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Downgrading your home? Avoid these Top 5 costly mistakes Singaporeans make!

Considering to sell your condo and buy an HDB? Or perhaps you're looking to right-size and move to a smaller home? If so, you might be thinking of downgrading your property.

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After years of living in your current home, you'll inevitably feel a bittersweet melancholy when thinking of 'downgrading'. Even the term sounds like you're making a sacrifice - all the more building towards that hesitance in your heart.

Yet in many property journeys, there will come a time when downgrading your home can be a good thing!

Attaining the long-awaited financial freedom is one huge draw - reducing that costly mortgage or maintenance fee so you can spend the extra money on yourself and your family. Or perhaps to reduce the number of empty rooms and make the home more homely and less empty (also fewer places to clean!). To find out more about the benefits of downsizing or downgrading, read our other article here.

Before jumping in to sell and buy your new place, take some time to uncover the 5 common mistakes downgraders make, so that you won't!


Summary of the Top 5 Common Downgrader Mistakes

Mistake 1: Overestimating the sales proceeds Mistake 2: Not accounting for all the 'hidden' costs

Mistake 3: Not managing the Buy & Sell timeline well

Mistake 4: Not being aware of recent Government Regulations

Mistake 5: Not realizing that downgrading is NOT the only option


Mistake 1: Overestimating the sale proceeds

For homeowners living in their homes for many years, there is inevitably an emotional attachment. Sometimes this translates irrationally into a higher-than-fair expected price.

"You can't find a place like this anymore". "I spent $X on renovation few years ago". "My house is the best in the area because...."

If you find yourself saying things like these, PAUSE! As Dan Ariely aptly wrote an entire book on it, we are human beings with emotions, and that sometimes get in the way of our rationality. After all, if your home isn't that great TO YOU, you wouldn't be living there for so long, isn't it? The key is not to let your irrationality get in the way of your downgrading plans - especially if you're overestimating the worth of your home.

Instead, have your home appraised by an expert with no emotional attachment, and rely on different data points of reference to derive a fair value for your home. This will set the direction of your downgrading plan, so make sure you get it right from the start! If you're uncertain or want to have another reference point, use our multi-factor Home Valuation analysis to get your own Home Valuation Report.

Mistake 2: Not accounting for all the 'hidden' costs

Don't just consider the price of selling your condo and the price of buying your HDB when planning your downgrade. You'd need to first account for the full cost of selling your property. Aside from typical expenses like agent commission fees, early loan repayment penalty (if any), or seller stamp duty (unlikely but possible), the largest 'hidden' costs are the CPF used plus accrued interest that you'd have to return to your CPF OA account. For the purchase of your next home, if it is a second subsidized flat like a new HDB BTO, resale HDB with grants, or a new Executive Condo (EC), do consider the resale levy which could go up to $55k. If you're buying a private property like a landed or a condo before selling your existing home, also consider the upfront ABSD, as you'll need to pay for it before getting a remission.

Cash-over-valuation is also a major factor if you are still planning to take a loan or use your CPF to finance your next home. Oh, and don't forget to factor in potential renovation costs as well!

Mistake 3: Not managing the Buy & Sell timeline well

Timeline. Timeline. Timeline.

We can't emphasize enough the importance of managing the timeline in a buying and selling process.

How you plan your sale and purchase can affect your finances - as we briefly touched on in the previous point about ABSD and ABSD remission. Ideally, even if you'd be eligible for an ABSD remission, it'll be better to avoid paying for it upfront as it can affect the amount of free cash/CPF that you can use.

Not planning the timeline well could also result in the need for a bridging loan while awaiting the cash proceeds from the sale of the house to come in. This means unwanted interest that could amount to quite a bit of money!

Finally, not planning your timeline well can also potentially lead to a need to rent elsewhere before moving into your new home. Anyone with experience in moving can attest to the amount of work and stress that goes behind the whole house-moving process. Don't forget, this is on top of the time required to find a suitable place and the financial cost to rent it.

Mistake 4: Not being aware of recent Government Regulations

The biggest hurdle for those selling condos and buying a resale HDB today would be the latest cooling measures released in September 2022. With the introduction of a temporary 15-month wait-out period, sellers of private property who are under the age of 55 will be unable to purchase a resale HDB for a 15-month period. In our opinion, this is mainly targeted at the majority who are looking to downgrade from condo to HDB, as they would have a large amount of cash to purchase those million-dollar HDBs without flinching.

Thankfully those who are above 55 would still be able to purchase an HDB that is 4-room and smaller. However, for those who are looking to receive an HDB grant, the same 30-month wait-out period still applies.

For those looking at buying an HDB, HDB also has a right-sizing policy known as the Silver Housing Bonus - incentivizing elderly aged 55 and above to right-size to a smaller 3-room HDB and receive a cash bonus.

Other considerations would be the eligibility to own an HDB, and those affecting the loan calculation - which differs when buying an HDB or a private property!

Mistake 5: Not realizing that downgrading is NOT the only option

For many who are facing financial difficulties and considering selling their property for extra cash flow, downgrading might be an option.

However, for those who own private properties (including ECs past the MOP period), another option would be to take up an Equity Term Loan (also known as Home Equity Loan) on your existing property.

This option allows you to use your property as collateral to unlock the equity of your home. Think of this like reversing the process of paying up your home loan - instead of reducing your loan, you're increasing the loan - which you'll get in the form of cash.

This method of leveraging on your asset (property) allows you to get extra cash to pay off expenses like your wedding, your child's education, or working capital for your business.

For those of you considering downgrading due to difficulties paying the monthly mortgage for your current home, you could also explore if refinancing could help your situation. This will benefit those who have been under less-favorable loan packages - which were more common during low-interest rate environments.


In Summary...

Downgrading your property marks a key change in your life, but you shouldn't sell your property and buy a new home hastily.

No matter if you're downgrading from a condo, an HDB, or even a landed property, learning the common mistakes made by other downgraders can put you in an assured position to make the right move.


Still unsure about whether you should downgrade, or how to start planning for it? Download our Downgrader's Checklist, or reach out to us for a chat!


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