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29 Sep 2020
SOURCE: CPF Board
Finances play a huge role in the milestones accompanying the life stages of a young adult and buying your first home is probably the biggest purchase that you will first be making. It involves a myriad of tasks that have significant financial implications such as choosing a suitable home, adopting the right mortgage repayment strategy and overseeing the home renovation process. This article is a starter pack that consists of tips that would help potential first-time home buyers plan ahead financially.
Once you plan to settle down with your other half, the topic of flat buying inevitably crops up. Buying a flat is often seen as the first step to building your love nest. Factors to consider would include the budget as well as the location. Proximity to transport nodes, amenities and parents’ homes are all considerations that could affect the eventual location.
Buying a flat within the available budget ensures that the couple would not overstretch their finances. There are several ways to make your purchase more affordable. For a start, tapping on the various types of CPF housing grants (shown in Diagram 1) will make your future HDB flat more affordable.
Diagram 1: Different types of CPF Housing Grants for first time flat buyers (Source: CPF)
This is especially the case for young couples who may not be earning that much yet, as these grants can significantly reduce the initial purchase price and make home ownership a reality. In addition, the CPF Ordinary Account (‘OA’) savings will come in handy as it can be used to pay for the downpayment and monthly instalments of your housing loan. When Heartland Boy purchased his Build-to-Order (BTO) flat, he tapped on his OA savings to pay for stamp duties and legal fees incurred! CPF gives us a headstart in saving for our future needs, and you can tap on it for support in this home ownership journey.
If your first home is an HDB flat, you have the option of choosing between a housing loan from HDB or a financial institution to finance your purchase.
With a housing loan from the financial institution, you have to make a downpayment of 20%, of which at least 5% needs to be paid in cash. Note that you’ll also have to pay the balance 5% of the purchase price using cash or CPF when you collect the keys to your flat, as financial institutions can only grant a maximum loan quantum of up to 75% of the purchase price. The financial institutions have different housing loan packages with varying interest rates and terms and conditions. The interest rates of bank loans may fluctuate according to market conditions.
If you are financing your flat purchase with an HDB housing loan, you have to make a downpayment of 10%, payable in full using OA savings and/or cash. The interest rate of an HDB housing loan is currently pegged at 0.1% above the prevailing OA interest rate, i.e. 2.6% p.a.
An advantage of taking an HDB housing loan is the flexibility to switch to a housing loan from the financial institution anytime without incurring any penalty. This is why Heartland Boy recently refinanced to a bank loan to save more than $14,000 in interest expenses. However, do note that as interest rates for floating packages fluctuate from time to time, it is better to monitor and keep a lookout for refinancing options to ensure that you are getting the best rates possible when the lock-in period expires. Also, if you take a loan from a financial institution, note that you would not be able to refinance it to an HDB housing loan.
Additionally, it’s important to know how much CPF savings you can use for your housing purchase. You can use the CPF Housing Usage Calculator to calculate this amount, or check how much more of your OA savings you can use for your home purchase under the “Property” section on your CPF statement.
When deciding whether to pay the monthly instalments of your housing loan with CPF or cash, most homeowners would consider their cashflow needs. There is no perfect balance as each household’s financial situation is unique. However, it is also important to plan with your retirement needs in mind. If you use more of your CPF savings for housing, you will have less CPF savings left for retirement. Hence, if the household financial circumstances permit, young couples can consider using a combination of CPF and cash to pay for housing (e.g. downpayment and monthly instalments), so that their CPF savings can grow with attractive interest of up to 3.5% p.a.*. With more retirement savings set aside in your CPF, you can enjoy higher monthly payouts for a more comfortable retirement in future.
In addition, for those who pick an HDB housing loan, Heartland Boy thinks that it is prudent to tap on the option of setting aside up to S$20,000 in your CPF OA, instead of depleting it entirely for your housing purchase. Previously, flat buyers had to use all the funds in their OA before taking an HDB housing loan. The amount that is kept in the OA can be used for monthly mortgage instalments in times of need, or help improve retirement adequacy if left unutilised. One tip to maximise OA savings that you do not need for your housing, or other needs, would be to transfer that amount to your Special Account (SA)^ to earn a higher interest of up to 5%* per annum!
* Includes extra interest, which is paid by the Government, on the first $60,000 of a member’s combined balances. Read more on CPF Interest rates.
^CPF transfers to SA are applicable for those below age 55, up to the current Full Retirement Sum. CPF members aged 55 and above can transfer their SA and OA savings to their RA, up to the current Enhanced Retirement Sum.
According to Qanvast, the average cost of renovating a 4-room BTO flat by an interior designer is $42,600. To save on renovation costs, do consider hiring a contractor which can often be 30% - 50% cheaper than an interior designer. However, a contractor usually does not perform the roles of project management nor consultancy. Therefore, be prepared to spend considerable amount of time liaising with different technicians under this route. When it was Heartland Boy’s turn to renovate his flat, he hired an interior designer to oversee the entire home renovation process.
Diagram 2: Heartland Boy hired an interior design company to oversee his home renovation process (Source: Weiken)
By heeding professional advice on the type of furniture to buy and where to source for good bargains, Heartland Boy saved considerable amount of time as well as money. While it was definitely a more expensive option, he felt that it was a good trade-off because this allowed him to carve out precious bonding time with his child.
At first glance, the entire process of building your dream home is both a time-consuming and costly affair. As this first-home starter pack has demonstrated, it is possible to mitigate these challenges through early financial planning. When planning your home financing methods, strike a balance so that you can grow your savings steadily for a more comfortable retirement as well.
For more information on CPF and handy financial tips, you may want to join CPF Board’s new Telegram channel @CPFBoard
Disclaimer: This article is written in collaboration with CPF but the views expressed here are entirely from Heartland Boy.