CPF Millionaire — Buying your first home
Besides planning for their wedding, Singapore couples are also faced with the tough decision of buying their own home. Fortunately, the Singapore government has made this easier but keeping HDB flats affordable through the use of ones’ CPF funds.
There is however one big misconception that young couples have is — all debts are bad. As such, young couples will use whatever extra cash and CPF they have to pay off as much of the purchase price as possible. While I agree that one should not be in debt, I however disagree that all debts are bad. Used correctly, debt is an effective way of making our money work for us.
Let me illustrate …
A young couple I know recently purchased their new HDB flat. As they were already working for several years before their wedding, they had a combined total of $100,000 in their CPF Ordinary Account. Like most young couples getting married in Singapore, they used up the entire $100,000 in their CPF Ordinary Account to reduce their mortgage. This left them with a small monthly payment which would easily be covered by their monthly CPF contributions.
Here is the problem. While taking a smaller mortgage is an intelligent thing to do, in the current low interest rate environment, it is not the wisest thing to do. Current bank mortgage rates are in the region of between 1 to 1.5%, while money in our CPF Ordinary Account earns an interest of 2.5% (with the first $20,000 earning an additional 1% making it 3.5%). Hence, by keeping their money in their CPF accounts, the young couple would in effect be earning 1% (or 2% for the first $20,000) per year. That is roughly an extra $1,200 per year earned (assuming we used $100,000 as the principal), which can easily be used to pay off the loan at a later date.
Thus, while being in debt is generally bad, wisely using debt can in effect be a smart way to make your CPF money work harder for you.
It is important to note that current CPF rules require you to “zero-out” the money in your Ordinary Account when taking a housing loan. The work-around is to make an investment in Unit Trusts prior to the purchase of your home, and “return” the money after completion of the purchase.