INTRODUCTION
Buying a home will probably be the biggest investment you will make. Many of us will use CPF to pay for our homes. Yet at the same time, CPF is meant to be our old age savings. There are 2 key points you should keep in mind before committing to your dream home!
Limit your total housing loan and other debt payments to 35% of your gross monthly income. The more money you spend on housing, the less you will have for retirement.
Be aware of the withdrawal limits on the use of CPF for housing. Once you have reached the limits, you may have to pay your housing instalments fully in cash.
IMPORTANT FACTORS TO NOTE WHEN BUYING A PROPERTY
A. MANNER OF HOLDING PROPERTY
You and your co-owner(s) can hold the property as joint tenants, or tenants-in-common. The manner of holding property will determine who gets the deceased owner’s share of the property when one owner passes away. The property will form part of the deceased owner’s estate if it is held in tenancy-in-common or will be passed on to the remaining surviving owner(s) if it is held in joint-tenancy. Regardless of whether a property is held as joint tenancy or as tenancy-in-common, all CPF monies withdrawn by any owner towards financing the property will cease to be refundable when he passes away.
B. CPF HOUSING WITHDRAWAL LIMITS
The use of CPF for your housing purchase is subject to various housing withdrawal limits which are put in place to encourage CPF members to be prudent when buying a property, and help them set aside more CPF for their old age needs. The various limits are as follows:
(i) Valuation Limit
The Valuation Limit (VL) is the lower of the purchase price or market value of the property at the time of purchase, as assessed by the Board. You and your co-owner(s) may use your Ordinary Account (OA) savings up to the VL to buy the property and/or pay the monthly instalments of the housing loan.
When the total CPF withdrawn by all the owners reaches the VL, every owner must individually set aside the half of the prevailing Minimum Sum in his OA and Special Account (SA) if he wants to withdraw more CPF to service the outstanding housing loan. Any owner who does not meet the above condition will not be allowed to do so.
The VL is not applicable to new HDB flats financed with HDB concessionary loan.
(ii) Withdrawal Limit
The Withdrawal Limit (WL) is the maximum amount of CPF beyond the VL that you and your co-owner(s) can use for the property. Once the WL is reached, no further withdrawal of CPF by any owner will be allowed. If the housing loan is still outstanding, you and your co-owner(s) will have to service it fully with cash. The WL is not applicable to new or resale HDB flats financed with HDB concessionary loan. The WL is determined by the date of purchase or refinancing of loan as follows:
Date of Purchase (i.e. Sales & Purchase agreement) / Refinancing of Housing Loan Withdrawal Limit
1 Jan 2006 – 31 Dec 2006 132% of VL
1 Jan 2007 – 31 Dec 2007 126% of VL
1 Jan 2008 onwards 120% of VL
C. USE OF CPF TO PURCHASE MULTIPLE PROPERTIES
If you already own a property bought with your CPF and wish to buy another property with CPF, you should take note that you may do so only after you have set aside half of the prevailing Minimum Sum in your Ordinary and Special Accounts. The maximum amount of CPF you and your co-owner(s) may use for your second and subsequent property is capped at its VL.
* The Minimum Sum changes every July. Please refer to the CPF website for information on the prevailing Minimum Sum.
BE A PRUDENT HOMEBUYER
It is important to buy a home within your financial means. Otherwise, you will need to tap more into your CPF and end up with less for your retirement. As you will have lower CPF contributions after age 55, you should plan to pay off the housing loan before then, or you might find that you would have to fork out more cash to service the remaining monthly instalments.
Here is an example to illustrate how commitment on housing will affect your ability to build up savings for retirement. Let us assume that you and your co-owner earn a gross monthly household income of $6,000.
Scenario 1: Monthly housing instalment < 35% of gross monthly income If you are prudent and buy a property of $225,000 with a 25-year loan, the monthly instalment will be around $1,120 which is well within 35% of your combined gross monthly income. You will reach the Valuation Limit (VL) and Withdrawal Limit (WL) in around 16 years and 19 years respectively. Upon reaching the WL, you will need to continue servicing your housing instalments in cash for the remaining 6 years of the loan term. The total cash that you would have paid for the property is about $90,000. Both of you are projected to be able to meet your CPF Minimum Sum fully in cash at age 55 (The Minimum Sum is the amount that members are required to set aside in their Retirement Account at age 55 to meet their basic living expenses in their old age). On top of your Minimum Sum, both of you would have additional savings of about $153,000 each in your OA and SA. Scenario 2: Monthly housing instalment > 35% of gross monthly income
However, if you choose to buy a property of $480,000 with a 25-year loan, the monthly instalment will be around $2,400 which is more than 35% of your gross monthly income. It is estimated that you will hit the VL in 22 years. While you will not reach the WL before the loan term ends, your CPF will be insufficient for the full repayment of the housing instalments starting from as early as the 3rd year of the loan term! The total cash that you would have paid for the property is about $246,000, or around 3 years of your combined annual income!
