One simple way HDB could stop your flat being a money trap (but won't)

Have you ever heard of cash-out refinancing (aka a reverse mortgage)? No? Then chances are you live in an HDB flat, where "cash-out refinance" is an impossibility; you can only do it with private property. The problem is, for a certain segment of Singaporeans, that just turns their entire HDB flat into a gigantic money trap. Here's how the lack of a cash-out refi can screw them over:


What is this cash-out refinancing thing, anyway?

Cash-out refinancing is an option open to private property owners, who have fully paid off their home.

If they're ever in need of cash, they can use their paid-up house as collateral for a super-low interest rate loan; much cheaper than the credit lines or personal loans typically offered by banks. The interest rate on a cash-out refi is seldom more than 1.6 per cent per annum, even lower than the original HDB loan (2.6 per cent per annum). The amount that can be borrowed is also much higher, compared to most bank loans. For example, a retiree can borrow up to 50 per cent of their home value, without having to meet loan curbs such as the Total Debt Servicing Ratio (TDSR).

Because the interest rate on cash-out refinancing is so low, it provides a rare opportunity for Singaporeans to grow their wealth. Consider that even simple financial products, such as an endowment policy, provides returns of three to four per cent per annum. This is much higher than the interest rate on a cash-out refinancing loan. You can read more about Refinance with Cash out in our article on how to use cash-out refinancing.

Since HDB is so reluctant to let you do this with flats, however, it results in a number of bizarre scenarios; all of which end in mostly unnecessary pain.

Situation 1: You have to sell your house to pay bills, even if moving is not ideal at your time of life

Let's say someone you care about – a spouse, sibling, or child, is faced with serious medical costs. Their insurance coverage or MediSave has run out, and you need $50,000 for their medical care.

As a retiree, you no longer have a monthly pay cheque. You can't even take a loan from the bank, as you have no income. What you do have, however, is a fully paid up HDB flat. You purchased it for $400,000 many decades ago, and now it's appreciated to well over $650,000.

Guess what you can do with such an asset:


What exactly are you going to do? Call the hospital and tell them "Hey, I have no money, but I have a FULLY PAID UP FLAT. You'll do the operation because of that, right?"

The only way to unlock the money you need is to sell the HDB flat. That's easier said than done. By that point you may have lived in your neighbourhood for 30 years. All your friends are there, and it's the area you've grown familiar with. You probably also don't want to have to go house hunting, and have all your furniture and stuff shifted out. Or maybe, you just don't want to leave, given that you've raised your family under that roof, and spent your life paying for it.

Well if you could get a cash-out refinancing home loan – just like what any private property owner could do – you wouldn't have to sell. You wouldn't even need 50 per cent of your flat value – 10 per cent is more than enough to pay for everything. But because you can't use cash-out refinancing, too bad; you need to sell your entire flat and move out, to provide for someone you care about.

Situation 2: If you need a loan, you have to take an unnecessarily expensive one

Let's say you're 45 years old, and due to prudent financial management, you've managed to pay off your flat in full. Now, you dream of going on an important trip, like a religious pilgrimage; or perhaps you want to fund your child's education abroad, or provide capital for their business venture.

As you still have some income sources, and your children can pitch in to help you repay loans, a cash-out refi would be ideal. You could borrow a significant amount, without having to sell your house. And with the interest being so low, repayments would be more than manageable.

But wait: you have a flat, not a private property. So now, you can go ahead and use expensive personal loans, instead of a cash-out refi. Instead of paying 1.6 per cent interest, you might get a personal loan at six to nine per cent per annum. You would be paying more than triple the interest rate.

After a while, your fully paid-up flat just looks like the world's most ridiculous bank vault. Your money is so tightly locked up in it, even you can't get it out.

Situation 3: It really drives home the whole "inequality" situation

Let's be brutally frank: there's a gigantic wealth divide in Singapore, and it's already obvious when you look at the condo across the street. People who can afford private property already have an advantage – that they're able to unlock their home value without selling, whereas HDB dwellers can't, just rubs salt into the whole thing.

We're not saying HDB needs to allow cash-out refinancing overnight. There have to be some controls, and they should allow it only in reasonable situations (there's always oneidiot who will try and cash-out refinance so he can buy a BMW). But there's no reason to cut off HDB dwellers from this form of financing altogether, and force them into selling their home to unlock its value or worse, many actually have to borrow from more costly money lenders. Is this fair?

Paul Ho
MBA Macq. B.Eng(Hons). ACTA Certified Trainer
Chief Mortgage Consultant 
– I CompareYou Save!

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