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Pros And Cons of Using CPF Or Cash To Pay For Your Home Loan
Buying a home is possibly one of the largest purchases you would make in your life. Likewise, paying for a mortgage is possibly one of the longest loan repayments you will undertake. While most homebuyers will likely use a combination of cash and CPF to pay for their home loans, it is worth investigating the pros and cons of using either option, CPF or cash for your home loan repayment.
#1 Pro Of Using CPF: More Cash In Your Pocket For Other Expenses
Being able to use the 20% CPF contribution from your salary for housing repayment gives you 80% of your salary for other expenses. If you choose to pay cash and your home loan monthly repayment is 20% of your salary, you would only be left with 60% for all your other expenses. By not spending a single cent on your home loan using CPF, you have more flexibility to spend your cash in any manner including expenses such as renovation, nicer furnishings, staycations/ vacations, groceries, and investments.
#2 Pro Of Using CPF: More Cash For Greater Variety Of Investment Opportunities
Having the additional cash flow from using CPF for home loans can also mean having more cash to invest in a greater variety of investment instruments and opportunities. More importantly, cash allows you the flexibility to invest not just in investment instruments that may give you higher potential returns, or join a partnership or set up a business of your own. You cannot use CPF to fund these opportunities.
#3 Con Of Using CPF: Less CPF For Your Retirement
Using cash is an attractive option because CPF is a powerful way to save for retirement and using it for housing depletes the compounding power of your CPF funds.CPF’s greatest strength is the guaranteed risk-free interest of 2.5% per annum on our Ordinary Account (OA), 4.0% per annum on our Special Account (SA) and 4.0% per annum on our Medisave Account. We also earn an additional interest of 1.0% per annum on the first $60,000 of our CPF account balances. This makes CPF a safe and stable way to save for retirement, guaranteed by the government.

In the current low-interest rate environment, it is difficult to find a comparable risk-free investment that yields higher than CPF OA’s 2.5% per annum. Finding an investment that yields higher than CPF SA’s 4% per annum without a significant increase in risk is almost impossible.
#4 Con Of Using CPF: You Need To Refund CPF Accrued Interest Upon Sale
One less-mentioned fact about using CPF to pay your home loan is the need to return CPF monies back to CPF with accrued interest upon the sale of your property. Accrued interest is the interest that your CPF monies would have earned if they were held in your CPF account. This is the way CPF safeguards your retirement by ensuring that CPF monies that would have been compounding in your CPF account are returned and set aside for your retirement.

This would mean that your property would have to sell for a much higher price to be profitable after accounting for the CPF refund. Additionally, it is possible to end up in a situation where the sale of the property does not cover all the debts owed, including the refund to CPF. If you sell below the valuation of a property, you have to top-up the shortfall in the CPF refund of principal and accrued interest in cash, even when you are making a loss on the sale.

Using CPF To Pay For Home Loan Can Affect Your Retirement
In the end, if you use all your CPF for housing, there would be little left for your retirement unless you consciously use the extra cash flow to save and invest for your retirement.
If you are actively investing and planning for your retirement outside of CPF, the choice of using CPF or cash for home loan may depend on whether you can achieve an investment return higher than CPF’s guaranteed risk-free rates of 2.5% and 4% at a risk level that is acceptable to you.
However, if you don’t have alternative retirement plans, using cash to pay your home loan may be an option worth considering as CPF is a mandatory retirement savings plan that cannot be touched until the withdrawal age of 55.

You Can Use Both Cash And CPF And Vary Accordingly
While most discussion on using CPF or cash to pay your home loan tends to support one or the other – either you use all CPF or all cash.
For example, you may want to use more CPF early on when you need more cash flow or need to keep more emergency funds because your job situation is uncertain. Conversely, you may want to use more cash later as your income increases, and you have additional cash that you can channel to repaying your home loan.
The amount of CPF you use to pay your home loan can be easily adjusted, by making an online submission on CPF’s website for HDB flats or private property financed using bank loan, or making a form submission at any HDB Branch Office for flats financed using HDB housing loan.

