En bloc sales are not always a pot of gold. For a well-prepared investor or homeowner, this can be a smooth process. But homeowners, especially those who never intended to move, can experience an uncomfortable headache.
One of the main problems with timing is the proceeds from the sale: it can take a while to get the money off the block, and during that time you will still need a new home.
We spoke to Mortgage Master, a home loan specialist, about their top funding issues:
What is the main financing problem with an en bloc sale?
There are cases when the sales proceeds take longer than usual. An example of this is when a developer agreed to the deal but later wants to close it.
For example, a developer may not want the new development to start in a difficult time like the current Covid-19 environment. As such, they can agree to the en bloc purchase but don’t want to complete the transaction until 12 months later.
This can be a headache for some property owners, especially those who have not wanted to move for some time. If you recently bought the property and, for example, renovated it, you may not have the money to find a replacement home.
The other problem is that if you take out a new home loan while still paying the existing one, you may be servicing two home loans at the same time. Even if you can afford to get such a loan, it could put a significant strain on your finances.
David Baey, CEO of Mortgage Master gave us a few possible workarounds:
Don’t pay two mortgages at the same time
Before buying a replacement home, consider when your existing mortgage will be paid off. Otherwise, there might come a time when you are forced to service two home loans at the same time: one for the property you are buying and one for your existing home.
“Ideally, wait until you have about six months before expecting the proceeds from the en bloc sale,” says Baey. “Only then do you buy and complete the purchase of your next property.”
This is because you want to avoid the financial burden of paying back two mortgage loans (assuming you are still paying the loan on your en bloc property). “
In this context, one of the problems frequently addressed here is the reissue of the option to buy (OTP).
In the past, it was possible to lower the booking fee for a new starting apartment and have it repeatedly renewed by the developer when it expires. This was often used to “reserve” a unit while waiting for the proceeds of the previous home to be sold.
From September 2020 this will no longer be possible. Developers cannot repeatedly renew the OTP once it has expired. You can try to extend the OTP validity period to 12 weeks at most (from a maximum of eight weeks previously). URA must also approve such extensions.
This can make the timing problem more complex. Contact us if you need someone to guide you through the timing.
If you’re struggling to cover the down payment on your next property, consider a bridging loan
Note that for purchases of private property, the absolute minimum discount is five percent of the price or value, whichever is lower. If you already have an outstanding home loan, e.g. B. on your existing property, the required down payment can be up to 25 percent.
As a result, some homeowners waiting for a block could run into cash while trying to purchase a replacement unit.
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“Bridging loans are designed to help with the down payment to buy a property,” says Baey, if you haven’t received the proceeds from the sale.
“The interest rates for bridging loans are usually between 4.25 and seven percent,” says Baey to bank; So do your homework and get the black and white interest rates on offer before you make a decision . ”
Unfortunately, once you hear the whisper of a block, there is no hurry to get a bridging loan. You must first submit the sales order for the en-bloc to apply for a bridging loan. You will also need to provide evidence that the Strata Titles Board (STB) approved the block.
There are currently no bridging loans that last longer than six months
This can be problematic when an en bloc sale takes longer. You may want to raise the issue at Extraordinary General Meetings (EGM) when developers are demanding long waits of 12 to 24 months before the proceeds of the sale are released.
It’s not just the amount you agree to pay; It is also when they pay for it.
Another funding issue to consider is lifting your lockdown should you need to
Some home loan packages include thresholds and prepayment penalties if you try to pay them off early. One potential problem is that the en-bloc occurs during the embargo period. This can result in a prepayment penalty of up to 1.5 percent of the amount redeemed.
Baey says this:
“There are always ways around this as banks handle these on a case-by-case basis. The simplest method would be to secure a home loan with a waiver of a penalty for sale if you are expecting an en bloc soon. “
This type of waiver is stated in the terms of the home loan.
Some home loans state that there is no penalty if the loan is repaid early due to the sale of the property (this applies to both retail and “normal” sales).
There are also partial waiver home loans (e.g. no penalty for the first $ 150,000 if you redeem the loan early). However, it is better to get a loan package with a complete waiver of the sale if you are expecting an en bloc soon.
“Alternatively, if you want to take out a loan for your next home purchase, you can get it from the same bank you are with,” says Baey. “However, request a discount or penalty waiver on your current loan.”
If the stars match, then the bank you are with is also offering decent loans at that time. Chances are, however, that your existing bank only offers expensive loan packages. In these cases, the waiver may not be worth it. It is wise to hire a mortgage broker to figure out the numbers for you before making your decision.
Also, don’t stop refinancing yourself to a cheaper loan when you can, just from en bloc attempts
Refinancing typically costs between $ 2,500 and $ 3,000. As a result, some homeowners feel that if there is an en bloc discussion going on, they shouldn’t care. However, Baey suggests otherwise:
“It’s not entirely true. You should refinance if your current interest rates are well above the market average. For example, if you pay 2.5 percent, you can refinance at a 1.25 percent package.
The key is to get a package that includes a waiver of the sale penalty offered by several banks. “(For the reasons explained above).
Check out the timeline for buying a new home when the en bloc trials begin
Whether or not the en bloc attempt is successful, it is best to be prepared. Remember that when you have an 80 percent majority, the decision to move is not in your hands. It will happen.
We know homeowners who start budgeting early on and manage to get a new property without the help of a bridging loan.
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Also note that the Sellers Stamp Duty (SSD) applies to en bloc sales. SSD is used if the en-bloc occurs within the first three years of purchase.
The SSD accounts for 12 percent of sales in the first year, eight percent in the second year, and four percent in the third year. Take these costs into account when setting the budget for your next home.
Contact us if you are concerned about persistent en bloc attempts and we can help you prepare for the transition.
This article was first published in Stackedhomes.
