Policy inconsistency hitting a group of HDB owners

Amid the authorities’ repeated statements to date that property cooling measures should not yet be lifted lies a policy inconsistency that denies a group of Housing and Development Board (HDB) owners from upgrading to potential private housing.

In an effort to bring financing for executive condominium (EC) purchases in line with public housing, a 30 per cent mortgage servicing ratio was placed on loans.

The National Development Ministry said this is to discourage buyers from overstretching their finances and support an affordable and sustainable EC market.

The inconsistency is firstly to do with new EC buyers who own an HDB flat with an outstanding mortgage.

For EC purchases, they are not subject to the 50 per cent loan-to-value cap and 25 per cent minimum cash downpayment for a second home loan.

This relief is given because the borrower must dispose of his HDB flat within six months of the issuance of the temporary occupation permit for his EC. His first mortgage would thus be discharged.

Secondly, new EC buyers who own an HDB flat are granted a remission of the Additional Buyer’s Stamp Duty of 7 per cent imposed on a second property, as they cannot end up owning a second home concurrently.

These concessions implicitly recognise that EC buyers would not be over-stretched by a higher loan-to-value or by having to service two mortgages.

The current mortgage servicing ratio, though, prevents EC buyers from taking up a loan that is within their financial capability after taking into account the proceeds from the eventual sale of their flat, which would reduce the new loan.

One perverse consequence of the cap is that buyers are prompted to switch to pricier private properties, where the restriction does not apply, resulting in overstretched borrowers and increasing the very risk of default the authorities are trying to mitigate. This measure has also disadvantaged certain second-timers in their purchase of ECs that are not subject to the resale levy. The number of such ECs will diminish.

Equally, HDB dwellers who wish or need to relocate to another HDB home or estate for good reasons are deterred from doing so. Also, there is a segment of the population close to the income ceiling; they will become ineligible to buy a flat or an EC over time due to salary increments.

There is a case for fine-tuning the financing for EC and HDB purchases. This could include recognising a portion of the nett proceeds from the sale of an existing HDB home, tied to a covenant by the borrower to pay down his loan utilising these proceeds.