Financing of a property purchase would probably be a ‘simple and straight-forward’ process for most of the young working Singaporean adults. Why is it ‘simple and straight-forward’? It is probably not because everyone is an expert in financial planning and management. It is rather the case where most of us are left with very little financing options given the high prices of Singapore property.
Majority would have taken the maximum loan limit of 80% (subject to meeting the total debt servicing ratio limit), maximizing the loan tenure and source for the lowest interest rate mortgage loan package to make sure our monthly mortgage repayment is manageable and the financing of the 20% down payment using cash and CPF savings.
This was the case for myself when I made my first purchase of an investment property in my late twenties. Back then, banks could lend up to 35 years and the total debt servicing ratio limit was not as stringent as today. I managed to secure a 35-year loan at 1-month SIBOR + margin rate and it comes with the option of switching the base rate at any time. This option is something useful and offers flexibility as I can enjoy the low-interest rates at that point in time and yet protect against any rise in interest rate by switching the base rate to a longer term SIBOR when short-term rates start to increase. Yes, the word ‘Flexibility’ is the key.
What about the 20% down payment? The initial 5% option fee had to be paid in cash. Then for the remaining 15% down payment, there are a few factors to consider when I was deciding how much cash/CPF to use for the payment:
- Maximizing the interests of my CPF savings – There is an extra 1% interest per annum paid on the first S$60k combine balances with up to S$20k from Ordinary Account. Hence, I would want to make sure that I still have sufficient savings in my CPF combine balances to maximise the extra interest. Just as an illustration, if S$20k of my OA savings can get to enjoy a higher 3.5% interests, I would rather keep these S$20k inside my OA account and not drawing it down for property purchase, to let my money work harder for me!
- CPF Accrued Interest – Using similar principle as point 1 above, if we compare the CPF OA interest rate of 2.5% (without additional interest) against cash savings rate in banks of about 0.05%, one might be inclined to use more of their cash savings to pay for the property purchase and not to use their CPF savings. Moreover, there is an accrued interest component repayable to a person’s CPF account for the amount in CPF OA drawn down for property purchase. A person needs to top up into his CPF account from the sales proceeds upon selling his property. And the greater amount a person draws down from his CPF OA for a property purchase, the more accrued interest he will need to refund to his CPF account when he sells his property in future. Also, the amount of CPF accrued interest will be more if the holding period of a property is longer. Hence, in some instances, the remaining cash left for a property seller might not be much after deducting the accrued interest.
- Financial Flexibility – So, should we just keep all our CPF savings untouched and use as much cash as possible? It all boils down to the amount of financial flexibility that a person would like to have. The trade-off of the higher CPF savings rate is that the savings inside the CPF account have restricted use prior to our retirement age. Savings inside the CPF accounts can only be used for property purchase, CPF-approved investments, and financial planning products. For a person like me, who is always on the lookout for investment opportunities, having the financial flexibility in holding more cash is more important than enjoying the high interest rates in CPF accounts.
I believe that there isn’t one rule for all when it comes to financial planning and management. Every individual has a different set of considerations and priority to consider. Hence, it would be important to list down your priorities and considerations, think through them and even seek advice, so that you are able to make a sound decision that would not cause you to lose any sleep over it.