New launch vs. Resale condo payment schedules: What’s the difference?

There isn’t a need for another “pros and cons” article on this, so let’s focus on the con that they both have. Which is, you know, having to pay out the wazoo for either of them. As you may expect, how you pay for your million-plus dollar purchase is going to have a massive effect on your finances. Both new launch and resale condos can have different payment schemes, but one may be a bit more comfortable than the other:

 

The standard payment schedule for buying a resale condo

Unlike developers, sellers of resale properties want/need your money much more quickly. This is the general process for resale condos:

• Pay 1% deposit (i.e. the booking fee) to obtain the Option to Purchase (OTP) from the seller
• Sign the OTP with the 14-day deadline and pay the remaining deposit of 4% (i.e. the option fee). Both booking and option fees are to be paid via cash/cheque/cashier’s order
• Pay various stamp duties (Buyers Stamp Duty / Additional Buyers Stamp Duty) within 14 days of exercising the option
• On completion date, which is about eight weeks’ time, pay the remaining downpayment (for those with no outstanding home loan, this would mean 25% minus booking and option fees already paid)

You’ll start making home loan repayments the same month that the bank disburses the remaining funds for the property.

The Progressive Payment Scheme for new launch condos

The Progressive Payment Scheme (PPS) is used when the new condo hasn’t been built yet. As the name implies, the payment increases progressively as more of the development is completed. Buyers get what is known as a Building Under Construction (BUC) loan, from the same bank that you’ll be using for the mortgage.

Before the BUC loan, the interested buyer pays a 5% option fee in cash. In return, the developer issues the buyer the Sales & Purchase Agreement (S&PA).

After the signing of the S&PA, the buyer pays the remainder of the downpayment and the stamp duties applicable within eight weeks, and then the BUC loan begins.

Under the BUC loan, funds are disbursed from your home loan as follows, and buyers pay a monthly installment which gradually increases at every stage:

• Laying of foundation: 10% of purchase price disbursed
• Completion of superstructure: 10% of purchase price disbursed
• Partition walls completed: 5% of purchase price disbursed
• Ceiling / roofing completed: 5% of purchase price disbursed
• Electrical works and plumbing completed: 5% of purchase price disbursed
• Car parks, drain works, and roads finished: 5% of purchase price disbursed

At this point, construction is mainly done.

The next 25% of the purchase price is disbursed upon receipt of the Temporary Occupancy Permit (TOP), and the final 15% upon receiving the Certificate of Statutory Completion (CSC).

Note that the process is not exact; it’s possible, for example, for the laying of foundation and completion of the superstructure to both happen at once. Likewise, there’s no definite time for the completion of any particular phase, as it varies between developments.

The funds are disbursed from the bank within 14 days of a particular phase being completed, but this isn’t something you have to manage. You’ll just get a letter informing you when another phase is completed, and that your home loan repayment for the coming month will be increased.

Due to the progressive nature of PPS, you will pay less towards your home loan in the initial stages. For example, your home loan repayment may only be $800 a month until the foundation is laid; but it becomes $1,500 a month after the walls are complete, $1,700 after the ceiling is complete, etc. You’ll be paying the full monthly amount once the development has received the CSC. By then you would’ve already gotten your keys.

 

So, what are the key differences?

• The PPS gives you more time before paying the full loan amount
• The PPS offers more protection from non-completion
• With an under-construction property, there’s no rental income to offset the loan until completion
• Payment schedules are a bit more predictable for resale units

1. The PPS gives you more time before paying the full amount

The biggest draw regarding the PPS is the long period in which the buyer is paying less. It typically takes two to three years to complete the property (i.e. obtain the TOP at least). In that time, the lower monthly repayments allow you to save up more as a buffer, have more to invest, etc.

Resale condos don’t give you that “break”, as you start repaying the full loan amount from completion onwards.

 

2. The PPS offers more protection from non-completion

This is unnecessary for resale condos, which are already complete. But one of the main goals of the PPS is to spare you the financial damage of a developer that can’t complete the project. While this is rare in Singapore, it has happened before: Sycamore Tree and Laurel Tree are both condo projects in which the developer failed to complete, causing buyers much anguish.

If you were to use the regular loan repayment scheme, you’d run the risk of being saddled with the full loan amount even if the developer stalls or fails to complete the project.

(Note: your bank has already disbursed the full amount to the developer, so you can’t stop repaying your bank even if the developer decides to be a fly-by-night).

 

3. With an under-construction property, there’s no rental income to offset the loan until completion

Just a quick reminder that with condos under construction, there’s nothing to rent out. This does affect payment issues, since buying a resale condo can mean you immediately start renting it out, and offsetting the mortgage with it. In fact,you can even buy resale properties that are already tenanted, so rental income is covering loan repayments from day one.

If your intention for buying is to rent out the unit as a landlord-investor, don’t overlook this. No matter how much cheaper PPS is at the start, it’s not going to give you rental returns for some time.

 

4. Payment schedules are a bit more predictable for resale units

With resale condos, home loan repayments can fluctuate due to changing interest rates (this depends on your home loan package). But with PPS, you have to contend with both changing repayment amounts following completion, as well as changing interest rates.

This can result in some unpredictable surges. For example, say you have a floating rate home loan and it rises at the end of the first year. At the same time, your developer completes multiple phases in a very short time. This can cause your home loan repayments to rise at a significantly higher pace than in the preceding months.

Likewise, there can be a big jump in loan repayment amounts by the time the TOP is granted. Interest rates can fluctuations over two or three years, and the short span of time between the disbursement of 25% (upon TOP) and then 15% (upon CSC) can result in a spike in monthly home loan installment amount!

This is not to say PPS is cheaper or more expensive. In the end things mostly even out, but the uncertainty can make financial planning a little bit more difficult.

So is a new launch or resale condo easier on my wallet?

The answer is neither, it just depends on your cash flow situation. If you want to pay less at the start, then a new launch condo with PPS can help with your cashflow. Conversely, if you’re a pure investor and want to minimise expenses, then perhaps a property you can rent out asap should be the priority.

 

Check out this latest other article about home loan interest rates: US Fed pledges “near zero” rates through 2022. How will home loans respond?

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