Smaller down payment for BTO flats should not be the motivation for students to buy

Apr 1, 2024

HOUSING may not be something that is on top of couples’ minds while they are still studying, but the latest changes to the Build-To-Order (BTO) scheme by the Housing and Development Board (HDB) could spur more couples to start planning ahead.

Among a series of changes made to improve housing affordability, the Ministry of National Development said that it would halve the initial down payment for BTO flats for couples who qualify for the deferred income assessment. Eligible couples will pay a 2.5 per cent down payment on their flat when they sign their lease agreement.

To qualify for deferred income assessment, couples must be current full-time students, recent graduates or national servicemen. At least one party must be aged 30 or below, and the couple must be married or applying for a flat under the Fiance-Fiancee Scheme.

This means that an undergraduate couple buying a S$500,000 flat will only need to fork out S$12,500 instead of S$25,000 after booking a flat, excluding other miscellaneous fees.

Mortgage Master chief executive David Baey said that the halving of the down payment will likely allow more couples who are of a lower socioeconomic status to apply for BTO flats sooner, since couples from higher-income households can typically get their parents to fund their down payment.

“You’re actually opening the door to anyone who is in tertiary education…to apply for a BTO (flats),” he said.

Perhaps youths should take the leap and apply for BTO flats. However, the opportunity cost of paying S$12,500 upfront is significant.

Just by leaving that sum in their CPF Ordinary Accounts for five years, they could earn an additional S$1,643.

The total return of the MSCI World Index over the last five years was even higher, at 12.2 per cent. There are no guarantees that the market’s current bull run will persist in the next five years, but at this rate, investors could receive an additional S$9,727 in returns.

What are the risks of applying sooner then? The largest risk would probably be if a couple breaks up.

The costs differ depending on when a couple breaks up.

OrangeTee Group chief researcher and strategist Christine Sun noted that since the August 2023 BTO exercise, couples will be considered second-timers for a year if they are invited to book a flat but do not do so.

“(The lower down payment) is just a sweetener, but I don’t think it will cause the application rates to spike. It’s just to help a small group of people who are sitting on the fence and they feel like this will help them,” she said.

First-timer couples have a much higher chance of securing a flat as they receive three ballot chances for any flat type in any estate, compared to just one ballot chance for second-timer couples.

If a couple signs the lease agreement and breaks up subsequently, they will forfeit the down payment on the flat, as well as any legal fees paid for the transaction. Notably, the down payment that a couple could lose under the new scheme is halved, which could further encourage couples to sign up, knowing that they have less to lose.

Still, they will also face a wait-out period of one year when they will not be able to apply for a new flat or a resale flat with CPF housing grant, among other restrictions.

As couples become more aware of the HDB’s Staggered Downpayment Scheme, it could motivate more couples to seriously consider marriage.

Yet, I have personally observed school couples break up after they graduate and start working. As more stressors emerge, couples will need to adapt to pressures that they may not have felt when they were studying.

It is all well and good to encourage couples to apply for flats sooner, but the whole impetus to do so is still largely due to the fact that BTO flats take years to be built.

The average waiting time for HDB flats has come down in recent BTO exercises, but it remains a concern for many.

Instead of gambling with their own readiness, perhaps it may be more prudent for couples to BTO later and rent a flat in the meantime, or consider resale flats.

Since last year, eligible first-timer buyers of two to four-room HDB resale flats can receive S$80,000 in grants, up from S$50,000 previously.

It may not be feasible for some couples to continue waiting for BTO flats after they have graduated, but that may be a wiser choice than subjecting such bets to the vagaries of life.

And if you are just thinking about buying a house after this lowering of down payment for BTO flats was announced, I would suggest that you are not the right audience for the scheme.