Buying New Properties With the Progressive Payment Scheme in Singapore

Looking to purchase a new launch property in Singapore, and are still considering your loan options? The Progressive Payment Scheme (PPS) can be a game-changer for managing your finances. Read on to understand how the Progressive Payment Scheme works, the benefits and challenges, as well as some key considerations before you commit.

What is the Progressive Payment Scheme Under The BUC Loan?

The Progressive Payment Scheme is a unique financing arrangement used when purchasing Buildings Under Construction (BUC) in Singapore. It allows you to stagger your payments for the property based on the progress of construction, rather than paying the full amount upfront.

Here's how it works:

• Funding for Unbuilt Properties: The Progressive Payment Scheme is specifically designed to fund properties that haven't been built yet. This helps both buyers and developers manage their cash flow during the construction phase.
• Phased Payments: Instead of a lump-sum payment, you make payments in stages, aligned with key construction milestones. These milestones typically include the completion of the foundation, superstructure, roofing and final handover.
• Disbursement According to Construction: A significant portion (usually 80%) of the property price is paid over time as construction progresses. This means you only pay for completed work, reducing your financial burden in the initial stages.

What Are the Key Stages of the Progressive Payment Scheme

The Progressive Payment Scheme breaks down your payment for a new launch property into manageable stages, aligned with the progress of construction. This helps you spread out your financial commitment and reduces your upfront costs. Here's a typical progressive payment schedule in Singapore:

Initial Stages

• Booking and Option to Purchase (OTP): You start by paying a booking fee (usually 5% of the purchase price) to secure the Option to Purchase (OTP). This fee is typically non-refundable.
• Mortgage Loan Selection and Conveyancing: Once you have the OTP, you'll need to secure a mortgage loan and engage a conveyancing lawyer. 
• Buyer's Stamp Duty (BSD) and Additional Buyer's Stamp Duty (ABSD): You'll need to pay these stamp duties within two weeks of signing the Sales & Purchase Agreement (S&P).
• Downpayment: The remaining portion of the down payment (usually 15%) is due within eight weeks of the OTP date.

Foundation Work Completion Phase

• A payment (typically 10%) is made upon completion of the foundation work for the property. This marks the start of the construction phase.

Construction Phase

The remaining payments are made in stages as the construction progresses. These stages typically include:

• Completion of the structural framework
• Completion of partition walls
• Completion of roofing/flooring
• Completion of windows/door frames, electrical wiring, plumbing, and internal plastering
• Completion of external works like car parks, roads, and drainage

Temporary Occupation Permit (TOP) to Certificate of Statutory Completion (CSC) Stage

• Temporary Occupation Permit (TOP): A significant payment (usually 25%) is made when the TOP is issued, allowing you to move into the property.
• Certificate of Statutory Completion (CSC): The final payment (usually 15%) is made upon the issuance of the CSC, marking the legal completion of the project.

For a more detailed overview of the timeline and payments required, you may refer to the image below: 

Benefits of the Progressive Payment Scheme

The timeline of the Progressive Payment Scheme offers several advantages for those looking to purchase a new launch property in Singapore:

Better Cash Flow Management

One of the biggest advantages of the Progressive Payment Scheme is that it allows for better cash flow management. Instead of paying a large sum upfront, you can spread your payments over the construction period, which is typically 2-3 years. This can be particularly beneficial for first-time homebuyers who may still be servicing other financial commitments, such as student loans or car loans.

Lower Initial Down Payment

With the Progressive Payment Scheme, you typically pay a lower initial down payment compared to buying a completed property. This can free up funds for other purposes, such as furnishing your new home or investing. For example, if you're buying a new launch condo under the Progressive Payment Scheme, you might only need to pay 20% upfront, compared to 25% for a resale condo.

Developer Accountability

The Progressive Payment Scheme incentivises developers to adhere to the construction schedule. Since they receive payments only upon reaching specific milestones, they are motivated to complete the project on time. This provides a degree of assurance to buyers that their property will be delivered as planned.

Risks of the Progressive Payment Scheme

While the Progressive Payment Scheme offers several advantages, it's also essential to be aware of the potential risks involved:

Project Delay

One of the main risks with the Progressive Payment Scheme is the potential for project delays. While developers are incentivised to complete projects on time, delays can occur due to various factors such as:

• Insufficient Sales: If the developer doesn't achieve a certain sales threshold, they might delay construction to manage their financial risk.
• Contractor Issues: Problems with contractors, labour shortages or material supply chain disruptions can also lead to delays.

Such delays can have the following consequence:

• Disruption To Your Plans: You might have to wait longer to make your payments and move in, potentially affecting your financial and other plans made based on the expected completion timeline.

