After months of searching, you finally find a property that meets your requirements. You negotiate with the seller, agree on a purchase price and obtain the Option to Purchase. However, when the bank conducts its valuation, the property is valued below the price you have agreed to pay.

 

This situation can be worrying, especially if you were planning to take the maximum housing loan and use your CPF savings for most of the downpayment.

 

In Singapore, banks generally calculate the maximum home loan based on the lower of the property’s purchase price or the bank’s valuation. Therefore, if the bank valuation is lower than the agreed purchase price, your maximum loan may be reduced. The difference may also have to be covered using additional cash.

 

A similar concept applies when purchasing an HDB resale flat. When the agreed resale price is higher than HDB’s valuation, the difference is known as Cash Over Valuation, or COV. This amount must be paid in cash and cannot be covered by an HDB housing loan, bank loan or CPF savings.

 

Understanding how property valuation works before exercising the Option to Purchase can therefore help you avoid an unexpected cash shortfall.

 

What Is a Property Valuation?

A property valuation is an assessment of how much a property is reasonably worth in the current market. For a private property purchase, the valuation is normally carried out by a professional valuer recognised by the bank.

 

The valuer may consider recent transactions within the development or surrounding area, the property’s floor level, facing, size, condition, layout, remaining lease and other characteristics. The valuer may also take into account current property market conditions.

 

The final valuation does not necessarily follow the seller’s asking price or the price agreed between the buyer and seller. A seller may ask for a premium because the unit is renovated, has a desirable view or is rarely available. However, the bank’s appointed valuer may not recognise the full value of these features.

 

For HDB resale flats, buyers who are using CPF savings or taking a housing loan will generally need to submit a Request for Value. The value provided will form the basis for CPF usage and may also be used as a reference when determining the housing loan amount.

 

How a Lower Bank Valuation Affects Your Maximum Home Loan

For a bank loan, an eligible borrower may generally obtain financing of up to 75% of the lower of the purchase price or bank valuation, subject to the applicable Loan-to-Value limit.

 

However, receiving an In-Principle Approval for a certain loan amount does not guarantee that the entire amount will be available for a particular property. The final loan remains subject to the property valuation, the buyer’s financial assessment, Total Debt Servicing Ratio, Mortgage Servicing Ratio where applicable, loan tenure and the bank’s internal credit criteria.

 

Suppose you agree to purchase a condominium for $1.5 million. You expect to obtain the maximum 75% loan, which would be $1.125 million.

 

However, the bank values the property at only $1.44 million.

 

The maximum loan would then be calculated as 75% of $1.44 million, giving you a maximum loan of $1.08 million.

 

Instead of receiving the expected $1.125 million loan, you would receive $1.08 million. Your available loan is therefore reduced by $45,000.

 

This $45,000 reduction does not mean that the valuation difference is only $45,000. The actual difference between the purchase price and valuation is $60,000. However, because the bank was only financing 75% of the property value in the first place, the reduction in loan works out to 75% of the $60,000 valuation shortfall.

 

You must still complete the purchase at the agreed price of $1.5 million. As a result, your total downpayment increases from the expected $375,000 to $420,000.

 

Can CPF Be Used to Cover a Property Valuation Shortfall?

CPF Ordinary Account savings may generally be used for a property purchase up to the applicable CPF housing withdrawal limits. One of the main reference points is the lower of the purchase price or the property’s valuation at the time of purchase.

 

This means that when the purchase price exceeds the valuation, CPF savings generally cannot be used to pay the amount above valuation. The valuation shortfall will therefore have to be paid in cash. CPF usage may also be further restricted where the remaining property lease does not cover the youngest buyer until age 95.

 

Using the earlier example, the condominium is purchased for $1.5 million but valued at $1.44 million.

 

The $60,000 difference between the agreed purchase price and valuation would have to be covered in cash. You must also satisfy the minimum cash downpayment applicable to a bank loan.

 

Based on a 75% loan against the $1.44 million valuation, the loan would be $1.08 million. The remaining 25% of the valuation is $360,000. At least 5% of the valuation, or $72,000, would normally have to be paid in cash, while the remaining $288,000 may be paid using CPF savings or cash, subject to CPF rules and availability.

