Last few years of Sell-One-Buy-Two Huat Big Big scheme create a lot housing loan business for banks….many banks are laughing with big big profits now

[k1976]

How Interest Rates Turned the “Sell 1 HDB & Buy 2 Condo” Strategy Into a Debt Nightmare​

Ohmyhome
Mon, 28 October 2024 at 10:52 AM SGT5-min read

With another interest rate hike announced recently and new mortgage offers by the banks increasing in tandem, we revisit the highly popular “Sell 1 HDB & Buy 2 Condo” scheme promoted by many agents a few years ago.

Contents:​

• 1. Interest rates will never always be low
• 2. Leverage wisely
• 3. Follow the rule of thumb

At a time of low interest rates, where new money was practically free, this might have made some sense, but very quickly (some projects launched then aren’t even completed yet), this “asset progression” strategy turned into a debt nightmare especially when new rates are hovering around 4.1-4.3% p.a.
ADVERTISEMENT

Let’s dive deep into the proposed plan and why many could end up losing their homes or declaring bankruptcy soon.
The Sell 1 HDB Buy 2 Condo scheme had a few requirements to make it work:

1. You are in a dual-income household
2. You both qualify for enough financing
3. You receive sufficient funds from selling your HDB

So, the typical scenario looked like this:

1. You and your spouse earn an annual household income of $60,000 and $40,000 respectively.
2. You purchased a 5-room HDB for $500,000.
3. You sell it after 10 years for a 50% profit at $750,000.
4. You receive $95,000 in cash and about $345,000 in CPF.
5. During the 10 years, you managed to save 20% of your take-home pay totalling $160,000 in cash.
6. With this total of $600,000, you decide to purchase 2 condos each. The first, a 2-bedroom condo for your residence at $1.2m under your name and, the other, a studio unit for investment at $800,000 under your spouse’s name. (You buy it separately to avoid paying ABSD.)
7. You borrow the remaining $900,000 at 1.2% p.a and pay $2,980/mth for 30 years, and your spouse borrows $500,000 at 1.2% p.a. and pay $1,655/mth.
8. Immediately, you rent out that $800,000 unit for $2,000/mth (fully paying off your mortgage).

ADVERTISEMENT

Now, this is where it gets dicey…
Just 2 years ago, as shown, mortgage rates were at 1.2%. Even though it was a stretch, the two of you were paying 50-60% of your income to service the 2 mortgages within the old 60% TDSR limit.
However, with the new rates, you aren’t so lucky.

	You	Your Spouse
Annual Income	$60,000	$40,000
Previously Monthly Mortgage (1.2% p.a.)	$2,890	$1,655
Current Monthly Mortgage (4.25% p.a.)	$4,430	$2,460
How Much Mortgage Is Eating Up Your Monthly Income	88.6%	73.8%

At the current 4.25% p.a rate, your $2,980 monthly mortgage jumps to $4,430 per month and your spouse’s $1,655 monthly mortgage jumps to $2,460, an almost 50% rise!

 

[k1976]

Right off the bat, the mortgage on your $1.2m now takes up 88.6% of your monthly income, and the mortgage on the studio unit takes up 73.8% of your spouse’s monthly income.

Things used to be tight, but now you’re up to your ears with mortgage payments.

But we’re not done. Trying to salvage the situation isn’t as easy as it seems.

Even if you decide to sell the studio unit, and let’s assume you can sell it for $900,000 now after 2 years, you’ll have to pay Seller’s Stamp Duty of 4% or $36,000. In fact, after all the fees, you might even be looking at a negative sale of around $6,000.

What a nightmare.

ADVERTISEMENT

At one point you were tripling your net worth, having a condo unit fully paid for by your tenant and you’re living a comfortable life in your new condominium surroundings, but now you’re losing money on your investment and the remaining mortgage is almost as much your personal income.

So, what can we learn from this?

 

[k1976]

1. Interest rates will never always be low​

Since 2008, interest rates plummeted and never recovered. For 13 years we were used to seeing 1-ish percent on mortgages, and many thought this is the new normal. But when black swan events, like the pandemic, rolls by and countries are flushing the system with new money to try and save the economy, inflation bites us in the behind and the interest rate lever must be pulled to try and not get the world spiralling into another recession.

2. Leverage wisely​

It’s common knowledge that the real way you earn from property is through leverage. The moment you’re using your own money to pay for your property in full cash, you lose out.

