How CPF can make your home purchase more affordable

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.

What type of property in Singapore should you buy

  • Buying property is a long term investment. When you're thinking of diving into real estate investment, it's better gather as much information on it as possible.
  • Just like in any part of the world, having a private property is a good decision as there are many benefits. For instance, the property cycle in Singapore over the last years indicates that there is a steady rise in real estate's value.
  • Alternatively, real estate investment can be a source of passive income. You can purchase a property and rent it out.
  • Hougang Capeview BTO flats

    BTO comes under the Housing and Development Board (HDB), Singapore. It's a responsive system, which allows Singaporean citizens to apply for flats at a location of their choice.

  • BTO flats at Sky Terrace@Dawson

    Once 65-70 per cent of the flats are booked, the construction work begins.

  • Tampines GreenLace BTO flats

    After the construction is completed, you will have to wait for some time before you can move in.

  • Pasir Ris One DBSS project

    Design, Build, and Sell Scheme (DBSS) is an incentive of the HDB system. DBSS is public housing scheme developed by private developers.

  • City View @ Boon Keng DBSS project

    The DBSS scheme offers more comfortable designs and better locations.

  • Executive Condominium

    Executive Condos (ECs) caters to young graduates and professionals who wants a property in between public and private housing.

  • Executive Condominium

    ECs are comparable in design and facilities to private condominiums as they are developed and sold by the private developers.

  • When it comes to investing in real estate, you should ask whether there is easy access to MRT stations, schools, and other essential facilities; the property can be easily resold; and affordability.
  • What are the costs involved in buying a property in Singapore? First, you have to check your stamp duty rate. Based on the market value of the property, you can compute for your Buyer's Stamp Duty (BSD).

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.

5 money traps couples fall into when buying their first property

  • Thanks to the government's slew of cooling measures, among which are capping MSR at 30 per cent for HDB flats and TDSR at 60 per cent for all properties, you should find yourself unable to seriously overextend yourself even if you are tempted to.
  • - Staying home to look after children may potentially half your income. - Interest rates are at rock bottom currently but they will most definitely go up. - Property prices are not at fire sale prices.
  • The ABSD will not last forever, but your property may (especially if it is freehold). One must remember they are one of a set of cooling measures to rein in property prices and keep them affordable for first-time property buyers.
  • However, if property prices were to start tanking significantly, it is likely that the current measures, including ABSD, will be relaxed layer by layer, like peeling an onion. After all, it is to no one's benefit for the single largest asset owned by most of us to depreciate.
  • Refinancing later on comes with many risks, including the interest rate environment then, your employment situation then, the state of the economy and property market then (affecting the valuation of your homes) and government/banking policies then (which affect whether legal subsidies can be given by banks).
  • Even if the initial rates are 0.1 per cent higher than the other bank's, what you'd want to ensure is that the rates after the initial years are competitive, in case you are unable to refinance to your advantage when the lock-in period is over.
  • It may be tempting to buy a 500 or 600+ sq ft condominium unit at less than S$1million, especially for professionals or HDB dwellers looking to buy an investment unit.
  • Do keep in mind the thousands of units coming into the market over the next few years, which means that it may not be easy to rent out or sell your unit at a profitable price. This while it locks up your 'quota' for property ownership with ABSD and punitive financing quantums for subsequent property purchases.
  • An old property on a 99-year lease is simply what it is, an old property with a shorter life span. One should always assume that the value of the property will be zero at the end of the lease and ask ourselves if we are comfortable paying the amount for the remaining lease.
  • If you are contemplating marriage and buying your first property in the foreseeable future, it is good to use the above as a checklist to have the necessary discussions with your significant other before making the largest purchase of your life.

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.

CPF tips for your age group

  • You are more likely to enjoy coverage without exclusions due to a lower chance of health issues.
  • Buy a home you can afford. Try not to use more than 20 per cent to 25 per cent of your family’s gross income to service monthly repayments.
  • Top up your Ordinary Account (OA) with spare cash as returns from CPF savings currently exceed bank deposit rates.
  • Review your mortgage periodically to see if it is still competitive or if there are better options.
  • Enjoy tax relief by making annual CPF top-ups for your parents and grandparents.
  • Make sure you are well covered with health and mortgage insurance.
  • If you can take some risks but have no time to track stocks, financial advisers suggest considering unit trusts or exchange-traded funds.
  • It will determine the payout on the annuity scheme, CPF Lifelong Income For the Elderly (Life).
  • Determine the kind of lifestyle you want so you can figure out if your retirement income is enough.
  • Decide which of the two CPF Life plans, Life Standard Plan or Life Basic Plan, suits you better.

This article first appeared on MoneySmart. is Singapore’s leading personal finance portal, and aims to help people maximise their money with powerful tools and engaging content.