You know that period of time in your life when all your Facebook friends are taking turns to get married? I'm on the tail end of it, which means that my Facebook feed is currently filled with announcements about buying a house as a couple and then moving in. And babies. Non-stop babies. But that's a discussion for another day. Right now I want to focus about housing for a new couple in Singapore.
Unless husband and wife have had experience in the property market, chances are that they're both new to the concept of buying a house. It's ironic then that such a big financial decision - arguably the biggest commitment outside of marriage - is often made by two people who don't really know any better about what they're getting themselves into. The good thing is that there are means in which this process can be made less of a financial burden.
Use my CPF to help pay for my house? How's that possible?
We're not saying that you need to have accumulated almost a million dollars in your CPF account before you can think of owning a house. In fact, if you have been working for several years, chances are that you already have a substantial sum in your CPF Ordinary Account that you can use to buy a house. Let me explain.
Let's assume Ms Lee is currently 24 and is earning $2,500 a month. Since she's below 35 years of age, this is the breakdown of contributions to her CPF accounts:
The CPF Special Account is primarily set aside for retirement, and you cannot use the funds until you reach retirement age. The CPF MediSave Account is set aside solely for hospitalisation expenses and medical insurance purposes.
The Ordinary Account, on the other hand, can be used for a variety of purposes, such as insurance, investment and education. Almost all Singaporeans, however, use most of it to pay for their housing. So in Ms Lee's case, 23 per cent out of the total 37 per cent contributed is put into the Ordinary Account, or $575 each month.
In a year, assuming no bonuses, that's $6,900. In 5 years, assuming no bonuses and no change in salary, that's $34,500 in her CPF Ordinary Account. For simplicity's sake, let's assume Ms Lee then meets her special someone, and he conveniently also earns $2,500 a month and has accumulated $34,500 in his CPF Ordinary Account after 5 years as well.
Wow! $34,500 seems like a lot, but compared to the price of a house, it's not very much, is it?
However, let's look at just how much it costs Ms Lee and her fiance to buy a 4-room HDB flat in Sengkang, where the selling prices start from $267,000.
For ease of calculation, let's assume the flat costs $300,000 and that the flat has a lease balance of at least 60 years. Aside from peripheral costs like stamp duty and legal fees, the biggest initial cost is the down payment.
If you take an HDB housing loan, your down payment is at least 10 per cent of your purchase price. If you are ineligible for an HDB housing loan, or if you prefer to take a home loan from a bank, your down payment is at least 20 per cent of the purchase price, of which at least 5 per cent needs to be in cash. If we assume Ms Lee and her fiance choose the latter option, they will need to have at least $45,000 in their CPF, so that they will only need to pay $15,000 out of their pocket, and not put too much pressure on their monthly cash flow. If they choose to take an HDB loan, they will only need to pay a combined total of $30,000 for the down payment.
Although Ms Lee and her fiance are earning only $2,500 each per month, they already have a total of $69,000 in their CPF Ordinary Accounts after working for 5 years. This means that they have more than enough to pay for their flat's down payment. Getting a HDB concessionary loan means that besides paying the down payment, Ms Lee and her fiance are also required by HDB to use the balance of their OA savings towards the purchase.
So, they will wipe out their OA savings initially, but this also means that they end up borrowing less, subsequently paying less for their monthly repayments. And this is before even taking into account the grants available to them.
If that's the case, why don't they apply for a more expensive flat? Surely they could afford to?
While it's important to ensure that you have enough CPF savings for your down payment to avoid paying out of your pocket, it's also important to ensure that your monthly loan payment doesn't affect your cash flow. Understanding this, the government has introduced measures to limit the size of a housing loan that Singaporeans are eligible for.
The first of these regulations is the Mortgage Servicing Ratio of 30 per cent. This means that your monthly mortgage loan repayment should not exceed 30 per cent of your monthly salary. In fact, we believe that 30 per cent is already a generous limit.
A prudent gauge therefore, is to set aside 20 per cent to 25 per cent of your monthly salary at most for your home loan repayment. The ideal is to be able to fully pay off your home loan by the time you're ready to retire. In life, however, we cannot ensure that our monthly salary is consistent. By reducing the repayment commitment from the beginning, you are giving yourself more breathing room should anything happen to your ability to earn at any point in your life.
Remember that while you're below 35 years of age, your CPF Ordinary Account gets 23 per cent of your salary each month. As you get older, that drops to 21 per cent. Above 45years, less than 20 per cent of your salary goes into your CPF Ordinary Account. So if you set it at 20 per cent of your monthly income, you would be able to repay your home loan using your CPF Ordinary Account alone, without ever needing to pay off your loan in cash, whilst still earning some money in your CPF OA account.
There's also another benefit of keeping your monthly repayment amount low!
Taking on a home loan where your monthly repayment is 20 per cent to 25 per cent of your current monthly salary ensures that you'll be able to use most if not all of your CPF Ordinary Account to pay off your home loan. But as your monthly salary grows, this means that there will be enough funds in your CPF Ordinary Account for the other purposes mentioned above. Also, it's important not to forget that you continue to earn 2.5 per cent interest on the money inside your OA in excess of how much you are paying for your loan instalments, which means that you are able to grow your money while still paying off your home loan.
Ultimately, when you reach 55, the money in that account will be added to the money you've already set aside in the Special Account to form the Retirement Account. The amount in your Retirement Account determines how much you will get each month from CPF LIFE.
At the end of the day, as much as Singaporeans are focused on buying a dream house, it's important to have a more long-term mindset when it comes to managing your CPF money. There's really no point in sacrificing your future financial freedom to have a fancy house now. So by making the right decision when buying a house with your partner, and by understanding how your CPF can help you, you're also ensuring that you will have more funds set aside for your retirement.
This article first appeared on MoneySmart.
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