Having been a real estate agent for more than 7 years, I’ve come across many of my clients’ property portfolio, in particular, the CPF statement. In Singapore, the Central Provident Fund is a compulsory comprehensive savings plan for working Singaporeans and permanent residents. The main purpose of CPF is to fund for the people’s retirement, healthcare and housing needs.
My own HDB Journey (My REAL Case Study)
After I got married, I started off my home ownership journey just like most ordinary Singaporeans. We applied to purchase for our first 5-room flat from HDB in Punggol at about $269,000 in 2001. We paid mostly using CPF and almost zero cash.
5-Room HDB Purchase Price: $269,000
Location: Punggol
Bought: 2001
Sold: 2007 for $352,800
We paid off our HDB flat within about 5 years. We sold our flat soon after the Minimum Occupation Period (MOP) was met in 2007.
However, just because we paid off our HDB loan doesn’t mean we were in the clear. There is this particular CPF ruling called CPF Accrued Interest.
What Is CPF Accrued Interest?
CPF Accrued interest is the amount that members would otherwise have earned had they not withdrawn their CPF savings for their housing repayment. The interest is computed on the principal amount withdrawn for housing on a monthly basis (at the prevailing CPF Ordinary Account interest rate) and compounded yearly.
Do You Know — CPF accrued interest would continue to compound even when your flat has been fully paid off?
In essence, you are still borrowing money from your CPF for as long as you are still holding on to the HDB flat.
Our Cash Proceeds Were Not As High As We Thought
When we sold our HDB flat at $352,800.00, our cash proceeds were meant to be $83,800 ($352,800 – $269,000 = $83,800).
However, the calculation for the return of principal + accrued interest in the 7 years worked out to be $314K. Thus, cash payable to us (cash proceeds) turned out to be just $33K.
Let’s Assume we held on the HDB flat for another 10 years. Below would be the CPF Accrued Interest table.
17 Years Accrued Interest Table
| Year | (2.5%) | |||
|---|---|---|---|---|
What Was Our Opportunity Costs For Selling our Punggol Flat after MOP?
Today in 2017 the median price of resale HDB market @ Block 106 Punggol Field in 2017 is about $450,000.
At this moment, you would say that if I have waited to sell my flat in 2017 at $450,000, I could have made
$450,000 – $269,000 = $181,000
$181,00 – $83,800 =$97,200
ADDITIONAL $97,200 in profit. (Compared to my profit of only $83,800 in 2007)
But did you notice that with the selling price of $450,000, the principal plus accrued interest I have to return back to CPF after 10 additional years (from 2007) is now $403,182.96! (Refer to table above). My total cash proceeds would have been $181,000.
Cash Proceeds of $46K vs $33K (Selling in 2017 vs Selling in 2007)
But with the refund of the principal plus CPF accrued interest, my cash proceeds would merely be $46,817.04! (Compared to 2007 original cash proceeds of $33,104.11).
We would have to hold on our flat for an additional 10 years – just to gain additional $13K.
Have you realise that the Opportunity Cost of cash that would be locked is $134,182.96? This is definitely a painful amount of cash to part with!
And if I were to still hold on to our flat for 30 years’ time, the principal plus accrued interest that I will have to return back to CPF would be ~ $555,315.73!
30th Year Accrued Interest Table
(2.5%)
With abundant public housing in Singapore to compete with remaining lease of 60 years, I have to sell higher than $555,315.73, just to have positive cash sales.
When you first bought the flat, you might think it should be easy to sell. But the truth is, it is likely to be much harder to due of 2 reasons – huge supply of upcoming BTO flats and the remaining lease.
It will be much tougher than what you could have thought. Just imagine, how much do I have to sell for a typical 5 room flat in Punggol that is 30 years old just to get cash proceeds?
What if, the price of the HDB flat does not appreciate as much as the annual CPF accrued interest of 2.5% ? Most likely, this means that there would be no cash after returning the principle plus accrued interest back to the CPF.
Your cash proceeds will never be as high as you think it could be ESPECIALLY as your HDB flat gets older.
Yes, I agree that the money in your CPF ultimately still belongs to you. However, the CPF accrued interest will easily lock most of your cash liquidity you initially thought you have.
CPF funds are meant and have been designed specifically for retirement. Life expectancy is getting longer, so expect certain policies on CPF to remain.
The Alternative Path To Private Property
Though we started off like any average Singaporean couple, We proceeded to take a different path. We seized the opportunity from the monetization of our HDB flat soon after my flat hit MOP. We invested in our first private property, paying $695,000.
It took 3 years for our private property to be ready so we stayed at my in-laws place. We eventually moved into our first freehold private property in 2010.
There was no such thing as MOP for private properties. That gave us freedom to proceed to the next step easily.
We stayed for only 1 year as we got a suitable buyer offer. We then sold it off in 2011 at $1,150,000.
The cash profit from the sale was $420,575.60, after returning the principal plus accrued interest and other miscellaneous expenses.
Have I held on to my HDB flat till today, it would be impossible to make that additional $332,358.53.
This is the Opportunity Cost I could have lost should I be still holding on to my HDB flat!
Therefore the truth is, it will be a mistake to think that you will be “FREE” from financial obligations just because you have FULLY paid off your HDB loan.
Issues will surface later, especially when the remaining lease of your flat starts to become shorter and shorter.
If you try to sell your (older) HDB flat in the hopes of financing your retirement, you might be sorely mistaken as it might be difficult to get your asking price.