Furthermore, both of you will not be able to set aside your Minimum Sum fully in cash at age 55.
Please refer to the Annex for details of working.
FOR MORE INFORMATION
It is important that you buy a house that you can afford based on your income. Housing loan is a long-term financial commitment and you should feel comfortable with the repayment. Generally, your total monthly debt payments (including housing loan) should not be more than 35% of gross monthly income. Remember this as you are thinking about your dream home!
For more information on the use of CPF for housing purchase, please visit the CPF Retirement Ready website at http://www.retirementready.sg. We also recommend that you use these online calculators to assess your financial position before committing towards a loan:
(i) Housing Affordability Calculator: estimates a maximum loan amount based on your income and ability to repay the loan.
(ii) CPF Retirement Calculator: estimates your retirement nest egg and whether your retirement goal is achievable.
(iii) CPF Housing Withdrawal Limits Calculator: estimates when you will reach the housing withdrawal limits.
(iv) Total Interest Calculator: estimates the amount of interest you pay on a loan.
Annex
A Worked Example
Assuming that you and your co-owner are 30 years old and earn a monthly household income of $6,000 as at January 2008:
Scenario 1: Monthly instalment < 35% of gross monthly income Scenario 2: Monthly instalment > 35% of gross monthly income
Profile
(a) Age 30 30
(b) Household monthly income $6,000 $6,000
Property Details
(c) Purchase price $225,000 $480,000
(d) Value of property $225,000 $480,000
Loan Details
(e) Downpayment
(i) 5% by CPF
(ii) 5% by Cash
$11,250 $24,000
$11,250 $24,000
(f) Housing Loan
Assumes 90% of property value $202,500 $432,000
(g) Housing Loan Term 25 yrs 25 yrs
(h) Monthly instalment (MI)
Assumes 4.5% interest rate Around $1,120
(19% of household monthly income) Around $2,400
(40% of household monthly income)
CPF Housing Limits
(i) Valuation Limit (VL) $225,000 $480,000
(k) Withdrawal Limit (WL)
Assumes 120% of VL $270,000 $576,000
(l) Years to VL (from today) 15 yrs 10 mths 22 yrs
(m) Years to WL (from today) 19 yrs 2 mths Loan term ends before WL is reached
Total Cash Used
(n) Cash downpayment, i.e.
e(ii) $11,250 $24,000
(o) Cash needed to top-up shortfall in MI due to insufficient Ordinary Account (OA) balances Nil
(OA balances are sufficient for all MI payments) Around $222,000
(OA balances are insufficient from 3rd year of loan repayment)
(p) Cash needed to repay MI till end of loan term, after CPF usage reaches WL Around $78,400
(Around $1,120 for 5 yrs 10 mths) Nil
(Loan term ends before WL is reached)
Total cash Around $90,000 Around $246,000 or 3 years of your combined annual income in 2008!
Balances at Age 55 (For Each Owner)
(q) Ordinary Account (OA) Around $171,000 $0
(r) Special Account (SA) Around $143,000 Around $142,000
(s) Applicable Minimum Sum at age 55 Around $161,000 Around $161,000
(t) Cash balances after setting aside the applicable Minimum Sum
(q) + (r) – (s) Around $153,000 Nil
(Unable to set aside the applicable Minimum Sum fully in cash)
Key assumptions:
1. The owners each earn $3,000 as at January 2008 and contribute equally to the housing payments.
2. Monthly instalment payments are made from the owners’ Ordinary Account (OA) first. Any shortfall due to insufficient OA balances is topped-up in cash.
3. Legal fees, stamp fees, government housing grants etc are not included in the calculations.
4. Except for CPF housing scheme deductions, all other uses of CPF are not included.
5. CPF contribution and allocation rates are based on those for private sector employees and government non-pensionable employees.
6. Constant annual wage increment of 3%.
7. CPF interest rate for OA balances and Special Account (SA) balances are 2.5% and 4% respectively.
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