Quality Concerns

When buying a BUC property, you're essentially purchasing a plan. The final product might not perfectly match your expectations or the marketing materials. There's also a risk of potential construction defects or variations from the original specifications.

Risk of Project Cancellation

In rare cases, projects can be cancelled due to unforeseen circumstances, such as the developer's financial difficulties or regulatory issues. This can lead to significant financial losses for buyers.

Uncertainty on Rental Yield

If you’re buying a second property (which has its own pros and cons) or an additional property for investment purposes, there's uncertainty about the rental yield you can achieve. Market conditions can change during the construction period, affecting rental demand and potential returns.

Interest Rate Volatility

Since most BUC loans have floating interest rates, you're exposed to interest rate fluctuations. If interest rates rise during the construction period, your monthly repayments could increase, impacting your affordability.

Key Considerations Before Taking Up a Progressive Payment Scheme

Before committing to the Progressive Payment Scheme, it's crucial to carefully evaluate your situation and understand the implications. Here are some key considerations:

Personal Financial Planning 

Assess your current financial situation and long-term financial goals. Consider your income stability, existing financial commitments and how a progressive payment schedule will impact your cash flow and budget. Ensure you have sufficient funds for the down payment and subsequent instalments, factoring in potential interest rate increases and other unforeseen expenses.

Marketing Environment and Interest Rate Environment

Research the current property market and interest rate trends. Understand how market fluctuations could impact your investment and the potential for capital appreciation. Consider whether a fixed or floating interest rate is more suitable for your risk tolerance and financial goals.

Housing Developers Reputation

Choose a reputable developer with a proven track record of completing projects on time and to a high standard. Research the developer's past projects, financial stability and customer satisfaction ratings. This can help mitigate the risk of project delays or quality issues.

Other Available Options 

While the Progressive Payment Scheme is a common option for new launch properties, consider other payment schemes that might be available, such as the Deferred Payment Scheme (DPS). Evaluate your financial compatibility with each option, considering the payment timelines, interest accrual and potential risks. Choose the scheme that best aligns with your financial situation and risk tolerance.

Comparing the Progressive Payment Scheme and a Normal Loan

Here is a summary table comparing the differences between the Progressive Payment Scheme and a normal loan: 

The Bottom Line: 

• The Progressive Payment Scheme Can Be Used If: You're buying a Building Under Construction (BUC) property.
• A Normal Loan Can Be Used If: You're buying a completed property (e.g., resale condo).

Common Misconceptions About the Progressive Payment Scheme

The Progressive Payment Scheme can be a great option for financing a new launch property, but it's important to understand how it works to avoid any misconceptions. Here are some common myths:

“You Only Start Paying Once the Property is Completed"

This is incorrect. With the Progressive Payment Scheme, you start making payments much earlier, typically within a few weeks of booking the property. The initial down payment and stamp duties are due before construction even begins. Subsequent payments are then staggered based on construction milestones.

"Progressive Payment Scheme Loans are Interest-Free Until Completion"

While you might have a lower initial repayment amount under Progressive Payment Scheme, interest still accrues on the disbursed loan amount. This means you'll start paying interest from the first disbursement, even though the property isn't completed yet.

"The Progressive Payment Scheme is Always More Affordable than a Normal Loan"

The Progressive Payment Scheme can be more manageable in terms of initial cash flow, but it might not always be more affordable overall. Due to the interest accrual on disbursed amounts, the total interest paid over the loan tenure could be higher compared to a normal loan for a completed property.

"Progressive Payment Scheme Allows You to Delay Financial Planning"

The Progressive Payment Scheme doesn't mean you can postpone financial planning. In fact, it requires careful planning to ensure you can meet the payment obligations at each construction stage. You need to factor in potential interest rate increases and other unforeseen expenses.

"Progressive Payment Scheme Is Only Beneficial for First-Time Buyers"

The Progressive Payment Scheme can benefit both first-time buyers and seasoned investors. While it can be particularly helpful for first-time buyers managing their initial finances, it can also be advantageous for investors looking to leverage their capital. This is due to the possibility of them benefitting from capital appreciation during the construction phase.

Should I Take Up the Progressive Payment Scheme?

Like any financing option, the Progressive Payment Scheme has its own set of advantages and disadvantages. The best choice for you depends on your individual circumstances, financial goals and risk tolerance. 

If you’ve already asked yourself the three essential questions before buying a new home, and are still unsure about whether the Progressive Payment Scheme is the right choice for you, it's always best to seek professional advice. A mortgage specialist can help you assess your financial situation, compare different loan options and guide you towards the best decision for your needs.

Contact Mortgage Master today for a consultation with our experienced mortgage advisors in Singapore. We can help you navigate the complexities of property financing, and find the best solution for your unique circumstances!

References

1. DBS
2. Money Smart
3. Decoupling Expertise