This article has been contributed by Tan Hock, 42.
Is it possible to “use less CPF when young”?
Home purchase is one of the biggest ticket purchases a young couple can make in their lifetime. And because they are allowed to use their entire CPF-Ordinary Account for their housing loans, it is natural to choose the biggest flat they can afford, regardless of their requirement.
Naturally a big flat comes with a big loan, more interest and a longer loan repayment period. This will take a toll on their CPF-OA and ultimately their CPF-RA.
Take for instance a couple earning a combined monthly income of $5,000. The couple has an option to purchase a 3-room BTO, a 4-room BTO or a 5-room BTO. On top of that, they have another option to purchase a flat in either a mature estate or non-mature estate. Each of these options will affect the CPF-OA and ultimately their CPF-RA.
Let’s take a simple scenario. A young Singaporean couple has been working for 5 years. Each earns $2,500 per month and receives a conservative 3% increase in pay every year and also enjoys a one month bonus. At the end of the 5th year, each will have about $43,000 in the CPF-OA. That will mean they have at their disposal $86,000 to purchase a BTO flat.
Next, let’s look at the prices of the BTO launches in 2013 and 2014:
From the above, taking the price at mid-point, we can see a 3-room BTO flat in Bukit Merah which is a mature estate costs about $336,000 while a 4-room BTO flat in the same estate costs about $503,000. Similarly, a 4-room BTO flat in Yishun which is a non-mature estate costs about $285,500 while a 5-room BTO flat in the same estate cost about $363,000.
Let’s now say the couple wants to get a BTO flat. They have a few choices:
1) They can choose a 3-room BTO in Bukit Merah. Loan $250,000 ($336,000 – $86,000).
2) They can choose a 4-room BTO in Bukit Merah. Loan $417,000 ($503,000 – $86,000).
3) They can choose a 4-room BTO in Yishun. Loan $199,000 ($285,000 – $86,000).
4) They can choose a 5-room BTO in Yishun. Loan $277,000 ($363,000 – $86,000).
For simplicity sake, the incidental charges are not included.
*Note: The couple cannot qualify for a 3-room BTO in a non-mature estate because their combined monthly income is more than $5,000.00
Needless to say, it is definitely not a wise choice to go for the 4-room BTO in Bukit Merah as it is not prudent to take a big loan.
So the couple is left with 3 choices – either a 3-room BTO in Bukit Merah or either a 4-room or 5-room BTO in Yishun. This means either a loan of $199,000, 250,000 or $277,000.
Since the couple contributes about $650 each to their CPF-OA, they will be able to put aside $1200 per month for loan repayment. Using a simple online mortgage calculator, we will get the below answers:
Interest at 2.6% per annum and repayment of $1200 per month:
1) For a loan of $199,000, full settlement will be 210 months or 14 years.
2) For a loan of $250,000, full settlement will be 210 months or 17.5 years.
3) For a loan of $277,000, full settlement will be 233 months or 19 years and 5 month.
We can easily see that if the couple opts for a 3-room BTO flat in Yishun, they will be able to pay for the entire loan after just 14 years. So assuming they settle the entire housing loan by the time they reach 45, they will have the next 20 years to build up their retirement nest.
Now, what kind of apartment would you buy?
Would you chose wisely so that you’ll use less CPF money when young?