 

On top of this, the $60,000 amount above valuation must be funded in cash.

 

Your minimum cash contribution could therefore increase to approximately $132,000, comprising the $72,000 minimum cash downpayment and the $60,000 valuation shortfall. This is before considering stamp duties, legal fees and other transaction expenses.

 

CPF savings may be used for permitted costs such as stamp duty and legal fees, subject to the applicable CPF usage conditions. However, buyers should not assume that all available CPF savings can automatically be applied to the purchase.

 

What If the HDB Valuation Is Lower Than the Purchase Price?

When purchasing an HDB resale flat, the buyer and seller first negotiate and agree on the resale price. After the seller grants the Option to Purchase, a buyer who intends to use CPF savings or take a housing loan will need to request a valuation through HDB.

 

If HDB’s valuation is lower than the agreed resale price, the difference is known as Cash Over Valuation.

 

For example, suppose you agree to purchase an HDB resale flat for $650,000. HDB subsequently values the flat at $620,000.

 

The Cash Over Valuation is:

$650,000 minus $620,000 = $30,000.

 

The $30,000 COV must be paid in cash. It cannot be financed through an HDB housing loan or bank loan, and CPF savings cannot be used to pay it. HDB’s payment planning information specifically states that COV must be paid in cash.

 

The valuation will also affect the maximum housing loan available.

 

If you qualify for an HDB housing loan with a maximum 75% Loan-to-Value limit, the loan will be calculated using the lower of the resale price or market valuation. In this example, it would be based on the $620,000 valuation.

 

The maximum HDB loan would therefore be:

 

75% of $620,000 = $465,000.

 

The remaining amount required to complete the $650,000 purchase would be $185,000. This would consist of the $155,000 downpayment based on 25% of the valuation, together with the $30,000 COV.

 

The $155,000 may generally be paid using CPF savings or cash, subject to the buyer’s CPF availability and applicable housing rules. However, the $30,000 COV must be paid in cash. The actual HDB loan offered may also be lower than 75% because it remains subject to HDB’s credit assessment, the buyer’s income, age, financial commitments and MSR.

 

HDB Bank Loan When the Valuation Is Lower Than the Resale Price

The cash requirement may be higher if you are using a bank loan to purchase the HDB resale flat.

 

Using the same example, the agreed resale price is $650,000 and HDB’s valuation is $620,000.

 

At a maximum Loan-to-Value ratio of 75%, the bank loan would be limited to $465,000. The remaining 25% of the $620,000 valuation is $155,000.

 

Of this amount, at least 5% of the lower purchase price or valuation must be paid in cash. In this example, 5% of $620,000 is $31,000. The remaining 20%, amounting to $124,000, may generally be paid using CPF savings or cash.

 

The $30,000 COV must then be added to the minimum cash downpayment.

 

The buyer may therefore need at least $61,000 in cash, consisting of the $31,000 minimum cash downpayment and $30,000 COV. This excludes the option fee, stamp duty, legal fees and other purchase-related costs. HDB’s current guidance states that the minimum cash payment for a bank-financed resale purchase is based on the lower of the resale price or value of the flat.

 

Does a Lower Valuation Reduce Buyer’s Stamp Duty?

A lower bank or HDB valuation does not reduce your Buyer’s Stamp Duty.

 

Buyer’s Stamp Duty is calculated based on the higher of the property’s purchase price or market value. Additional Buyer’s Stamp Duty, where applicable, is also computed based on the higher of the purchase price or market value.

 

If you purchase a property for $1.5 million and the valuation is $1.44 million, the Buyer’s Stamp Duty would generally be calculated using the higher $1.5 million purchase price.

 

This can create a double impact for the buyer. The lower valuation reduces the amount that the bank is prepared to lend, but stamp duties continue to be calculated using the higher purchase price.

 

Buyers should therefore include the full stamp duty amount in their financial planning instead of assuming that the duty will fall together with the bank valuation.

Why Can Different Banks Give Different Property Valuations?

A property valuation is a professional assessment rather than a guaranteed selling price. Different banks may use different valuation firms, comparable transactions and assessment methods.

 

As a result, one bank may value a property slightly higher or lower than another bank.