Why You Should Not Be Rushing To Pay Back Your Housing Loan Using Your CPF Savings

During a low-interest rate environment, paying off your housing loan in advance using your CPF savings might not be the best choice.

Recently, the achievement of a young couple who in their mid-30s had managed to pay off the housing purchase of their Bishan flat in 2 years was lauded on social media. The thrifty and hardworking couple earning an ordinary income had accumulated a large sum of savings in cash and CPF before they purchased their flat. After their flat purchase, they took a small HDB loan of $53,000 and paid it up within 2 years. This decision almost wiped out their cash and CPF savings, but they achieved the feat of fully paying up for their flat in 2 years.
It is indeed an accomplishment, but is it really a financially wise choice?

You Stand To Lose Tens Of
Thousands Of Dollars In CPF Interest Gains

Many Singaporeans are so fixated on the idea a “Debt-Free” status that they use their precious CPF Ordinary Account (OA) savings to pay up their outstanding housing loans. This is financially unwise.

The math does not work out in favour of you withdrawing your CPF monies from your OA to pay for your housing loan.

Your CPF OA savings earn you an interest of 2.5% annually. A housing mortgage loan from a bank usually charges an interest of about 1.5% today. If you have an outstanding housing loan of $100,000, and if you redeem the $100,000 loan with your OA, this is how the maths stack up:
Interest earned from OA at 2.5%: $100,000 X 2.5% = $2500
Interest paid for Bank Loan at 1.5%: $100,000 X 1.5% = $1500
Interest forgone by redeeming housing loan = $1000 per year
If you have withdrawn from your CPF savings a few hundred thousand dollars for a loan that could be stretched for 10 to 20 years, you would have forgone tens of thousands of dollars that you could have generated in interest from your CPF savings.
In case you are worried that the bank interest will increase above 2.5%, you always have the option of paying up the loan with your OA savings. Hence, it is pretty risk-free.
The Interest Difference Is Even Larger If You Transfer Your CPF Monies From CPF Ordinary Account (OA) to Special Account (SA)
Had you transferred the S$100,000 from your CPF OA to Special Account (SA), the math would work even more in your favour:
Interest earned from SA at 4%: $100,000 X 4% = $4000
Interest paid for Bank Loan at 1.5%: $100,000 X 1.5% = $1500
Interest forgone by redeeming housing loan = $2500 per year
However, there is a slight risk with this move. If the bank mortgage interest rate increases beyond 4%, you could suffer a financial loss. As the transfer from OA to SA is irreversible, you would have to fork out cash to pay the loan instead of your OA CPF monies. Arguably, the likelihood of the mortgage rates exceeding 4% is low for a long time to come, given the current low interest rate environment.
By not redeeming your housing loan with your CPF monies from your Ordinary Account, you can make money by arbitraging the interest rate difference between the higher CPF interest rates and the lower bank mortgage rates.

In our Asian culture, having debt is often frowned upon. However, from a financial standpoint, when the returns generated from debt are higher than the debt cost, they can be deemed as “positive” debt. That is why many companies take on loans to help them generate higher profits, though there are associated risks.

In the unique case of housing loans in Singapore, the interest returns of leaving your CPF untouched is higher than the mortgage interest, and it is almost risk-free (barring policy changes). So, we should not demonise all debt and instead harness it to our favour, especially in the case of housing mortgage loans.

Returning What You Have Withdrawn From CPF For Housing May Be Wise

You might want to consider ploughing back your cash into your CPF by returning back what you have withdrawn for your housing payment from your CPF. The returned CPF would generate 2.5% interest, which is far higher than what you can ever get from any fixed deposit or government bonds now.

Given the current property bull run, and the fact that many property owners are selling their houses, it is worth considering keeping the monies in CPF. Be wise with what you do with the proceeds from the sale of the house.

In short, we should all aim to achieve a “financially wise” life through better CPF and financial literacy.

