There’s a common belief among the older generation that you can’t go wrong buying property in land-scarce Singapore.
To be fair, their perspective is not without credit. The Merdeka generation – people born in the 1950s to 1960s – experienced tremendous property wealth growth by simply buying HDB flats.
The same thing can no longer be achieved today. The Singaporean economy has matured and the time for such explosive growth is past.
We will never be able to experience the same massive capital gains buying
But is it reasonable to buy a HDB flat as a home?
Of course it is.
The trouble isn’t buying a home.
It’s how you buy it.
Pay for it the wrong way and you can end up in a nightmarish scenario where,
- You’re Short Hundreds of thousands of dollars
- You have no way to sell your flat and downsize for retirement
- Your CPF monthly payouts when your retire is ridiculously low
This article is meant to help you dodge the nightmare and get out of it if you are in one.
#1 – Always Take A Bank Loan.
Bank loans are not the most common way of financing your flat.
Banks only offer 75% of your flat’s price, so owners actually have to pay more cash upfront.
This “painful” cash upfront amount convinces most new owners to go for the more attractive HDB loan.
But is it really that attractive?
A bank loan, by contrast typically averages 1.95% – 2.4%.
What most people fail to see is how much money 0.2% can be over a period of 25 years.
Let’s take a deeper look.
HDB Loan vs Bank Loan ($375,000 Loan)
A loan amount of $375,000 from the HDB would cost you $11,253 more over 25 years.
Note that I’m only comparing equal loan amounts. If I were comparing 90% loan valuations, the difference would be way larger.
In fact, for a full 90% loan to valuation over 25 years, the savings from a Bank Loan is approximately $113,407!!
We’re not even done yet. Remember that 10% down-payment you used from your CPF OA?
That’s due and payable the moment you sell your flat too.
So while taking a bank loan is more painful upfront, flat buyers should not let that blind you to the dangers of a higher interest rate.
Not to mention, bank loans can always be restructured to your benefit every couple of years.
You can always restructure your loan to take advantage of low-interest environments or hedge against high-interest rates.
Considering everything, a bank loan can represent a lot more than just $113,407 in savings.
That’s a significant sum of money over the years which can go towards investing in a portfolio to provide passive income, or towards gaining additional interest rates in your CPF account.
Key Takeaway: Don’t be shortsighted with your money. Look ahead. Look very far ahead. Look years and decades ahead. Shortsightedness with money tends to leave people poor.
- Bank loans are cheaper over time vs HDB loans.
- Bank loans allow greater flexibility and provide more savings, allowing owners to hedge in times of risk and take advantage of low-interest rate environments in times of growth.
#2 – Don’t Pay Your Mortgage With Your CPF Ordinary Account
The second biggest mistake most HDB flat owners commit is utilizing their CPF OA account to pay for the monthly mortgage of their HDB flat.
That means they are sacrificing the 2.5% – 3.5% interest that they could have gained had they simply left the money inside.
On a fundamental level, they are sacrificing money that grows for a flat that doesn’t grow in value.
Let that sink in for a minute.
Just let that sink in really deep.
It’s a really bad, really yucky, disgusting feeling once you realise what it means to pay for your flat this way.
Paying for your flat this way is like saying you’re happy to lose money year on year.
Feeling disgusted yet?
Now take that disgusted sensation deep in your stomach and snowball it for 25 years.
$476, 212.80. That’s how much you would have had if you left your money in your CPF OA over 25 years if you’d been paying a $1000 per month mortgage.
It gets worse.
$476,212.80 is what you would have had if you left that $1000 per month in your OA.
That’s opportunity cost.
What about what you actually owe your CPF account?
You’ve been drawing money from it after all.
It has to be paid back at some point if you ever sell your flat.
If you’d been withdrawing $1000 a month, for 25 years, at an interest rate of 2.5% imposed by HDB, you would have to pay back $415,422.86 to your CPF OA upon the
sale of your flat.
For most people, that’s the selling price of their flat. Or at least 80% of it.
What are you going to buy your retirement home with?
Are you going to buy a new home with another loan at 55 or 60?
Will the banks even loan you that money?
They won’t. Not unless you’re especially rich. And your CPF money doesn’t count here.
So what about not selling your flat?
You don’t have to pay your CPF account back. But your CPF retirement account is still short a ton of cash.
And that means a lot less money for you to withdraw when you officially retire, and its a lot less of a monthly payout.
In other words, if you paid for your HDB flat with your CPF-OA monies, you lose, no matter what.
You lose out on the opportunity cost. You can’t sell your flat because you won’t be able to buy a new one. And if you don’t sell your flat, your ordinary account is depleted anyway!
