Your HDB flat is likely the biggest purchase you made in your life. Beyond just providing a roof over your head – it provides a home.
And to buy this home – you have to go into debt – and service a multi-decade mortgage loan. For most people, it is a 30-year loan.
It means you will still be paying for your loan until you reach your late 50s or early 60s.
If you took the HDB loan – you will be paying for a 2.6% interest loan.
For a $500K HDB loan, this means a monthly payment of $2.3K per month.
Also, take note of the whopping $180K interest you will be paying eventually.
This payment will usually be paid out from your CPF monies – as HDB deducts from your CPF Ordinary Account monthly.
It will be from your future retirement monies – from both husband and wife.
Let’s assume both are in their 30s.
Salary of $4000 per month
CPF Contribution: $1480
Salary of $3500 per month
CPF Contribution: $1295
This means a total contribution of about $2.7K per month – means there is no need for cash top-up.
The HDB loan can be fully serviced by their CPF monies.
In your 30s – this is all fine and good. You are young and full of energy – with minimal responsibilities.
Do Not Forget About The CPF Accrued Interest
Remember – while you are not paying for your property via cash – you are using your CPF monies.
And borrowing from your future retirement monies is NOT free.
There is 2.5% interest rate that will be payable – upon the sale of your HDB flat.
This is called the CPF accrued interest – and the amount is dependent on how much of your original CPF monies are used.
While this CPF accrued interest is essentially your money – instead of CPF Board paying for the interest – it becomes YOU are the one paying for it.
What is the impact of the CPF accrued interest?
Simply put – you get lesser cash proceeds or you might even fall into a negative cash sale – if you were to sell your flat.
You Cannot Ignore This As You Cross Your 40s
Some of the things you must consider as you grow older are the following:
- Reduced CPF Contributions
- Increased expenses due to aging parents
- Increased expenses as children grow up
- Potential Job Disruption or Job Loss
Below is a table of the CPF contributions that gets reduced as you cross the older age-bands.
If your income continues to grow as your enter your 40s and 50s – this is all fine.
But if your income were to stagnate – this might be a tough situation as you may also encounter other issues like caring for aging parents or taking care of your children.
Some of the potential increased costs may come from:
- Engaging a helper (FDW) or nurse to take care of elderly parents
- Educational costs for your children eg tuition or post-secondary costs
All this contributes to more expenses and lesser money available to pay for your mortgage loan – due to lesser funds channeled to your CPF OA.
How do I know all this? I have helped enough families to navigate these issues.
Let’s Explore Your CPF Contributions
The following calculations below are directly extracted from the CPF Board calculator. You can try it out yourself here: https://www.cpf.gov.sg/eSvc/Web//Miscellaneous/ContributionCalculator/Index?isFirstAndSecondYear=0&isMember=1
Imagine topping up via cash for your HDB monthly installment when you are in your 60s – because your CPF OA contribution is too small.
The reason why I am able to share this is because I have seen it happen to the various cases I’ve encountered.
Optimizing Your Finances For Your Future Security
I have seen it before in my 13 years of experience. Selling a home and downgrading to pay off a debt.
I have also seen cases where HDB owners cash out their gains – and channeled it to a more “worthwhile” investment.
There is no best solution – it really depends on the unique situation and needs of the family themselves.
Earlier this year, I helped this couple to sell off their existing home and buy another home that is fully paid.
In this case, I helped them sell off their 5-room HDB flat and buy a fully-paid off 4-room HDB flat.
For this case, what they are after is peace of mind – they no longer want to be “burdened” by the idea of monthly payments for their HDB loan.
Simply put as they cross their 50s – they realize they face alot of uncertainties. It is not always upgrading – but unchaining oneself from loans.
Right now, my client Norsiah – no longer needs to worry about servicing a HDB loan.
That means she is able to:
- quit her job
- take care of her aging mother herself
- place less pressure on her husband who is now the sole breadwinner
- focus on her family more
For their case, their HDB is really a home and not an investment vehicle for gains.
Their 4-room flat is no longer a burden on their finances.
At their age of 50 – they no longer need to worry about their home or paying for it.
There Is No Right or Wrong Answer Here
As we grow older, we cross different chapters with different goals and objectives.
Could Norsiah and her husband cash out from their HDB flat and upgrade to private property?
It is an option but it will be a big stretch on their finances.
At their age, I would not advise taking another 20-30 year loan!
Instead, they accepted the fact – the time has come to plan for their future peace of mind.
And most important – they took action and proceeded forward – instead of looking back.
The next 5 years – with no more monies being deducted from their CPF – they can start to grow again their CPF OA and SA.
At the age of 55 – a Retirement Account will be created from their OA and SA.
This will be the basis of their CPF Life payouts – which should start paying at 65.
In the meantime, there still exists more options to increase their income for their retirement.
These options include:
- HDB Lease Buyback Scheme – selling off the remaining lease back to HDB
- Downgrading to a 3-room HDB flat – especially when their children move out
- Renting out a room to a tenant once they have the space
You might not be looking actively to downgrade or even to upgrade.
You might even be in a very comfortable position right now.
But as we enter a new decade in 2020 – a lot of things can happen.
We cannot predict the future.
- We do know that things like the CPF Retirement Sum is destined to increase thanks to inflation.
- We do know that HDB will deduct monies from our CPF account every month to pay for our monthly loans.
- We do know that we are using part of our future retirement monies to pay for our home.
- We do know that our contributions to our CPF OA account becomes smaller as we grow older.
What is more important is to have a very clear understanding of where we stand financially and what options we have.
If you are ready to find out if you qualify to get a fully-paid HDB home – I invite you to contact me for a no-obligation financial consultation.