Tuesday, July 17, 2012

Buying a resale flat from the open market - CPF Valuation Limit (VL)

Just something that I would like to share in case you may not know.

If you have purchased, or thinking of buying a HDB resale flat from the open market, with the intent to pay it off using your CPF monies, please note that there is such a thing called a Valuation Limit (VL)

What is Valuation Limit?
Copied and pasted from CPF website "The Valuation Limit is the lower of the purchase price or the value of the property at the time of purchase"

E.g. 1 - Your resale flat is valued at $200k and you bought it for $250k, the VL is $200k
E.g. 2 - Your resale flat is valued at $200k and you bought it for $180k, the VL is $180k

What does that mean?
This means that if you are buying a resale flat, you will only allowed to use you and your spouse's CPF monies up to the valuation limit, and the rest of the amount would have to be forked out in cash. An example is as below

E.g.  - Let's say you intend to purchase a resale flat at $300k, which is the valuation set for your flat at time your purchase. You are able to pay off upfront of $30k and the rest of the amount will be paid over 30 years via HDB loan with interest at 2.60% pa. Based on the loan you are taking, which is $270k, your total interest incurred over 30 year will be $119,130, making your total amount payment for this loan of $270k to be $389,130. As above, the valuation limit is set at $300k. However, you would have to minus of $30k, which was the amount of CPF money that you have used for the initial down-payment, resulting in you only able to use $270k to pay for the loan of $389,100 and as such you would have to fork out $119,130 in cash. This amount may look large, but note that it is based purely on the premise that if you continue to service the loan on a monthly basis with the same amount you would have used if paying by CPF deduction. I guess for most people, when they reach the VL, and have been notified of it, they would have paid HDB a visit to re-work out a refinancing arrangement.

Please note that there are two conditions that will still allow use to continue to use your CPF monies to service the housing loan when your VL is reached. The two conditions are

(1) If you are below 55 and your CPF ordinary account has more than half of the CPF prevailing minimum sum, you can use the excess money to service this loan.

(2) If you are above 55, you may use the excess CPF ordinary account savings to repay the loan, after setting aside the minimum sum cash component shortfall. [source: CPF]

How does it affect me?
My gut feel is that it will not affect most people who have bought a resale flat from the open market  because of the following cases

(1) When you eventually have the capacity to 'upgrade', and decided to sell your current house, it is likely that the valuation of the house would have increased, and the valuation amount is able to cover the price of the house + whatever interest owned to HDB at the point of time.

(2) When your VL is hit, it is likely towards the later part of the loan period (20-25 years thereabouts). If you and your spouse earns a steady income, by then, both you and your spouse should have enough to set aside half of prevailing minimum sum, and use the excess to service the loan.

Thus, you can see that the VL should not affect most people much, and the actual cash amount that needs to be paid eventually (if any at all), should be minimal, or at least affordable on a monthly basis. However, its a little clause that I think a lot of people don't know about. At least for me, when I was sitting in the HDB office signing the documents to purchase my flat, I am certainly not aware of this VL thingy, and by the way the officer has explained, I would have thought that I would be able to pay off my entire HDB home loan purely on my CPF account.

In the next post, I would share how this you may actually be affected by this VL in some cases.

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