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So you’ve reached one of the most important milestones of your life: buying your first home.
Before you get excited browsing through the various property marketing platforms and head to Pinterest to search for your dream topic, let’s look at the most important step that is often overlooked: financing.
If you are one of the majority, you are probably planning to apply for a BTO with your partner.
That’s what they told us to do anyway; Complete the HLE Online (HDB Loan Eligibility) and VIOLA!
You can then apply for a BTO at a location that you can pay and accept, as simple as ABC, right?
Not.
Many have heard of “CPF Accrued Interest OA”, but what exactly is it?
https://www.facebook.com/CPFBoard/posts/10156115497465923
From here you can see how you can end up in a dead end scenario if you have made the wrong financial decision.
Nobody wants to sell their flat HDB only to find that they have to pay back hundreds of thousands of dollars plus accrued interest, and even if they don’t sell, face unsustainable low monthly CPF payments.
Let me show you an example.
The latest surveys by Robert Half and Michael Page (International Recruitment Agencies) indicate that in Singapore, the median gross monthly income from work, including contributions to the CPF of residents with full-time employment, is $ 4,437.
For those ages 35 and younger, your contributions to the CPF will amount to 37 percent of your monthly salary, with 17 percent contributed by your employer and 20 percent contributed by yourself.
A large portion of this – 23 percent of your salary to be specific – goes into your Ordinary Account (OA), which can also be used for your first home purchase in the future.
For the sake of simple calculations, let’s assume that both you and your partner have been working steadily for the past 5 years.
Assuming 23 percent of $ 4,437 goes to your OA, that would mean that each year you would have $ 12,246.12 in your OA. Given the 2.5 percent OA interest at the end of 5 years, you would have saved a total of $ 64,369.63.
With that, they would both have a total of $ 128,739.26.
So let’s say in this hypothetical scenario you were both looking at a BTO unit in Queenstown.
BTO’s introductory price for a 4-bedroom (83 square meter) flat on the 12th floor will set you back $ 520,000.
Again, here are some simple calculations:
HDB Price – $ 520,000
Option fee 5 percent – $ 26,000
Stamp duty – $ 10,200
Legal fees – $ 1,000
Home insurance – $ 1,000
Total – $ 38,200
So before buying the house, he used up $ 38,200 of his OA, still in the safe zone.
That leaves you with an OA balance of $ 90,500.
So far so good?
Now HDB will loan you what’s left after fully utilizing your OA, which means $ 520,000 – $ 26,000 (the other 5 percent to offset the 10 percent down payment) – $ 90,500 = $ 403,500, which means a monthly payment of $ 1,810, which you can support with a monthly household income of $ 6,800.
Let’s say your mortgage starts the day you start living in your house and you plan to live in your BTO for 8 years. Here’s what’s going to happen: I’m going to ignore the 38.2k he paid for 3 years before he collected the keys.
Missing amount of OA – $ 128,000 / 2 = $ 64,000
Monthly house payment $ 1,810 / 2 = $ 905
Monthly Employer OA Contribution = $ 1,000
Fast forward 8 years later – you would have used $ 172,327.84 from each of your accounts, making for a grand total of $ 344,655.
Now is the time to sell your home. The last transaction n. 12 at Strathmore based on recent transactions would be around $ 700,000 rounded up for good measure.
Well done! That is a good amount of $ 180,000 more than what your house bought.
Happy Days?
Not quite.
With your loan balance of $ 257,000
$ 700,000 – $ 257,000 – $ 14,000 (agency fee) – $ 5,000 (legal fees) = $ 424,000
Take away that $ 345,000 (cpf accrued OA interest) and you get to $ 79,000.
So congratulations, you would have made $ 79,000 (+ $ 345,000) over 8 years (not including the time you spent waiting since you selected your BTO)
Is that a good ROI for you at the end of the day?
Now let’s look at another scenario, or rather, the correct way to do it.
Let’s use the same numbers for a fair comparison, and the only thing that will change here is that the home loan is paid for in cash.
So, because the home loan is paid in cash, CPF OA at the end of 8 years will show a debt of $ 78,000 (a total of $ 13,000 CPF of accrued interest on the principal amount)
Instead, you put the $ 1,000 a month in your OA, which will result in positive interest of $ 94,000.
Now is the time to sell your house.
Here is the trick.
Are you ready for it?
$ 424,000 – $ 78,000 – $ 78,000 = $ 268,000 in cash
$ 78,000 will have to go back to your OA + a positive of $ 95,000 = $ 173,000
Total of $ 346,000 in your OA and $ 268,000 in cash
That brings you to a grand total of $ 614,000 …
Now who is in a better position to upgrade to that fancy new 2m condo versus your BTO that requires a 500k down payment?
[[nid:497989]]So unless you’re some kind of investment guru who can grow a pile of cash at a higher rate than you would earn on the interest on your CPF OA account, it doesn’t really make much sense to use your CPF to pay off the mortgage. .
And I think this basically applies to most Singaporeans.
The accrued CPF interest that you will have to repay to your CPF OA account can be quite high, especially as it accumulates over many years.
This may not apply to those whose flat prices have appreciated, but HDB floors tend not to appreciate for a long period of time.
The simple truth is that the Government knows that with 80 percent of the population living in HDB flats, it will always be in dire need of controlling the prices of public housing.
So this will really just be an exception to the rule.
If you need help calculating the income from your sale, HDB has a useful calculator here.
* Disclaimer: Existing money in the OA that would have earned positive interest of $ 12,109.3 at the end of 8 years based on a balance of $ 115.51 per month after paying off the monthly loan was not accounted for.
This article was first published on Stackedhomes. Disclaimer: Existing money in the OA was not accounted for, which would have earned positive interest of $ 12,109.3 at the end of 8 years based on a balance of $ 115.51 per month after paying the monthly loan.
