While a condo in Singapore could easily cost a good million dollars, you don’t have to be a millionaire to buy one. Sounds contradictory?
There are multiple ways and combinations to finance your condo: with your CPF account, cash savings, and/or with a bank loan. Working out which method is best for you can help you better realise that you can actually afford to buy a condo before you’re like… 70.
Take this as a comprehensive guide to figuring out your finances for home-buying:
Financing your condo in Singapore
Using CPF to pay for your home
First things first…
How much CPF CAN you use to buy your condo?
Your CPF can be used to finance 2 stages of condo payments: the downpayment of your home (to be paid upfront when you purchase the property), as well as to foot your monthly home loan repayments.
The downpayment for a condo is:
- New condo launch: 20% of the purchase price, of which at least 5% must be paid in cash (i.e. 15% with CPF)
- Resale condo: At least 5%, including an option fee of at least 1% which must be paid in cash (i.e. 4% with CPF)
Home loan repayments
When it comes to repaying your home loan with CPF, this is when it gets a wee bit trickier as there’s a certain CPF Withdrawal Limit for home loan repayments:
- Valuation Limit: The current property value or the purchase price of the property, whichever is lower
- Once you hit the Valuation Limit, you can only continue using your CPF savings to finance your home loan up to the Withdrawal Limit ONLY IF you meet the Basic Retirement Sum (BRS) in your Ordinary Account and Special Account if you’re below 55, and also in your Retirement Account if you’re 55 or above
- Withdrawal Limit: 120% of the Valuation Limit
- Once you hit the Withdrawal Limit, you’ll have to repay the rest of your home loan in cash only
For instance, if the purchase price of your condo is $1,000,000 and its valuation is $1,110,000, the Valuation Limit will be $1,000,000 (i.e. the lower of the two), and the Withdrawal Limit will be 120% of $1,000,000, working out to $1,200,000.
Now, there’s also the question of…
How much CPF SHOULD you use to buy your home?
Using your CPF to finance your HDB flat means you’ll have more cash on hand, and more flexibility in terms of how you use your money.
Using cash to pay for your home
Notice we say that you should use your CPF to pay for your home only if you’re using cash for investments with high returns.
That’s because the money in your CPF Account also gets you fairly high returns simply by, well, being in your CPF Account. Your CPF savings earn a risk-free interest of 2.5% per year (in comparison, the base interest rate of your bank savings accounts are typically about 0.1-0.2%).
Using loans to pay for your home
Now that you probably have a better idea of whether you should be using CPF or cash for your condo’s downpayment and loan repayments, the next question is…
How do I pick which bank loan to take up?
Other than the interest rate (duh), consider these variables:
Floating rate vs fixed rate
A floating rate home loan means you’ll be subject to a variable interest rate, based on certain market conditions or benchmarks (more on that later).
A fixed rate home loan means the interest rate remains the same for a specified duration – typically 3-5 years.
After which, the bank may choose to alter interest rates in a way similar to a floating rate home loan.
There’s no clear-cut answer to which type of home loan will work out to be cheaper – each has its own pros and cons.
Fixed rate packages offer a degree of stability. By offering you a standard interest rate, your bank is basically protecting you against market fluctuations.
The catch: These fixed rate loans typically charge a higher interest compared to floating rates – think of it as paying for the financial peace of mind.
Borrowers who choose floating rate loans are usually anticipating interest rates to remain low or even drop in the years to come. True enough, floating rate loans often work out to be cheaper than fixed rate loans.
However, because of the volatility of the economy, you’re at the risk of drastic interest hikes, which means your financial planning could take a big hit even if you’ve set aside savings to pay off your home loan.
As long as you’re able to afford it, it makes sense to want to pay off your loan ASAP, right?
Well, not really.
As counter-intuitive as it sounds, there are certain scenarios where a longer loan tenure might make sense for certain borrowers.
For instance, if you’re going with a floating rate home loan, a longer loan tenure gives you more leeway to cope with interest rate hikes – you’re repaying a smaller amount each month, buying you more time to let the interest rate dip back down.
Also consider not only existing liabilities, but future ones.
If you’re planning to have a child (or worse, if you didn’t plan to have a child), you might find it more straining to repay your home loans when you’ve got another mouth to feed.
Loans, CPF or cash?
Now, you’ve got a better idea of how to pay for your condo (and hopefully, you’re convinced that you can actually afford one, given the variety of financing options available).
Leave any other tips and tricks in the comments below, or read this article for financing options for a HDB flat in Singapore!