Most Singaporeans utilise their CPF money to finance their house purchase. On the surface of it, this makes perfect sense as big part of our saving is locked inside our pension fund. But what is the drawback?
Few days ago a HDB owner contacted me to seek my advise on how his family could upgrade from their current 4-Room HDB in Punggol to a condo.
The first challenge they face immediately is negative sales.
That is when the sales proceed of their property is lesser than the amount of money needed to pay their outstanding loan and return their CPF money plus its accrued interest to their CPF account.
How do they end up with negative sales?
They bought their flat in 2012 at around $470k.
Today’s market price? About $350-360k.
That is a whopping $100k++ loss if they sell.
A quick look at the price trend of their block (other same age HDB blocks in the area show similar pattern) over the last 13 years shows that;
1. The property price in 2010 is about the same as the price today.
2. If someone, like this owner, bought their flat in 2011-2013 period, they are looking at significant loss today if they sell.
Which brings us back to the CPF issue.
Assuming that I bought a flat there 10 years ago and I take out $200k of my CPF money to pay for the property, any idea what would the amount of money I need to return to CPF today if I sell at the same price?
With accrued interest added in, I need to put $256k back to CPF.
If I decide to keep the flat for another 10 years, the amount shoots up to $327K.
That difference of $127K is the amount my Ordinary Account fund will make if I leave the $200K inside for 20 years.
That’s slightly over 3% interest per annum.
So what are the factors we need to consider before we decide to use our CPF money for property?
If we decide to keep cash and use CPF, what are we going to invest our cash on? Normal saving account interest is certainly much lesser than the interest our money earn inside the CPF account.
The common idea is that property price should increase over time and earns more than the CPF Ordinary Account interest. But is that always true?
The property we buy matters . Do we see the value to appreciate over time or like this HDB flat, it will stay the same at best? In all likelihood, the price would drop as the flat lease run out.
If you are reading till this point, you could well be one of those who are also aware of this issue.
If you are looking for the right, sensible advise on how to plan well and buy right, if you want your CPF money to work harder to help you grow your retirement fund, drop me a message via whatsapp or by filling in the form below for non obligatory discussion.
