Your home is your castle, your refuge, your love nest, your (wo)man cave, and also what you have spent or will spend a large chunk of your life paying for.
It’s also potentially a key component of your retirement portfolio, whether you’re already earning passive income from it by renting it out or plan to live in it forever.
In this 4-part miniseries in collaboration with CNA, we’ll take you through the basic principles for a comfortable retirement, beginning with your home. Let’s start!
Housing vs retirement: which to prioritise?
Many of us have or will someday have our funds locked up in housing.
The CPF system encourages home ownership, as one of the few ways in which CPF Ordinary Account savings can be used before retirement is to fund a home purchase.
The catch is that those hard-earned CPF and cash savings could potentially form your retirement nest egg if not used on housing.
Conversely, if you spend 100% of your savings on housing, your home becomes your only retirement asset, which leaves you with no choice but to milk it for retirement income. Property is also highly illiquid, so it could take months or even years to sell profitably.
Like any investment vehicle, it is also inadvisable to throw everything into property, as you could find yourself in a pickle if the property market tanks just when you need the money.
While there is no hard and fast rule as to how much you should spend on housing, financial advisors tend to recommend using not more than 30% of your gross monthly income.
But what if you’ve already committed to a property purchase and home loan repayments are eating up huge chunks of your income, leaving you with little to set aside for retirement?
In the short-term, definitely consider refinancing to lower your interest rate and monthly loan repayments. In the medium- to long-term, you might want to consider downgrading your home or renting out rooms in order to help with the loan repayments.
Finding the right balance for your mortgage
Looking through home loan packages is often the first reality check that starry-eyed first-time homebuyers get in between browsing Pinterest and the IKEA catalogue.
When budgeting for your property purchase, you should be comfortable not just with the property price, but also with your monthly home loan installment amount and loan tenure. In other words, are you okay with paying $X for Y years?
It’s easy to get hung up on the monthly installment amount as that is what will “hurt” the most in the short-term, but don’t forget to critically examine the loan tenure, too.
Opting for a longer loan tenure will reduce your monthly loan installments, which can be comforting if you’re still freaking out over the cost. However, in the long-term, a long tenure will mean you pay more interest overall and spend more time in debt.
If you are taking out an HDB loan, you can later opt to repay it in advance without getting slapped with a penalty. This will not only help you get out of debt earlier but also let you save money on future interest payments. So, go ahead and opt for a longer loan tenure if you’re currently strapped for cash, and ramp up your repayments when your income rises.
Conversely, for bank loans, an early payment penalty may apply, so you need to select your tenure with more care. In the event that you decide to repay your loan early, you’ll need to calculate if it would be worthwhile to do so given the penalty.
When picking your loan amount and loan tenure, you are also constrained by certain limits placed by the government.
First up, there are loan tenure limits imposed by the Monetary Authority of Singapore (MAS) and/or the HDB, capped at 25 years for HDB flats purchased with an HDB loan, 30 years for HDB flats purchased with a bank loan and 35 years for private property.
The Total Debt Servicing Ratio (TDSR) rules put a cap on your home loan quantum by limiting your total repayments across all debt obligations to 60% of your gross monthly income.
If you’re buying a new HDB flat or Executive Condominium (EC), another limit to be aware of is the Mortgage Servicing Ratio (MSR), which limits your monthly mortgage repayments to 30% of your gross monthly income.
So, how do you find the right balance? Ideally, you want to ensure that you are able to cope with your home loan repayments while, you know, not starving to death and also being able to set money aside for the rest of your retirement portfolio.
At the same time, you don’t want to be in debt forever. You should make sure that your home loan will be fully paid off before your desired retirement age, at the very latest, and ideally before that in case you decide to retire earlier or are unable to work for whatever reason.
Optimising your mortgage payments
If you’re buying an HDB flat, you’ll need to choose between taking out an HDB loan and a bank loan.
HDB loans come with higher interest rates than bank loans, currently a hefty 2.6%. By contrast, bank loan interest rate currently hover at around 1.2% to 1.5%.
But there’s a reason so many people sign up for HDB loans — stability. HDB interest rates are more stable than the SIBOR, to which most home loans are pegged. With bank loans, most fixed rate loans will only lock your interest rate in for two to three years, after which you are at the mercy of market fluctuations.
In the short-term, HDB loans are also the least onerous option for cash-strapped buyers, since the Loan to Value limit (LTV) is 90% rather than 75%, which means you can borrow more.
HDB loan borrowers can also pay all of their 10% downpayment using CPF savings, while those taking out a bank loan must pay in cash at least 5% of their minimum 25% downpayment.
For those who envisage having to make an early repayment, HDB loans are also a more flexible option as there is no early repayment, while bank loans tend to impose early payment penalties of about 1.5%. HDB is also more forgiving with their late payment fees of just 7.5% per year.
Whether you’re opting for a bank loan or want to switch from an HDB to a bank loan, it’s important to compare the various options on the market to get a good interest rate. After all, you don’t pick a bank loan for the smiling customer service.
And because interest rates change all the time, make sure you check out the other bank loans on the market every now and then to see if refinancing would save you money.
Most people use CPF savings to pay for part of their homes. But there’s a catch. You will have to refund the cash to CPF when you eventually sell your property — with interest! Given the relatively high CPF interest rates, unless you have found a way to enjoy a better yield on your cash savings, you could end up losing money.
You can repay CPF money that you used to pay for property to your OA by making a CPF Voluntary Housing Refund. Such refunds can be made anytime you want, but does it make sense to do so?
The main advantage of making refunds is to let your money enjoy CPF interest rates in your OA, currently 2.5%, while at the same time avoiding having to pay the interest accumulated over many years when you finally sell your property.
So, if you have cash on hand that you’re not investing or getting a better-than-2.5% yield on, it can be a good idea to use it to refund your CPF as soon as you are able to.
How to monetise your home
So, you’ve spent half your life paying for your home, so might as well milk it for all it’s worth, right?
Assuming you want to make cash out of your home ASAP regardless of property prices, the quickest way to do so is to rent it out.
Even if you’re still living in your home, you can lease out individual rooms, although that comes with the obvious inconvenience of having to deal with other human beings and their questionable hygiene practices.
Another option is to downgrade to a smaller home. With the kids all grown up and leading independent lives, downgrading can be the perfect excuse to get them to stop using you as a free babysitter due to the lack of space.
For HDB flat owners, the Lease Buyback Scheme lets you sell some of the remaining years on your HDB lease back to the HDB in exchange for cash, which will be used to top up your CPF Retirement Account (RA).
To qualify, you have to be aged 65 and above and have a gross monthly household income of not more than $14,000, own no other properties and have at least 20 years left on your lease.
Being able to afford a property and making sure it has good feng shui aren’t the only considerations that need to be made when choosing a home. It’s important to actively plan your expenditure on housing so you don’t end up asset rich and cash poor in retirement.
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