 

The difference may be relatively small in a development with many recent transactions involving similar units. However, valuations may vary more significantly for landed properties, boutique developments, unusual layouts, very large units, older properties or units with few recent comparable transactions.

 

A recent transaction within the same development also does not guarantee that your property will receive the same valuation. The units may have different floor levels, views, sizes, orientations, conditions or remaining leases.

 

Banks may also take a more conservative position where the agreed purchase price appears significantly higher than recent transactions.

 

Can You Appeal Against a Low Bank Valuation?

You may ask the bank or mortgage adviser whether the valuation can be reviewed. Supporting information may include recent comparable transactions, details of the unit’s floor level, unique features or evidence that the valuer has relied on an unsuitable comparison.

 

However, there is no guarantee that the valuer will revise the figure.

 

You may also approach another bank. Since banks may use different valuation panels, another bank could produce a different valuation. However, buyers should not assume that a second valuation will definitely be higher. Multiple valuers may arrive at similar conclusions if recent market evidence does not support the agreed purchase price.

 

It is also important to consider the full home loan package instead of choosing a bank based only on the highest valuation. Interest rates, lock-in period, repricing options, partial repayment conditions, legal subsidies and long-term flexibility may be equally important.

What Should You Do Before Exercising the Option to Purchase?

Where possible, buyers should obtain an indicative bank valuation before committing themselves fully to a private property purchase.

 

An In-Principle Approval assesses how much you may be able to borrow based mainly on your income and financial commitments. It does not confirm that a bank will lend the full amount against every property. The final loan amount remains dependent on the property valuation and the bank’s approval.

 

For an HDB resale flat, the buyer can review the outcome of the Request for Value during the Option Period before deciding whether to exercise the OTP. An HDB OTP is generally valid for 21 calendar days, giving the buyer time to assess the valuation, financing and affordability before proceeding.

 

If the valuation is lower than expected, you can calculate the additional cash required and decide whether the purchase remains affordable.

 

You may also try to renegotiate the purchase price with the seller. However, the seller is not required to accept a lower price, especially if there are other interested buyers.

 

If the OTP has not been exercised, you may decide not to proceed, although the option fee paid may be forfeited according to the OTP terms. Once the OTP has been exercised, the purchase generally becomes legally binding. Buyers who are unable to complete may risk losing their deposit and could face further consequences under the contractual terms.

 

Where a material financing shortfall arises after exercising the OTP, you should speak to your conveyancing lawyer immediately.

Should You Proceed With a Property That Has a Low Valuation?

A valuation below the agreed purchase price does not automatically mean that the purchase is a bad decision.

 

You may be willing to pay a premium for a high-floor unit, unblocked view, desirable layout, extensive renovation, proximity to family or a location where suitable properties are rarely available.

 

For an HDB resale flat, some buyers may accept COV because a particular flat meets their long-term housing needs. HDB’s published resale statistics also recognise that some resale transactions are completed above market valuation.

 

However, the decision should be made with a clear understanding of the financial impact.

 

The additional cash used to cover the valuation shortfall cannot be reserved for renovation, emergency savings or other investment opportunities. A low valuation may also indicate that you are paying more than recent comparable transactions, which could affect your resale position if property prices do not increase.

 

The most important consideration is whether you can comfortably afford the additional cash without exhausting your emergency funds.

Plan Your Home Loan Before Committing to the Purchase

A lower property valuation can materially change your financing arrangement.

 

For a private property, it can reduce your maximum bank loan and require the amount above valuation to be paid in cash. For an HDB resale flat, the difference between the agreed price and HDB valuation becomes Cash Over Valuation, which must also be paid in cash.

 

The valuation shortfall may be manageable when the difference is small. However, for higher-priced properties, even a modest percentage difference can result in a substantial additional cash requirement.

 

Before exercising the OTP, buyers should confirm their loan eligibility, obtain an indicative valuation where possible, calculate the minimum cash and CPF required, and include stamp duty and legal expenses in the overall budget.

 

At FairLoan Mortgage Advisory, we assist buyers in comparing home loan packages across different banks, checking their loan eligibility and estimating the cash and CPF required for their property purchase. Proper financing preparation can help reduce the risk of discovering a major valuation or loan shortfall after you have already committed to the property.

 

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