Purchasing a home in Singapore is a rite of passage for many Singaporeans. Due to its hefty price, many will require a housing loan to foot this expense. These home loans can come as an HDB loan or mortgage loan from banks and licensed moneylenders.
Payment for these home loans is usually done via funds in our Central Provident Fund (CPF) or cash, depending on one’s preference.
What Type of Housing Is Applicable For HDB Loans?
All HDB housing is applicable for HDB loans. This includes all new BTO flats and resale flats in mature and non-mature estates across Singapore. The loan-to-value (LTV) limit for the respective HDB flats can be seen below:
|
|---|
| Type of HDB Flats |
HDB Housing Loan Loan-To-Value Limit |
| New/Built-To-Order Flats |
Up to 85% of the purchase price |
| Resale Flats |
Up to 85% of the lower of the resale price or value of the flat |
About 800,000 Homeowners Use CPF To Pay Off Their Home Loans
According to CPF, about 800,000 homeowners use CPF to pay off their home loan instalments each year.
When homeowners pay their housing loans with CPF, they are able to keep a larger proportion of their salaries for other purposes.
Image source: ValueChampion
Assuming that the monthly repayment for your home loan is 20% of your monthly salary, paying with CPF means that the 20% needed to foot your home loan does not come from your take-home salary. This leaves you with more cash-on-hand to save or pay for expenses apart from your mortgage loan.
Paying your home loan with cash conversely will affect your regular salary, leaving you with less money to spend.
However, is your monthly purchasing power the only reason why you should use your CPF monies for home loan instalments? Maybe not.
ValueChampion has listed down all the advantages and disadvantages of paying with cash or CPF for your home loans so that when it’s time for you to make a decision, you’ll be able to make a better choice.
The Advantages And Disadvantages Of Using Your CPF Monies For Mortgage Loan Instalments
Advantage 1: Homeowners Keep a Larger Portion of Their Salary
The first and biggest benefit is, of course, the fact that you have more cash on hand.
With CPF paying their home loans, the salary of homeowners will be left untouched. This allows homeowners more money to save for household expenses, including shopping for necessities, setting aside rainy day funds or emergency funds, and more.
Furthermore, with rising inflation, having more liquid savings will help with the immediate rising cost of living.
With more salary on hand, homeowners also have more spending power to attain their financial goals. Some of these may come in big-ticket items like luxuries or cars. Others might be to pay off loans, such as home loans or university loans.
Advantage 2: Homeowners Get a Fixed Interest Rate
Pegged at 0.10% above the prevailing CPF Ordinary Account (OA) interest rate, the HDB loan concessionary interest rate is fixed at 2.60%.
This rate has been consistent for the past few years, and will likely remain the same moving forward. However, do take note that this interest rate is subject to changes if there are future revisions to the CPF interest rate.
Nevertheless, this consistency in the HDB loan rate means that you are likely to pay these same interest rates regardless of how volatile the economic market conditions are.
Thus, this makes the CPF HDB loan a suitable option for consumers who do not have a large risk appetite.
Advantage 3: Homeowners Can Continue to Use Their CPF to Pay For Their House During Their Retirement Years.
Upon reaching the age of 55, the legal age to begin receiving your CPF payouts, you can continue to pay for your housing loan using CPF.
Your CPF payouts will come primarily from your CPF Retirement Account, which is made up of the funds in your CPF Special Account, followed by the CPF Ordinary Account until you hit the basic retirement sum.
Image Source: Vera / ValueChampion Singapore
The remaining amount in your CPF Ordinary Account can be used to pay your home loan instalments. If all goes well, you need not foot your mortgage loan using your own savings during your retirement years.
Disadvantage 1: Negative Cash Increments to Homeowners’ CPF
With the usual CPF interest rate at 2.5% and HDB loan interest rate at 2.6%, the net interest rate compounded in the homeowners’ CPF account will be -0.1%.
That means your CPF will be consistently losing money over the home loan period. This will affect your future CPF retirement savings and payouts.
Moreover, with Singapore’s basic retirement sum increasing year on year by 3.5%, it will be harder to achieve the needed sum of money. Below are the current and predicted basic retirement sum for the next 5 years.
|
|---|
| Year |
Basic Retirement Sum |
| 2022 (Current) |
S$96,000 |
| 2023 |
S$99,400 |
| 2024 |
S$102,000 |
| 2025 |
S$106,500 |
| 2026 |
S$110,200 |
| 2027 |
S$114,100 |
Consumers who are using CPF monies to pay for their home loans might want to think of ways to build a nest egg for retirement instead of waiting for a lump-sum payout from their CPF accounts.
Some methods could include investing in stocks, ETFs and bonds, putting their money in Fixed-Deposit accounts with a satisfactory interest rate return, ILPs and more.
Just take note that all these options have risks. Ensure you have done up your research before putting money into any of them.
Disadvantage 2: If You Sell Your House That Was Paid via CPF Funds, You Will Need to Return the Sum to Your CPF Account, Including the Interest.
To illustrate, Michael sells his house at S$500,000 at age 56, which he previously took a grant of S$40,000 from his CPF to pay the downpayment. Below, you can find a summary of Michael’s situation that will help us determine the amount of his sales proceeds.
|
|---|
| Things to Consider When A Sale Takes Place |
Michael’s Situation |
| Home Type |
4-Room |
| Purchase Price |
S$375,000 |
| Grant |
S$40,000 |
| Sale Price |
S$500,000 |
| Downpayment |
10% from CPF Ordinary Account |
| Loan |
25-Year HDB Loan |
| Remaining Home Loan Amount (After 5 Years) |
S$270,000 |
Upon selling his house, Michael will first need to repay any remaining outstanding housing loans. Assuming he obtained an HDB Loan and the remaining sum he needs to pay is S$270,000, he will be left with S$230,000.
|
|---|
| Paying off Outstanding Home Loan |
S$500,000 – S$270,000
= S$230,000 |
After, he will need to return the following sums listed below to his CPF Ordinary Account.
