HDB Lease Decay: How a HDB Flat Might Depreciate Over Time

It’s important to understand how the value of your flat may depreciate over time. While it’s difficult to determine exactly when a flat starts to depreciate at a faster rate, we can look at past data to understand how this may occur.

According to a graph published in the Straits Times on 12 April 2017, 

There are three points during the 99-year lease of an HDB flat that can cause significant depreciation in its value.

1st point: When the balance lease is less than 35 years.

Banks typically require a balance lease of 30 years at the end of the loan tenure, with a minimum loan tenure of 5 years. If the balance lease is less than 35 years, buyers will not be able to secure a bank loan. This means that if you were to purchase an HDB flat with a balance lease of 34 years, for example, you would only be able to loan for a tenure of 4 years, and banks have a minimum loan tenure of 5 years. Therefore, you would not be able to take a bank loan for this property. However, you can still use your CPF for downpayment and HDB loan servicing.

2nd point: When the balance lease is less than 30 years. 

At this stage, CPF usage is no longer allowed for downpayment and HDB loan servicing. However, HDB loans are still available.

3rd point: When the balance lease is less than 20 years.

At this stage, no loans are available for the purchase of HDB flats.


HDB Concessionary Loan: Financing Limits for Buyers.

The LTV limit for HDB housing loans has been lowered by 5%-points from 85% to 80%. The revised LTV limit will apply to new flat applications for sales exercises launched and complete resale applications which are received by HDB on or after 30 September 2022. The revised LTV limit does not apply to loans granted by private financial institutions, for which the LTV limit remains at 75%.

If you buy a flat with a remaining lease that can cover the youngest buyer up to the age of 95 and above, the HDB housing loan amount that you may take will be up to 80% of the lower of the flat price and value (“loan-to- value” limit). Otherwise, the HDB housing loan amount will be pro-rated from the 80% loan-to-value limit.

For example, let’s say you’re a newly married couple (The husband is 30 years old, while the wife is 27 years old). 

You’re interested in buying a 5-room flat in that is 44 years old and has a remaining lease of 55 years. 

This means you’re eligible for an HDB Concessionary Loan.

However, as the remaining lease of the flat is insufficient to cover the youngest buyer till age 95, the HDB Loan will be pro-rated to 59% of the flat purchase price or value of flat whichever is lower.

On the flip side, what does this mean for you as a flat seller?

Well, if you’re looking to sell an ageing HDB flat, your potential buyers (such as younger couples) may find it more difficult to secure financing.

This means that the pool of buyers for your older flat will be smaller making it harder to sell. 


Bank Loan: Financing Limits for Buyers

As per current policy, banks require the balance lease to be at least 30 years at the end of the loan tenure. 

This means that younger flat owners may have to opt for shorter loan tenures.

For example, a young couple intending to purchase a 5-room flat with a balance lease of 55 years can only take up a loan tenure of maximum 25 years compared to the maximum 30 years if they opt for a younger flat.

The shorter loan tenure means higher monthly instalments, leading to the need for a higher income to meet both the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) requirements. With TDSR capping monthly debt obligations at 55% of monthly income and MSR capped at 30%, buyers must ensure they have the required income to fulfill these obligations.

As a result, younger buyers might find it challenging to finance the purchase of older flats, and this can lead to a smaller pool of potential buyers for these properties. 

This, in turn, could cause the value of older flats to depreciate at a faster rate, as demand decreases while the supply remains constant or even increases.


Restrictions on CPF Usage for Older HDB Flats

Using CPF savings to finance the purchase of an HDB flat with a decaying lease is subject to limitations.

Starting from 10 May 2019, the maximum amount of CPF that can be used to buy a property depends on whether the remaining lease can cover the youngest buyer until they reach the age of 95.

If the remaining lease meets this criterion, the buyer can use CPF to pay for the property up to its valuation limit. However, if the remaining lease is insufficient, the use of CPF will be pro-rated.

For instance, in the previous example of the young couple intending to buy a 5-room flat with a balance lease of 55 years, the wife, who is 27 years old, cannot be covered until she reaches the age of 95. As a result, they can only use up to $365,000 from their CPF savings to finance the flat, which is less than the property’s purchase price of around $500,000.

In contrast, if they opt for a similarly-priced 5-room flat with a longer remaining lease that can cover the wife until she turns 95, they can use up to $500,000 from their CPF savings to finance the purchase.

The pool of potential buyers for older flats will be affected as the restriction to CPF usage will mean that younger buyers will have to use cash for their downpayment or when servicing their loan.


What happens to your HDB flat when the 99 year lease expires?

While some HDB flat owners may hope for the possibility of Selective Enbloc Redevelopment Scheme (SERS), it is important to note that only a small percentage of flats have been identified for SERS since 1995.

“Don’t assume all old HDB flats will become eligible for SERS.”

Minister of National Development Lawrence Wong cautioned this in the Straits Times on 24 March 2017. He said only 4% of HDB flats have been identified for SERS since 1995.

For most HDB flats, leases will eventually run out and the flats will be returned to HDB, which in turn surrenders the land on which the flats are on to the State.


If you are staying in an ageing HDB flat, you will need to ask yourself this question:

“Will my HDB flat become a liability or asset?”

Do not let time erode the value of your HDB flat.

Knowing the true value of your HDB flat can help you make informed decisions about your finances and plan for the future.

It is crucial to be aware of the potential financial risks and implications that come with the decaying lease of your property.

If you are planning a move or upgrade and wish to assess your financial situation or have a safe property plan for the future, do contact us for a non-obligatory sharing session.

Wondering if it’s the right time to buy, sell, or wait it out?

These decisions can be tough, and there isn’t a one-size-fits-all answer.

But don’t worry, that’s where we come in!

At Let’s Talk Property, we are here to provide clarity to you and guide you step-by-step in your real estate journey!

Whether you’re a first-time buyer or a seasoned investor, we hope to partner with you to create a clear plan that’s tailored to your unique needs and provide objective guidance to help you make the best real estate decision.

So, if you’re looking to buy, sell, or just want to chat about your real estate options, we’re here for you!

With our extensive on-the-ground experience, you can trust us to provide a top-notch real estate experience that’s both informative and stress-free.

Do contact us for a sharing session!

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Best Regards,
Let’s Talk Property
Dillon @ 9389 1992

P.S. HDB Owners, with so much UNCERTAINTY, Should you BUY, SELL or WAIT?
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