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August 2010
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To purchase a residential property in Singapore, the buyer must have the following resources in view of the regulatory lending guideline of 80% of the purchase price or valuation whichever is lower.
1) Cash over valuation (The difference between the purchase price and valuation if the purchase price is higher than the valuation) (thereinafter called “COV”)
2) Stamp fees and Legal costs amounting to about 3% of purchase price.
3) In addition to the Cash over valuation, another 20% of the remaining purchase price. Of which, 5% must be in cash. CPF savings can be used to meet the remaining 15% initial payment.
When the potential house buyer faces with any shortfall of any of the above resources, their first instinct is to checking with financial institution (thereinafter called “FIs”) for additional forms of financing on top of the housing loan (thereinafter called “HL”) to cover the shortfall. However, FIs are unable to provide any financing for all the above items in addition to the HL.
Should the house buyer be in the process of selling an existing residential property and the selling price is sufficient to repay the loan outstanding and refund to CPF Board for the amount withdrawn including accrued interest, FIs will be able to provide temporary financing to bridge over the forthcoming sales proceeds from the existing residential property. The temporary financing is commonly called “Bridging Loan” (thereinafter called “BL”).
BL is not applicable for purchase of HDB flat if loan financing is taken from HDB. HDB will provide Enhanced Contra Facility to bridge the time gap of both existing and new flats if the existing flat is also financed by HDB or fully repaid. More details are available at HDB’s web-site: http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/BuyResaleFlatECF?OpenDocument#Terms
The BL can only be used to finance the following requirements subject to terms and conditions:
1) The1st 4% to exercise option.
2) The remaining 15% or more of the remaining balance of purchase price.
Terms & Conditions:
1) There must be no COV in the purchase. If there is COV, the COV portion will have to be met in cash.
2) The sales proceeds of he existing property must have adequate cash proceeds to repay the BL funding the 4% of purchase price to exercise the option,
3) The CPF refund in the sales proceeds of the existing property must be sufficient to repay the BL for the15% or more of the remaining purchase price.
As the BL is bridging the time gap between selling of an existing property and the buying of another property, the FIs will disburse the approved BL together with HL to pay for the purchase of new residential property. Once the sales proceeds is received, the BL will be repaid. The FIs will have to first establish the net sales proceeds based on the following computation to ascertain the source of repayment of BLs.
Sales Price/Expected Selling Price of existing residential property
Less the following items:
1. All amounts owing and outstanding.
2. All of the exit costs such as prepayment fee, refund of subsidy or cash rebate imposed by the existing FI.
3. All CPF refunds including interest accrual.
4. Any CPF withdrawal from Special Account (Not be used again after the refund).
5. A further 6 months of CPF monthly withdrawal.
6. Estimated CPF interest accrual for another 6 months withdrawal.
7. Agent selling commission of up to 2% of the selling price.
8. Legal costs for the selling the existing property.
All the required information is obtainable from:
Latest HL statement.
Letter of Offer from the existing FI.
CPF Web-site
Under the purchase of a resale private residential property, FIs may need to know if the buyer needs the BL to meet the payment of 1st 4% to exercise option as the time to handle such transaction is constraint by the option expiry date, and all parties involved will have to rush through the processes within the window period to exercise the option. Part of the BL will be released under a Temporary Overdraft Account (thereinafter called “TOD”) to meet this payment.
When the HL and BL are approved, both financings will be stated in the FI’s letter of offer where the terms on how the disbursement of BL will be stated. Prior to the disbursement of BL, the FIs will need to have the documentary evidence of the following items:
1) Exercised option for the private residential property sold by the buyer.
2) For HDB flat sold by the buyer, the practice varies among the FIs, it is better to check with the FIs in the initial discussion. Unlike private residential property, the FIs are not accepting exercised option as evidence of sales. Some FIs will take the HDB letter of notification of 1st appointment whereas some will insist on the HDB letter of approval of sales which will comes in 2 weeks later.
Once the above pre-disbursement condition is fulfilled, the TOD or BL will be released accordingly. The interest payable will commence from the date of activation or disbursement. The interest is calculated based on the amount utilized, at the interest rate of a premium over Prime Rate and period used. Some FI may impose a minimum interest payment of 1 month if the TOD or BL is repaid within 1 month. The interest is payable on monthly basis in cash.
Other than the monthly interest, there is no other additional cost to getting TOD or BL If the TOD or BL is cancelled, there is no cancellation fee as the cancellation fee is only applicable to the HL only. Hence, whenever there is a transaction involving buying a property and selling one immediately, it is always good to have a BL to standby in the event of need as the completion timing of either transaction may be varied to unforeseen circumstances. This is especially so since there is cancellation can be done with a letter from the lawyer at no cost.
To understand how you can switch your property smoothly, please contact any of the Housing Loan Specialists at 6100SAVE(7283) for a detail discussion.
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