By now, most of you have read the headlines regarding the latest Central Provident Fund (CPF) statistics which showed that in 2020, about 8 in 10 home owners aged below 50 years of age are able to use their CPF to pay their loan, and had sufficient CPF savings for at least 6 months of instalments.
Assuming that the next question you might ask is “So what?”. Exactly, have you ever wondered what about the balance 20 per cent, or 2 in 10 home owners below 50 years of age, are found to be not able to have sufficient CPF monies to finance the balance of the home mortgage? Are they in dire straits? Would their retirement future be in jeopardy?
Back to the headline question, are you part of the problem? Meaning, are you living on an overextended lifestyle, or to put it simply, are you living beyond your means, and do you think it is the time that you should halt your obsession of pursuing that so-called “Singapore Dream” of owning multiple properties? Do you think that you are able to have enough sufficient retirement savings to survive for the rest of your life, including old-age?
How have private residential property prices perform so far
The above chart shows the URA Private Property Price Index (PPI), and in the latest data, the overall 2021 private residential home prices have shot up 10.6 per cent, as compared to 2.2 per cent in 2020.
While home prices have been showing an increasing pace, home owners appear to be show some financial prudence when using their CPF Ordinary Account (CPFOA) balances in making their home mortgage instalments.
In fact, in the latest November 2021 CPF Trends report, the number of CPF members who used their CPF to finance their mortgage payments have been declining from 2018 to 2020. Bear in mind that these three years that were surveyed were pre-Covid-19 pandemic years.
Moreover, in the latest 2021 Financial Stability Review (FSR) published by the Monetary Authority of Singapore (MAS), the authors noted that while household debt has been rising and housing loans being the single largest contributor (2.4 percentage points) to the 3.7 per cent growth in household debt since end-2019, they (housing loans) have largely declined by 0.8 per cent according to the 2021 FSR report.
But MAS has also sounded a caution in the same report that in the event of a shock to the property market, the correction in property prices could impact domestic demand, given that residential properties and loans account for the bulk of the household balance sheet, representing about 40 per cent of assets and 75 per cent of liabilities.
The caution might have also led to the latest implementation of a new set of property cooling measures with effect from December 16, 2021. With the ongoing global supply chain disruptions, domestic cost pressures, and the unsettled pandemic crisis (now in its 3rd year), CPF members, and especially those who might feel that they are in the so-called at-risk category of not able to retire comfortably, might want to seize this opportunity to take a step back and evaluate their past property frenzy lifestyles, and consider cutting back on their indulgence in chasing that so-called “Singaporean Dream” of owning multiple properties.
So, how do I know if I am in the “at-risk” category
First of all, if you are planning to sell your first property in the secondary market, be it a private property or a HDB flat, do you have sufficient sale proceeds to cover your initial home mortgage using your CPFOA balances?
You might question why do I even need to evaluate given that I am reasonably confident in selling my home at a price that can reasonably cover the balance of the home mortgage loan, and still have a reasonable balance left for my next home. Well! You do need to work out your sums first with a mortgage advisor, your bank, your real estate salesperson (RES), or a financial advisor before even thinking of proceeding with the sale of your property. Showing overconfidence about the future rising home prices is not going to guarantee that you are going to escape relatively unscathed in next housing downturn.
One of the reasons is if you are using your CPFOA to fund the majority of your home mortgage instalments, then the proceeds of the sale of your property must be sufficient enough to cover what you have withdrawn from your CPFOA, plus the accrued interest that goes along with it.
Say, for example, you dispose your flat for $500,000, with an outstanding home loan amount of $300,000, and that you have withdrawn more money from your CPFOA of say $225,000 to finance the $200,000 remaining balance your initial home loan, there is still a remaining $25,000 of that $225,000 amount used to pare down the remaining home loan balances of $200,000, on top of the other transaction costs like legal fees, etc., that needs to be returned back to your CPFOA, plus the accrued interest.