If you are seeking financial guidance, feel free to call us today at 9239 4229.

Interest rates Are At An All-Time Low: Is 2021 The Best Time To Buy A Condominium In Singapore?

On the lowest home loan packages offered in Singapore currently, first-year interest rates can go as low as under 1%. This is about the lowest it has ever been due to the economic blow from COVID-19. More than one year on, the pandemic is still having widespread effects on economies worldwide.
Low-interest rates typically encourage businesses and individuals to invest their money and discourage saving as returns poorer. One way that many Singaporeans wish to invest their money is to buy a property.

How Low Interest Rates Benefit Property Owners
One obvious question that arises in a low-interest-rate environment is whether this is a good time to buy a condominium in Singapore. This is because lower interest rates mean lower monthly mortgages, higher returns, and the ability to invest with a lower income.
Will COVID-19 Impact Ability To Pay More For Homes?
In contrast to most other economic crises, home prices in Singapore did not suffer. It is likely that the government close to $100 billion stimulus packages in 2020 supported home prices and measures such as deferring mortgages allowed people to continue holding on to their homes in the interim. The question is, can current prices can be maintained?

Home Supply In The Coming Years
Due to a slowdown in the construction sector, supply-side has been heavily affected. Many projects have been delayed and/or deferred. This also translates to increased supply in the next few years.
A slowdown in the jobs market in Singapore could also see foreigners and expats who rent condominium properties dwindling. This will mean greater vacancies, which could lead to cheaper rents and prices.

Many Other Considerations – Apart From Interest Rates
There are many other facets we need to look at when deciding whether now is a good time to purchase a condominium. Simply looking at short-term rates may not be so sustainable either.
How well Singapore is able to cope with COVID-19 infections may be the biggest indicator on whether property price increases are able to sustain in the current landscape. As will the support measures from the government.

It is important for us to consider these factors holistically and think long-term when deciding to buy a condominium. After all, buying a property is a big commitment.

5 Things To Know About DBS Home Equity Income Loan (DBS EIL)
As of 16 August 2021, DBS is launching a new financing solution for seniors: the DBS Home Equity Income Loan (DBS EIL). It is a pilot scheme that complements the national CPF LIFE Scheme, allowing eligible seniors to borrow against their residential property to top up their CPF Retirement Sums and enable them to receive greater CPF LIFE monthly payouts to fund their retirement.
Here’s what you know to know about the DBS Home Equity Income Loan (DBS EIL).
#1 DBS Home Equity Income Loan (DBS EIL) Only Available To Eligible Seniors With A Single Property
To apply for the DBS EIL, you will need to be a Singapore Citizen or Permanent Resident (PR) and be aged between 65 and 79 years old.
You also need to own and stay in a private residential property that is fully paid up and you must not own any other property in and/or outside of Singapore. The property should also have at least a remaining lease of 30 years.
Additionally, you will have to set up a Lasting Power of Attorney (LPA) as one of the conditions to take the loan.
#2 The Maximum Loan Amount Is Determined By CPF Retirement Sums
As the DBS EIL is designed to complement and work in conjunction with the CPF LIFE scheme to allow seniors to monetise their property for a stream of income in retirement, the maximum amount you can borrow is capped. The loan amount, subject to credit assessment, is at least the amount needed to top up your CPF funds to Full Retirement Sum (FRS) and up to the prevailing ERS.
This means that for a 65-year-old who does not have a single cent in their CPF accounts, he can borrow between $131,000 to $279,000 through the DBS EIL.
#3 You Will Not Receive A Lump Sum Payment But Will Receive A Monthly Income Through CPF LIFE
The loan amount is directly put into your CPF account to fund your CPF LIFE monthly payouts, unlike home equity loans. If there are any outstanding CPF charges on the property, they will be discharged during the loan application process to ensure that you obtain the loan amount needed to increase your CPF LIFE payouts.

