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

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.

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/month for 30 years, and your spouse borrows $500,000 at 1.2% p.a. and pay $1,655/month.
  8. Immediately, you rent out that $800,000 unit for $2,000/month (fully paying off your mortgage).

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.

YouYour Spouse
Annual Income$60,000$40,000
Monthly Mortgage
(1.2% p.a.)
Monthly Mortgage
(4.25% p.a.)
How Much Mortgage Is Eating Up Your Monthly Income88.60%73.80%

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!

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.

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?

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.

But when the tides turn and you’re over-leveraged, 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.

This article was originally published on Ohmyhome.

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