A simple explanation from the above paragraph is whatever the amounts that you have taken out from your CPFOA for the purposes of financing your home mortgage loan payments need to be refunded back, along with the accrued interest.
Exercise financial prudence for now
First, please do not feel ashamed that you have been leading an extravagant lifestyle for the past few years, and that you have now starting to come to terms with reality. First, you do need to seriously look at “repairing” your household balance sheet, and do not be too overconfident or think that property prices will outlast basic demand and supply dynamics.
Learn to accept the facts, and do the necessary corrections, rather than to let yourself overlook at the importance of saving hard for your retirement. Start early now.
Request for a voluntary CPF housing refund
Do you know that CPFOA earns you 2.5 per cent per annum? Well! Could you ask around, especially the financial institutions (FIs) that you have banking relationships with, if they a savings plan, or fixed deposit (FD) plans that give you 2.5 per cent per annum, and compounded each year?
Well, if you cannot, and if you using the 75 percent home mortgage loan from one of the local banks in Singapore to make up the monthly mortgage loan instalments using the bulk of your CPFOA savings, you might want to rethink or best, consider applying to the CPF for permission to do a voluntary housing refund (VHR. In fact, CPF is also actively encouraging home mortgage borrowers like yourself to do so early and fast for the following reasons:
The benefits seems to outweigh the pitfalls of doing a VHR as CPF sees it as
Less amount needs to be refunded to your CPFOA when selling your property.
Second, have more while in your retirement years.
Third, the refunded CPFOA moneys can be reinvested in other higher yielding financial products, such as the loval public-listed entities, or real estate investment trust (REITs) with reasonably good track records of sound corporate governance practices, and with the the highest ranked Environment, and Social Governance (ESG) scores.
Or simply to reinvest in your CPF balances (OA, SA, MA) to earn even higher yielding compounded rates.
Consider rental housing
The above diagram shows the rental index for private residential properties as of the 3rd quarter, 2021 (3Q21) where just for the rentals of non-landed properties alone, they have increased by 1.4 per cent as of 3Q21 compared with the 3.1 per cent increase in the previous quarter (2Q21). The latest private residential rental index for 4Q21 is expected to be published later this month (January 2022).
So, in short, non-landed private residential rentals, are relatively unscathed from the December 16, 2021 property cooling measures, at least as of 3Q21 for now.
However the low rental prices might not persist in 2022 as shown in the latest The Business Times (BT) article, published on January 12, 2022 which discussed about the housing analysts’ thoughts that the latest property cooling measures could spur more rental demand due to the several false starts to the reopening of Singapore’s borders, along with the global supply chain disruptions, among various other disruptions.
These factors could result in a potential spill over of homebuyers choosing to rent while waiting for their next property to be completed. This is most especially applicable to the thousands of homeowners still waiting for their respective Built-to-Order (BTO) flats and new private condominiums to be completed.
Live with parents or in-laws
If you are still trying to ponder on your next home, consider tighten even more on your finances, by continuing to live with your parents or in-laws. While this option might be the last thing in mind for couples who are seeking for their own so-called “freedoms” from co-sharing with their loved ones, one might turn around and say, it could be the only option left, and perhaps an opportunity to try to learn to live together harmoniously with your loved ones.
This pandemic season is also a good opportunity to strengthen the family bonds, and by now, you ought to know that time is limited especially for the aged folks among us. Your parents, and/or in-laws are getting old, and you want to be there to see them grow old and to make their rest of the remaining years more meaningful.
So, think about it. What if you turn older in the future, do you think that your children and/or grandchildren could afford to spend more time with you? How do you feel being neglected?
In summary, this article shows that there are many options available to avoid being overrun by sky high mortgage payments, and the prospect of living on meagre retirement savings because you did not plan your finances properly. Live within your means, and in the long-run, you will have a better quality of life, and you will treasure your family bonds even more.