#4 The Loan Tenure And Interest Rate For The DBS EIL Pilot Is Fixed
Under the current pilot, the loan tenure and interest rate for the DBS Home Equity Income Loan is a maximum of 30 years at 2.88% p.a. The current CPF LIFE premiums are earning an interest rate of 4% p.a. This means that borrowers will automatically be earning the difference of 1.12% p.a.
If the loan amount is $279,000, this interest difference will work out to be $3,124.80 per year or $93,744 over 30 years. However, as the payout is made in the form of monthly CPF LIFE payouts, this increase will be diluted and may be unfelt.
Instead, what the loan does to unlock the value of home equity and allow seniors who would be receiving little to no CPF LIFE payout, to receive a modest income that can be sufficient for their retirement needs.
#5 You Do Not Need To Make Monthly Repayments
DBS Home Equity Income Loan (EIL) doesn’t require monthly loan repayments. You only have to repay the loan and the interest accrued at the loan maturity or when you sell your property. Additionally, you have the flexibility of selling anytime and there are no penalty fees imposed by the bank for selling within the loan period.
The DBS EIL also doesn’t require you to make payments to reduce the outstanding loan amount if your property value declines during the loan period.
As the loan is designed to enable ageing in place, DBS also promises to not take immediate action (foreclosures) against your property and to work together with you (or your estate) to find mutually acceptable options in the event of:
· The borrower outliving the loan maturity
· The death of the borrower during the loan period
· The bankruptcy of the borrower during the loan period.

Effective Interest Rates VS Simple Interest Rates: Here’s What You’re Paying For
What Is The Simple Interest Rate?
The simple interest rate is the interest rate that the bank charges you for taking the loan. It is also commonly known as the flat rate, nominal rate or advertised rate.
Take the following scenario as an example:
Loan amount: $100,000
Tenure: 10 years
Processing fee: $2,000
Simple interest rate: 10% per annum

If you take out such a loan, you firstly get $98,000 in hand as the $2,000 processing or administrative fee will typically be taken at the point of issuing the loan. Next, you have to pay $10,000 every year, for the next 10 years, in interest payments, as well as another $10,000 every year, for the next 10 years, to pay down your principal amount.
While many of us understand interest rates, it does not take several things into consideration – 1) any “administrative” or “processing” fee that we’re not sure why we’re paying and 2) the fact that we’re paying down our principal amount each year and are actually borrowing less after each month. This is where the effective interest rate comes in.
What Is The Effective Interest Rate?
The effective interest rate on a loan takes into account any processing fee and the fact that you’re also paying back part of the principal that you borrowed every month but still have to pay an interest rate based on the initial sum you borrowed.
Given the same scenario above, this means you have to take into consideration that you’re paying an interest rate on a $100,000 loan but receive only $98,000 from the onset. Further, you also have to consider that your loan amount is lower after each month of repayment but you still have to pay an interest rate of 10% per annum on $100,000.
To give you some perspective on the situation, in the 10th year of your loan, you would have already repaid over $90,000 and have only $10,000 left on the loan. Yet, you have to make interest payments on a loan of $100,000.
Effective interest rates aim to give you a fuller picture by taking these things into consideration. And, in the same scenario above, you’ve actually been paying for a loan of $100,000 when you only got an initial loan of $98,000. This translates to an effective interest rate of over 17% per annum.
Why Is The Effective Interest Rate Important?
If you think about it, when a company sells a bond, the company pays a year coupon rate but none of the principal. They will only repay the principal when the bond matures. This means that the company is making full economic use of the entire principal until the end of the bond.
As an individual taking a loan, you’re not really in the position. You’re repaying part of the principal to the financial institution every month. This means you’re not making full use of the entire principal, and hence why the effective interest rate is actually higher for you.
Another important thing to note is that while the financial institution is charging you for that loan, it has already received part of it back, and can proceed to give out more loans with the same money.
At the end of the day, the effective interest rate just tells you the price you’re economically paying for the loan.
How To Find Out The Effective Interest Rate On A Loan
Thankfully, according to the Code For Advertising Practice for Banks in Singapore, any interest-bearing loan must include the effective interest rate. This can be a life-saver as calculating it involves a really tedious process (Lots of math involved). For economic interests, you should always choose a loan with the lowest effective interest rate.

