Today, we’re going to discover something that is almost always related to property funding in Singapore.
Yes, using CPF monies for your property purchase, installments, everyone knows it’s the almost the norm right??
Are you using CPF to fund your first home too?
If you had paid for your flat mainly using CPF funds and
- I’m going to chiong to finish the loan, be debt free (YAY!)
- holding on to the flat and thinking of investing in a private property (Yes! now i’m going to have 2 properties)
- going to sell my flat for huge profits (Woohoo!)
Read on then, this would interest you.
First things first, when you buy a flat, CPF monies are used to pay for the down-payment and servicing the loan (doesn’t matter from bank loan or HDB loan, as long as it comes out of your CPF account), you would be liable to “pay back” to your CPF account as you are “loaning” the money from your CPF account thus depriving it from earning 2.5% compounding interest. (click here to check your CPF accrued interest thus far)
Here’s what the CPF rules are when you decide to sell your house.
The accrued interest compounds at a rate of 2.5% P.A. To put it into perspective,
if for example you had used $400,000 for your flat. Plus the accrued interest, you owe CPF $513,000 thereabouts after 10 years. WHAT!?? Say if you had sold your flat for $550,000, assuming you had no outstanding loan left (because repaid all using CPF) $550k – $513k = Profit. Not as much as you expected?
http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
Now that you’re clear on how CPF accrued interest works, what are the pitfalls of the 3 scenarios above?
- I’m going to chiong to finish the loan, be debt free (YAY!)
- The CPF accrued interest would just keep rolling as long as the property is not sold and the loan repaid. Its just going to balloon out of proportion. (This is one of the reason why some people despite having their property value appreciated over time, have a negative sale: No cash proceeds)
- Holding on to the flat and thinking of investing in a private property (Yes! now i’m going to have 2 properties)
- same reason as above. But this is the more worrisome option. If you are into property investing, you should seriously look into the issue of accrued interest as it will eat into any potential profits in the future. In this example, a ten year loan would already incur over 100k of interests, what would the accrued interest be in say, 30 years later? If HDB is left with 60 yrs or less, the next buyer cannot take full loan. And if it reach at the end of 99 yrs, the asset value will depreciate to zero.
- same reason as above. But this is the more worrisome option. If you are into property investing, you should seriously look into the issue of accrued interest as it will eat into any potential profits in the future. In this example, a ten year loan would already incur over 100k of interests, what would the accrued interest be in say, 30 years later? If HDB is left with 60 yrs or less, the next buyer cannot take full loan. And if it reach at the end of 99 yrs, the asset value will depreciate to zero.
- Going to sell my flat for huge profits (Woohoo!)
- well, it depends. Depending on how long you had held on to the flat, or rather how long have u “owe” monies to CPF board, u might or might not have cash proceeds left after repaying loans and repaying CPF.
I’m sure by now you had more or less grasp the crux of it. Yes, Time. The longer you hold, the bigger it’ll roll. When compounding interest works for you, it’s GREAT, but not in this case.
BUT CPF also belongs to me!
Yes, that’s true, but for sellers looking to make a profit, or to use that cash proceed as down-payment for their next home, this might possibly be a deal-breaker if you do not have cash savings to start with.
(click here to check your CPF accrued interest thus far)
Big ticket items such as properties require planning and doubts should be cleared before purchasing.
Read about some common scenarios that Singaporeans are facing here!
However, it’s still not too late now, contact us if you are wondering how to restructure your portfolio now. Many had benefited from our services and you can too!
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