Should You Upgrade When You Can?
Case 1: The Undecisive HDB Upgrader
Mr and Mrs Tan are 40 years old with 2 children. Currently, they are living in a 4 room BTO flat. After selling their house. They stand to make $200,000 in profit. Their combined income is $12,000 per month. They plan to upgrade to a resale 5 room flat worth about $500,000 and plan to fully paid it in 10 years time. What is their housing plan in 10 years time when they are 50 years old?Their 5 room resale flat will likely be valued at $610,000 (2% annually gain) They could make a paper gain of $110,000. If they plan to upgrade, they can loan up to 15 years only. They still can buy…..but at 50 years old to commit to a private property? Is that too late? Alternatively, they can chose to downgrade to a $400,000 HDB resale flat when they are 60 years old.
Case 2: The Decisive HDB Upgrader
Mr and Mrs Ong are 40 years old with 2 children. Currently, they are living in a 4 room BTO flat. After selling their house. They stand to make $200,000 cash. Their combined income is $12,000 per month. They plan to upgrade to a EC worth about $1,000,000 and plan to take a 25 years loan to finance it.
What is their housing plan in 10 years time when they are 50 years old?Their EC will likely be valued at $1.22mil due to inflation. (2% annually gain) At this age, they have the options to upgrade to another condo or downsize back to a HDB flat. They would have pocked a cool $220,000 from the EC and yet enjoy staying there for the last 10 years. (Compare $110,000 from buying HDB) Their retirement plan is on track. They can chose to retire anytime after 50 years old.
What can we learn from this 2 cases?
- No fix formula for upgrading what type of property type. Its boil down to personal preference.
- If you can upgrade, you should leverage on your loan but yet at the same time do not overstretch. Take calculated risk!
- The choice you make today will determine your family standard of living and your retirement plans down the road.
- Worst case scenario! Sell and profit the gain. What is the worst can happen anyway?
- Always keep 6 to 12 months of living expenses as contingency.
- Been too safe in approach may not always be the best for your family. No pain, no gain!