Refinancing VS Repricing Your Home Loan

They both fulfil the same purpose; which is to optimise the terms of your home mortgage, for instance, reduce monthly repayment amounts or reduce the total amount of interest you pay.
Refinancing is when you switch your existing home mortgage to a new one with another bank, while repricing means you get a new home loan package with your existing bank. When you change your home loan from a HDB loan to a bank loan, you are also performing refinancing.
To help you understand better, let’s look at the differences between them so that you get a clearer view of which to choose.

Difference In Cost And Fees
Generally, refinancing costs you more.
When you perform a repricing, your bank will usually just charge an admin fee. As for refinancing, as you are establishing a new mortgage with a new bank, there will be legal fees and costs for valuating your property. If you are still within the lock-in period of your mortgage, you will be required to pay a penalty of around 1.5% of the outstanding loan amount. Additionally, if you took advantage of legal or valuation subsidies by your current bank, the separate clawback clause may require you to pay back the subsidies.

When Can You Do Refinancing/Repricing?

Repricing takes about 1 month to effect.
Since more entities are involved in refinancing, the entire process of refinancing usually takes at least 3 months. So, if you’re thinking of doing refinancing, you can start approaching brokers or compare home loan packages about 4 to 5 months before your lock-in period is up.

Regulations And Other Things To Note

When performing refinancing or repricing, remember to check if you are within the limits imposed by the Total Debt Servicing Ratio (TDSR) framework.

Guide to refinancing your Home Loan

Refinancing is the process of switching your existing home loan package to a new one with another bank. Reasons for refinancing include enjoying better interest rates, managing their cash flow (by lowering their monthly repayments), or changing their mortgage type ( a floating rate → fixed rate package)

In Singapore, most home loan packages are structured similarly. Interest rates for the first 3 years are attractively low, followed by a substantial jump from the 4th year onwards. This structure makes it financially sensible for property owners to refinance every few years.
If you’ve not done refinancing before or are not familiar with the process, here are the highlights you need to take note of.

Step 1: Are You Eligible To Perform Refinancing?
The first step is to check if you are even eligible to refinance your mortgage. Rules like TDSR and your credit score could disqualify you, and the terms of your current home loan package might make it unfeasible to perform refinancing at this point in time.
TDSR
When performing refinancing, you need to be within limits imposed by the Total Debt Servicing Ratio (TDSR) framework. TDSR limits apply to loans taken on an investment property. The TDSR threshold that stipulates your monthly repayments should not exceed 60% of your gross monthly income.
Credit Score
You will require an acceptable credit score before banks will be willing to lend money to you.
Lock-in Period
Most home loan packages will come with a lock-in period of 2 or 3 years. You will be levied with a hefty fee if you move your loan elsewhere before the lock-in period expires. Check the terms of your loan to be sure.
Subsidy Clawbacks
When you sign up for a new loan, banks typically threw in enticing perks like subsidies for legal and valuation fees. These perks come with clawback periods of around 3 years. If you attempt to refinance during this period, you will need to repay these subsidies, which typically amount to between $2,000 to $3,000.
Interest Rate Reset Dates
Some banks may specify that you must serve notice of your intention to redeem your SIBOR/SOR-linked mortgage and do refinancing on interest rate reset dates. What this means is that if you do not serve notice of your desire to refinance on the reset date, then you will have to wait another 1 or 3 months (depending on the SIBOR/SOR duration of your loan).