Key Takeaway: Don’t sacrifice invested cash for uninvested cash.
- People with no means of growing your wealth should use cash.
- Investors should use the pool of money that has the least growth or that doesn’t grow. That’s almost always cash. You only pay with your CPF OA monies if it has the least growth potential.
Getting Back To Retiring Well
So you’re saying you took a HDB loan and you are paid for your flat’s mortgage with your CPF OA monies?
All is not lost.
Let’s take a look at how to retire well regardless
1) Paying off your HDB Loan
Let’s start with the obvious. If you took
The sooner you pay off the loan, the less interest you pay.
This will mean performing some amount of earlier repayments so that you save on the total cost of the loan.
This can be as simple as paying off a $100 extra a month on your monthly mortgage.
The next most obvious thing to do is to stop paying your monthly mortgage payments with your CPF Ordinary Account money.
Remember that if you can’t grow your cash at 10-15% a year or more, you shouldn’t be using your CPF OA account.
2) Rent Your House Out. Don’t sell it.
The current average rent for a 4 room hdb apartment varies between $2,000 to $4000 depending on area.
Collecting rent every month while you stay with your children can not only mean being able to “unlock value” from your flat. It can mean being an immense amount of freedom especially when you factor in your CPF monthly payments.
If you can’t stay with your children, a single bedroom for rent still fetches between $500 – $1000 a month depending on location. That still represents a significant chunk of cash that can help to sustain you.
Don’t overlook it.
3) Start Investing
Notice in #2’s takeaway that I mentioned investors should use the pool of cash that has the least growth potential.
That’s because investors naturally have an edge over the rest of the population.
They have more resources to spare.
And if their CPF OA account monies truly represents the money with the least growth potential, then it makes sense for them to use it for their HDB mortgage anyway.
They can’t use it otherwise anyway.
Notice that in this case, a disadvantage for the average person becomes an advantage for the investor.
The investor now gets to use money that otherwise would be stuck.
The non-investor will have to suck it up and pay cash because he/she doesn’t have a choice!
His CPF is his “investment”!
Do you see?
Having the ability to invest and gain better returns on your money offers obscene advantage in our world.
But you’re the only one who can do it. You’re the only person in the world who can invest for you.
Not your insurance agent or financial planner. Not your government.
Not even your family or your loved ones.
- You are not the government’s priority. Government policies will always be broad-based applications meant to soothe the wound, not treat it. Even if you are among the few, government aid will not account for a significant improvement.
- You are not your Financial planners’ priority. Their sales targets are. That is a direct conflict of interest. You’re interested in building your wealth. The planner is interested in building their own. Not yours.
- Your loved ones are not you. They don’t always know what you like or want. So they can’t plan for your needs and desires. In other words, they can’t invest for you the same way you can for yourself. This is not even accounting for the fact that they have to worry about their own money too.
You must depend on yourself because no one else can prioritise you better.
That’s the harsh, ugly truth.
If you want to be able to retire peacefully with zero worries, you have to find a way to grow your wealth beyond your job, your savings, and your CPF account.
There a dozen methods to make money from investing.
Go google it. Learn some.
I have a preference for academically reviewed, quantitatively supported, results-driven strategies.
In other words, its boring, it requires discipline, it requires the ability to delay gratification, and it requires a commitment to learning.
Long story short – it’s definitely not for everyone.
But, if you are interested, you can find out more here.
On a more personal note, I would like your help in telling more people about this.
80% of Singaporean citizens and permanent residents live in HDB flats.
490,440 HDB flat owners were servicing mortgages as at end-2018.
320,526 flat owners took their loan from the Housing Board.
224,836 households paid their monthly instalment fully using CPF moniesSource
I’d like to point out that if 224,836 households each had 2 people at a minimum, that’s still 449, 672 people who will have their retirements affected.
If I assume that’s its a family of three, assuming parents and one child, that’s 674,508 people who will be affected.
Just let that sink in for a minute, alright?
We’re talking close to half a million Singaporeans minimum.
You may not form part of these group of people.
But they could be anybody. They could be your friends, your family, or even your loved ones.
Share this with them.
Explain what I’ve covered today with them.
If they don’t read websites or blogs, sit them down and explain it to them.
No one deserves to have to sit down with their parents and tell them they can’t retire yet, or that they won’t have enough money month to month to even survive if they quit working and rely on their CPF monthly payout.
No one deserves to be blindsided by their own home. The home which they had been paying for nearly half their lives.
If you think this article can help just one person – share it.
Help us spread the word so we can ensure more people never step forward into their lives making a gigantic costly mistake again.
If you have any thoughts or comments, no matter what they are, I’ll be happy to read them and discuss them with you. Simply leave your comments below.