Singaporeans are always looking for reasons to upgrade to a larger home. Then again why shouldn’t they? Homes are small enough as it is! But is it always a smart move to upgrade?
That’s a question that many Singaporeans unfortunately don’t ask and think of reasons to justify the upgrade. Some famous justifications include: “my family needs more room”, “we can free up some cash for our children’s education (or buy a car!)”, or “I’m sure we can make some money from selling the bigger house and downgrade after the kids grow up”.
So are you in the financial position to upgrade?
Let’s Look at an Example
Alvin is a 45-year old Singaporean making $5,000 a month who currently owns a 3BR HDB flat in Ang Mo Kio. He’s looking to upgrade to a 4BR flat in the same area.
Let’s look at the numbers:
The Property Sale
Alvin’s 3BR flat in Ang Mo Kio is worth $325,000. He has an outstanding home loan amount of $100,000. He has used $120,000 (including accrued interest) of his CPF funds towards the purchase of the property.
If he were to sell the property now at $325,000, his proceeds would depend on:
- Bank: (First Charge) – Pay back the bank whatever he owes , which is $100,000
- CPF: (Second Charge) – Refund to CPF whatever he has used, which is $120,000
- Cash Proceeds (Sale) – Whatever remains after the bank and CPF have claimed their part are his proceeds, which is $105,000
So after the sale, Alvin would only have $105,000 in cash as his proceeds.
The Property Upgrade
Alvin now has $105,000 + his CPF ($120,000) to use towards his property upgrade – which is a 4BR flat worth $445,000 located in the same area as his old flat.
Here’s the breakdown Alvin’s bank loan for the property upgrade:
|CPF||$66,750 (15%)$7,950 (Stamp Duty)||$45,300|
*Note: Assuming Alvin was approved for an 80% bank loan at $356,000 for 20 years. His monthly instalments would be $1,685 at 1.3%.
So what’s the problem with Alvin’s property upgrade? Well, there are plenty of problems with Alvin’s plan. When most people upgrade, they want to hold onto their cash proceeds instead of putting the amount back into their new property purchase.
In Alvin’s case, that’s exactly what he wants to do.
However, there are some big problems with Alvin’s approach:
- Based on Alvin’s age (45) and pay of ($5,000 a month), his contribution to his CPF OA is $950 a month, which means he needs to top-up $735 in cash every month! This means contributions to his CPF OA will be $0 for the next 20 years – meaning his OA balance will stay at $45,300 for the next 20 years (CPF OA 2.5% interest rate at best will negate the rate of inflation).
- With Alvin’s CPF OA stagnating at $45,300 + his Special Account (SA), most likely he won’t even be able to meet the minimum sum (MS), which is currently $155,000. That means he probably won’t be able to retire comfortably unless he has plenty of cash saved up.
- If Alvin doesn’t have enough money to retire comfortably on, most likely he’ll need to sell his 4BR flat and downgrade to a 2RM or 3RM flat. Not to mention he’ll have to pay conveyancing fees and stamp duties.
However, if Alvin were to keep his 3BR flat instead of upgrading to a 4BR flat, he could have easily paid off the $100,000 outstanding balance on his old property in as little as 5 years (assuming he’s paying $1,722 per month at 1.3%).
At age 50, he would have paid off his housing loan and would have been in a better position to start saving up for his retirement.
Assuming he’s still making $5,000 a month until age 65, he would have at least $87,000 in his CPF OA account. That’s much better than having only $45,300 – plus, that’s not counting any additional $772 ($1,722 monthly instalment – $950 CPF OA usage = $772 cash) he would have left over to save up!
That comes out to $138,960 if you save up that amount for the next 15 years, which will make your retirement even more comfortable.