Step 2: Shop For Quotes
The refinancing process can take up to 6 months to complete. You can start off with research and shopping for quotes about 6 months before your lock-in period/clawback period expires or before higher interest rates take effect on the 4th year of your mortgage.
This gives ample time to compare packages, and serve the requisite notice (usually 3 months) to your existing bank, as well as fix any issues with your credit score.
In addition to the interest rates offered, you also need to decide what kind of mortgage to get. (Fixed Rates, SIBOR/ SORA-pegged, Board Rates, Fixed Deposit-pegged)

Step 3: Sign With A Broker
Once you’ve identified the broker you want to work with and confirmed the home loan package you want to sign, get ready the required documents for.
You will need your NRIC (or passport for foreigners), latest income tax Notice Of Assessment, latest 3 months payslip, last 15 months’ CPF Contribution History, as well as latest monthly statements for credit cards, overdrafts, and other instalment payable loans.
Your broker will help you through the paperwork and link up with the bank.
Need Help With Refinancing?
Refinancing is a powerful tool to help you manage your mortgage. However, it can be an overwhelming process since a huge sum of money is involved. Thus, having a trustworthy and reliable broker is vital in easing the process, knowing that you will always get the best rates out there and enjoy unparalleled service.

If you’re considering refinancing, feel free to get a non-obligatory consultation. Call us today at 9239 4229.

Here's what to look out for in your mortgages. With rising interest rates, it's crucial to be prudent about your property purchases. Speak to us today to get the best advice for your home.

https://www.businesstimes.com.sg/banking-finance/money-playbook/as-rates-rise-what-should-consumers-watch-for-in-their-mortgages

As rates rise, what should consumers watch for in their mortgages? SINGAPORE'S property market rebounded strongly after a slow first half of the year in 2020, with home prices hitting new highs into the first quarter of this year. This is despite Covid-19 casting a shadow over the broader economy. Read more at The Business Times.

https://www.straitstimes.com/singapore/housing/over-4900-hdb-bto-flats-launched-including-in-queenstown-jurong-east-for-the-first?fbclid=IwAR2rwyQN5V-ECvTYylP5U_ZbEiq-KrREdj4vt6n0KMJFKi13Lf1KXrn5HAk

Buying a home needs careful planning. If you're seeking to refinance your mortgage, we're here to help. Simply drop us a message on Facebook.

Over 4,900 HDB BTO flats launched, including in Queenstown, Jurong East for the first time in about a decade Highly anticipated Queen's Arc in Queenstown will have 610 three-room and four-room flats on offer across two blocks.. Read more at straitstimes.com.

Are you thinking if you should re-finance your housing loan? You've come to the right page.

Here are some tips for you before deciding if you should re-finance your housing loan.

1. Check your loan's lock-in period.

2. Consider other banks offer. According to MortgageWise executive director, Darren Goh, he quotes "Banks always give a better deal to acquire a new customer than what they would offer their existing loyal customers. So do not be naïve to think that it pays to stay with the same bank." You may end up saving a lot more than you think when you switch.

3. Do your necessary research on switching costs
With the above Point 2 said, you want to make sure you do your research on the additional costs associated when switching to another bank. These include legal and valuation fees, and sometimes penalty charges for early redemption, which may total up to a hefty sum.

Why should I re-finance my mortgage?

Re-financing your mortgage can save you a lot of costs.

Firstly, you are more likely to find a more competitive interest rate when you refinance.

Secondly, you get the ability to cash out your equity for other uses. Think about it - you can use the money to pay off high-interest debt — like credit cards or personal loans — or invest it back into your home through remodelling projects.

Thirdly, it gives you an opportunity to pay off the loan quicker with a shorter term. Who doesn't want this right? By shaving years off your mortgage, you can unlock more equity faster or walk away with more money if you decide to sell your home.

Ultimately, if you weigh the pros in the long run (while considering all of the factors necessary such as additional costs that will be incurred, etc), you get to benefit more than you think.

According to Monetary Authority of Singapore (MAS), more families in Singapore could struggle with difficulties making their home loan payments in the coming months.

We understand that it may be a tough period for you and your family to manage your financial commitments, especially in light of the COVID-19 pandemic.

And that's why we're here to help. With Re-nance, you don't have to worry. Let us do the planning for you.

Contact us today to learn more.