A 25% increase in property prices could translate to a 100% return on your capital because you’re using the bank’s money instead of yours.

ADVERTISEMENT

But when the tides turn and you’re overleveraged, your entire plan can be flipped upside down in a matter of months.

3. Follow the rule of thumb​

There’s a reason why the 2 most popular and subscribed to formulas when deciding how much property to purchase are:

• Buy 5-7 times your combined annual income
• Keep mortgage below 30% of your income

These 2 rules promote prudent borrowing and ensure affordability remains a possibility.

If you’re making $100,000 as the example shows, you should only be purchasing a property between $500,000-700,000. Even with today’s interest rates of 4.25%, a $600,000 loan only sets you back $2,952 monthly or $35,424 yearly. A definitely more manageable figure.

ADVERTISEMENT

This is why financial planning is at the top of our list whenever we meet a client. Understanding your resources and future commitments makes homeownership a pleasant experience.

When you engage a property agent from Ohmyhome, you'll get a comprehensive market report and home valuation so you know how much your property is worth in the current market, and your Ohmyhome agent will walk you through a detailed financial calculation to make sure you have enough for your next home.

If you have any further enquiries, you can drop us a message on WhatsApp or chat with us via our Live Chat at the bottom, right-hand corner of your screen to speak with a Relationship Manager or be connected to a Super Agent. You can also book an appointment with our property agents via this form. We'll be in touch with you in under a minute.

 

[Raiders]

Hope your 2 condos are ok...

 

[k1976]

Any bro has successful stories to share?

 

[k1976]

Hope your 2 condos are ok...

Nope….moi has only satu Pigeon Hole

 

[k1976]

Hope your 2 condos are ok...

There are a few rich bros here with multi passive rental incomes

 

[k1976]

Any miss the boat bros?

 

[k1976]

Moi miss the boat too, no worries

 

[k1976]

 

[Raiders]

There are a few rich bros here with multi passive rental incomes

The ex pilot guy still alive?

 

[k1976]

The ex pilot guy still alive?

No sure leh

 

[k1976]

Last time , a lot Bros share their successful investments stories here , HWZ or even AF. Now no sound no pic liao

 

[k1976]

The ex pilot guy still alive?

Pilot supposed to Huat big big in post Covid years de woh… maybe he upgrade to landed or GCB Liao?

 

[k1976]

Is this guy one of them?

His face colour definitely dun look good at all

 

[cocobobo]

Last time combined 60k earning. Now combined 300k.
No problem one lah can still eat full.

 

[k1976]

This bro look more radiant

 

[k1976]

There are plentiful of bro with good potential pending for unlock de woh

 

[k1976]

Core inflation should end the year around 2% while near-term growth has been stronger than anticipated, the Monetary Authority of Singapore said in its twice-yearly macroeconomic review published Monday. MAS core inflation is expected to average around the mid-point of its 1.5-2.5% forecast range in 2025.

“The risks to Singapore’s inflation outlook are more balanced compared to three months ago,” MAS said in the report. “Significant uncertainty remains in the global economy and risks are, on balance, tilted towards lower global growth.”

MAS, which doesn’t have an explicit inflation target, left monetary settings on hold for a sixth consecutive review earlier this month, wary of stubborn price pressures. Indeed, data out last week showed Singapore’s core inflation remained elevated in September, driven by healthcare and education.

The review highlighted trade and geopolitical tensions as well as a slowing China among risks to Singapore’s economic outlook. It said that an index of trade policy uncertainty is currently at its highest level since early-2020.

 

[k1976]

Trade tensions are on the rise and could derail the disinflation process,” the review said. “An intensification of tensions could lead to further trade frictions and potential retaliatory actions that weigh on global trade and output, while raising prices.”

MAS said, as a result, central banks may have to slow the pace of monetary policy easing amid renewed near-term inflationary pressures.

Within Asia, the resilience to China’s slowdown could also be tested if Beijing’s recent support measures fail to stabilize the deterioration in the property sector. Negative spillovers could also become more pronounced if China experiences a prolonged period of weakness, MAS warned.

Despite the downside risks, the review showed that Singapore’s economy is set to expand at “close to its potential rate,” with GDP growth for 2024 projected to come in around the upper end of the 2–3% forecast range. The momentum is likely to be sustained in 2025.

Data out this month showed Singapore’s GDP advanced 2.1% in the three months through September from the prior quarter. From a year earlier, the economy expanded at a brisk 4.1% in the period.