjected to the Mortagage Servicing Ratio (MSR) framework for New ECs.
Under this framework, the applicants can only use up to 30% of their gross monthly income to repay their loans.
Let’s use an example of a typical 3 bedroom EC in Parc Greenwich that is going for approx. $1.154 mil,
With MSR in place – assuming a couple have a Income Weighted Average Age (IWAA) of 35 with no other outstanding loans – they need to have a combined income of $13k.
The calculation also revealed that the maximum loan amount that the couple can take is up to 1,158 mil.
For private properties – they are subjected to Total Debt Servicing Ratio (TDSR) framework.
Let’s take a look at the difference.
Under the TDSR framework, with the same age, income and zero loans – this couple now has the ability to loan up to approx. $1.6 mil.
This is almost double of the previous loan allowed under the MSR framework.
This also means that they are able to leverage almost twice the amount and they are able to invest in a private condo up to $2.1mil.
To be clear – I am not encouraging that you should fully leverage on the loan.
The point I wish to bring up is with the larger loan size – one can have more options in either getting a 3 bedroom private condominium or a 4 bedroom sized condominium.
This is especially so if they need a larger space for a big family.
Or perhaps even planning to convert 1 room to a workspace to leverage on the Work-From-Home (WFH) trend.
The trend towards bigger units seems to be returning thanks to the pandemic.
#3: You can only sell your EC apartment after Approximately 9 years
A typical EC development construction timeline is roughly 3 to 4 years.
However – EC owners can only sell their apartments when it reaches minimum occupation period (MOP) which is 5 years.
That is about 4-years(TOP) + 5-years(MOP) = 9 years in total.
Assuming at the age of 40, you had just upgraded to a New EC apartment thinking of selling it in the future.
When it reaches MOP, you will be 48 years old by then.
Compare this timeline of selling your private condo.
Taking into consideration that most owners will only sell it on the 3rd year to avoid incurring Seller Stamp Duty (SSD). – you will be only 43 years old by then.
It means you are losing out 5 years in comparison.
You could possibly reap capital gains from your existing private asset and move on to invest another.
Also do bear in mind that your loan tenure reduces as you grow older. This means you will be paying a higher monthly mortgage.
17 years (65 – 48) vs 22 years (65 – 43) is the maximum loan tenure that you are allowed to borrow
So my concern here is this:
Will you want to take the risk of paying a higher monthly mortgage at the age of 48 years old?
At this age, you will probably wish to clear or minimize any outstanding loans as you are preparing for retirement.
#4: ECs Are Designed For Own Stay & Personal Consumption
As executive condominiums are designed and built mainly for those who wish to stay there themselves – they are mostly located in the heartland of Singapore.
ECs attract a certain group of buyers who are mostly HDB upgraders or 1st timers who use it for own stay.
These buyers are not necessarily buying purely for investment purpose.
Looking at historical data, for most ECs – prices are pushed up once it reaches the MOP period. Why?
Because PRs and local buyers are also eligible to buy an EC apartment, creating a pent up demand.
In my opinion, another 5 to 7 years from the 5-year MOP mark is probably a good time to sell your EC apartment.
But if you plan to keep it for a longer term – then by all means keep it.
It is not necessary for you to sell.
You had the advantage of entering at a lower entry price point – which you might not be able to see again – for the coming future.
But if you are expecting another round of growth… then it might not happen.
Prices will gradually stabilize at some point. Prices inching up or down will depends on the overall market trend after that.
If you are keeping the EC because it is a cheap option for own stay – then by all means keep it. My take is this – I don’t see the prices dropping.
At the same time, I do not see prices spiking up either.
Hence, if you are looking for more opportunities or better performing assets to give you better returns – then perhaps you might want to cash out of this property.
#5: Fully Privatized ECs are Not Necessarily Attractive To Foreign Buyers
A reader of mine who currently owns an EC actually had thoughts of selling their EC on the 10th year mark when it becomes fully privatized.
That is when you can sell it to foreigners. He believes that doing it this way will allow him to maximise his profit.
There is nothing wrong to think this way.
But the reality on the ground does not support this.
You can see on the above chart on a particular EC in Yishun, only a small percentage of foreigners account the number of ownership in ECs.
Only 1.4% of 318 owners which only account 4 foreign owners.
In my opinion – waiting for 10 years before selling is not going to help boost the value of your EC apartment any further.
Imagine if you are a foreign investor who wishes to park their monies in the Singapore property market.
Would you park your monies in a newer private property or a 10-year old condo?
With the latest cooling measures announced in December last year, foreigners already have to incur a hefty 30% of Additional Buyer Stamp Duty (ABSD).
That’s on top of the 4% buyer stamp duty (BSD) that they need to fork out.
Imagine paying a million dollars for an EC apartment.
These foreigners will have to incur more than $300k that they could never take back when they wish to sell the EC apartment in the future.
Perhaps even renting a place makes more sense to them!
So if you are planning to wait 10 years and that’s another 5 more years from MOP before cashing out from your EC, I urge you to reconsider.
Especially if your goal for waiting is just because you think the prices will go up at the 10th-year mark.
With today’s government standing policy on ABSD, the possibility of 10-year old EC prices spiking up will be slim.
Gone are the days when EC land is cheap and the developer can afford to sell you at cheap prices with big units. It was worth it to buy and wait – back then.
If you wish to buy an EC for own stay and another private condo for investment – then a resale EC might be a good choice to buy because the prices are still hovering around a good range.
If you are thinking of liquidating your existing private property and settle down in a place for retirement – a resale EC apartment is something you can consider.
You are not going to lose much money there but you are unlikely to earn much profit from it either.
My goal is you to understand that there are alot of hidden consequences you might be unaware of with an EC choice.
But at the same time – I hope you can see the possibilities that can be shaped into situations that are desirable.
Before you make any big decision, I invite you to arrange a no-obligation discussion so you can get further clarity on options that are available to you.
Click here to arrange for detailed financial assessment that allows you to be strategic and think 3-4 steps ahead.