- Downpayment
- Monthly Loan Repayment
- HDB Housing Grant
Downpayment will consist of the initial downpayment of S$37,500 (10% of the purchase price) with interest, totalling up to around S$42,600.
Monthly loan repayments will cost around S$1,700 monthly with interest, amassing up to around S$110,000.
Repayment of the HDB Housing Grant will be the S$40,000 borrowed with accrued interest. In total, this amount should be approximately S$45,500.
Calculating all these costs, Micheal will receive back S$31,900 in cash. Below is a breakdown of the end amount that Michael receives.
|
|---|
| End cost that Michael receives |
S$230,000 (sum after outstanding home loan)
– S$42,600 (Downpayment with interest)
– S$110,000 (Monthly Loan repayment with interest)
– S$45,500 (HDB Housing Grant with interest)
= S$31,900 |
The above illustration was adapted from basic retirement sum increasing year on year by 3.5% and rewritten for greater clarity.
However, if the selling price of your property falls below the initial amount paid from your CPF, you are not required to top-up the difference. This is provided that the property is sold at market value. In the event that your house is pledged to make up your minimum retirement sum, you will also need to refund that amount to your CPF. This is important as it ensures that you will have sufficient funds in your CPF to receive CPF payouts when you reach the minimum CPF withdrawal age.
The Advantages and Disadvantages of Using Cash to Pay For HDB Mortgage Loans
Image source: iStock
Advantage 1: Homeowners Will Remain With Increasing Cash Increments for Their CPF
As CPF remains untouched when homeowners choose to pay using cash, the amount of money in their CPF will continue to compound at a rate of 2.6%. This interest rate is one of the highest consistent rates in the market for relatively risk-free investments.
Removing money from CPF for HDB loans will result in lesser retirement and medical funds. Thus new homeowners with low amounts of cash in their CPF should consider paying their housing using hard cash.
Advantage 2: Homeowners Will Be Able to Keep Their Earnings When Selling Their Properties
With CPF funds untouched when purchasing your property, there is no need to pay any amount back into CPF. That means that all profits earned from selling your property are yours to keep and save, providing more cash flexibility for you to spend.
Disadvantage 1: Money Used to Pay Will Be Taken From Homeowners’ Savings
As CPF monies were not used to fund the housing loan, all money will inevitably be from the homeowners’ savings. This would limit their spending power as less money is kept with them and CPF funds are extremely inaccessible (until the eligible CPF withdrawal age).
In the scenario that homeowners do have other important financial commitments, the lack of liquid capital could diminish one’s spending power. This will require homeowners to be more frugal with their spending on the initial years after purchasing their new flat.
Best Home Loans in Singapore
Unlike HDB loans that have a high fixed interest rate of 2.6%, bank and licensed moneylenders provide lower and more competitive interest rates. Compare more here using our home mortgage loan calculator.
They also have options for homeowners to pick a fixed or floating interest rate for their home loans.
Fixed-Rate Housing Loans vs Floating Rate Home Loans
Fixed-rate housing loans
Fixed-rate housing loans are the most ideal when the Singapore Overnight Rate Average (SORA) interest rate is expected to rise. That way, homeowners can have peace of mind amidst the fluctuating market and pay an affordable consistent interest rate. This rate however tends to be more pricey than floating rate mortgage loans in a usual economic market.
Floating rate home loans
Floating rate home loans are generally good when the SORA interest rates are declining. As these floating rates are pegged against SORA, the decline will reduce the cost of these floating rates. Often, floating rates are more affordable than fixed rates, but borrowers need to be ready for the financial fluctuations that may come their way.
Interest rates for bank and licensed moneylender home loans also differ between HDB flats and private properties. HDB flats tend to have lower interest rates for mortgage loans, while condominiums and private properties have higher interest rates.
To find the best rates for home mortgage loans, you can check out our home loan calculator here.
Bonus Tip: Refinancing Your Loans
When you refinance your loans, it means you are switching your current housing loan to a new lender with lower interest rates.
Typically, people refinance their loans for a few reasons:
- To enjoy a lower interest rate
- To adjust the monthly instalment payment to suit your current economic situation
- To adjust the payout period
Refinancing an HDB loan to a bank housing loan is the most common of the three. With a higher Loan-To-Value Limit of 85% compared to paying via bank home loans (75%), many will initially choose an HDB loan to foot this cost but will eventually switch to a bank home loan for their lower interest rate.
Do take note that once you switch to a bank home loan, you will not be able to refinance that property under an HDB loan again. Although this might seem like an ominous step, it is not as bad as it seems. With fixed rates from bank mortgage loans readily available at lower rates, you will still have access to stable interest rates without holding an HDB loan.
Final Thoughts
To get the most savings from repaying your house, review your home loan regularly. Opt for refinancing options with lower interest rates, and a time frame suited to your needs. To ease this process, we have a home loan calculator that can do this for you. It gives you the best rates right now in the market so that you can get the best interest rates that you need.
This article was first published on ValueChampion Singapore and republished on theAsianparent with permission.
This article was first published on Value Champion and was republished on theAsianparent with permission.