In Geylang Lorong 3, the remaining lease is currently about 3 years left.
From the Straits Times article dated 9 April 2017:
She said in disbelief: “My home is still standing. I don’t understand how it can be worth nothing. Will I still have a home to live in?”
The short answer is no. In a statement, the Singapore Land Authority (SLA) reiterates the Government’s stance: Its general policy is to recover land upon lease expiry.
Will this be the reality for OLDER HDB Flats?
I am not able to predict future HDB policies. But the meaning of leasehold is – Yes, it will be returned back to the state at ZERO value.
It means the remaining lease has to have an impact on the selling price of the HDB flat.
But there must be a reason why there are suddenly a lot of news coming out regarding this issue. I wrote about Minister Lawrence Wong’s blog post here where he cautioned about overpaying for old HDB flats.
There is an opinion piece by a journalist in The Straits Times titled “How To Figure Out If An Old HDB Flat Is Worth Its Asking Price”.
From this article dated 8 April 2017, it concluded:
…if your purchase is driven by other emotional and lifestyle considerations, the key is to take on board Mr Wong’s message.
Don’t buy an old HDB flat expecting SERS – or expecting the Government to guarantee its value.
It likely won’t happen.
In the article, ERA Realty key executive officer Eugene Lim has said: “It is going to be a lot more difficult to find buyers for older resale HDB flats. Prices for these flats may even take a big hit due to lack of demand. From now on, it is quite likely home buyers will view older 99-year flats differently.”
Now take a Time Machine (like Michael J Fox) and travel 30 years ahead into the future, what your retirement scene would be like?
You can choose to stay within your comfort zones.
However, by not taking any action, you have already chosen the default choice – which is your ageing flat CANNOT be depended upon to finance your retirement.
(Means you need to make active choices on your retirement decisions & plans – I recommend you to read up on CPF Life.)
Ultimately, there is no right or wrong for you to make the decision to not do anything today and paying off the flat, staying in it for the next 30 years.
BUT you may need to consider the implications of not doing anything. Right now, you are young and clear headed on your goals. As you get older, you tend to become sentimental and sometimes logic just goes out of the window.
As it has been mentioned in a few articles that this is a ticking time bomb.
http://www.straitstimes.com/singapore/housing/overpaying-for-old-flats
https://www.srx.com.sg/ask-home-prof/32162/are-you-sitting-on-a-99-year-time-bomb
HDB 99 year lease expiry: Potential time bomb for home ownership?
The main challenge is, if you have already optimized your CPF funds to expand your property portfolio.
Should you decide to do something NOW on your asset progression, you may want to find out what your available options are based on actual figures like:
- Your remaining HDB lease
- Current HDB valuation
- CPF accrued interest payable
- Current ages of the owner or co-owners
- Current income and liabilities
If you would like to understand more on the next action you can embark on base on your existing portfolio, I welcome you to contact me for a free review of your current HDB property portfolio.
Only by providing me with the correct figures would I be in a better position to understand, and subsequently, analyse and share with you your options available or the next course of action.
My two cents worth. Good for us to understand the implications. Almost 90{49daccbb7e2d0c10cdb8c8dac9c064a009bcfb6ad61c929010fad77784402b05} of sgs lives in or own hdb flats. Almost no choice except to camp. But you need a police permit. 100{49daccbb7e2d0c10cdb8c8dac9c064a009bcfb6ad61c929010fad77784402b05} of working sgs contributes to cpf. Almost all use cpf to buy homes. What portion of the population can use cash to entirely pay for the new hdb flat? Maybe cash rich new citizens. If they can fork out that cash do you think they prefer a private or hdb? So a major part of the population uses cpf. And hdb new flats becomes very affordable and always because many buyers believe they can use their cpf both husband and wife. They see their combined cpf growing to a million in 30 years. So why worry. Can afford. In any event they can sell and perhaps make a tidy profit. So carried away. With this scenario will hdb ever reduce the prices of new flats? Sanity check is needed.
1. What is the total amount of a 30 years mortgage with an average interest rate of say 6{49daccbb7e2d0c10cdb8c8dac9c064a009bcfb6ad61c929010fad77784402b05} per annum compounded? This is the real price you have to pay over 30 years.
2. Should any of you loose your job, the cpf contribution is reduced. And cash top up for the monthly repayment may be necessary. Perhaps your cpf balances can tie you over. For how long? Using cpf you can never ever walk away from your housing obligations. Even if you are made bankrupt. The draw down of your funds will stop only that account in cpf is zero. So no more retirement money? God bless you.
3. Okay cannot service loans sell flat. Be aware. The payback obligations to cpf. Others. You have enough to pay for the initial payments for alternative housing? Cost of moving. Renovations? downpayments etc?
4. The longer you stay in the flat the shorter the lease. Should many consider buying a flat left with 70 years or a brand new 99 year from hdb given the prices are very close.
Housing is big and lucrative business. But is it for you?
Hi Mr Tang, thank you for sharing your thoughts! I agree with your main points. That’s why it is important for us to be aware of these issues and that’s why I shared my personal experience. CPF accrued interest is something most people are not aware of and as an agent, I always see clients who get a big shock when they see the figures.
I really recommend everyone to login into their CPF account regularly to check on their accrued interest payable.
By the look of things, the strategy (of course depending on market situations), would be to get your HDB (BTO), sell after 5 years, get the cash portion of the profit to invest in a private property. Do NOT stay in that for long, capitalize on that ASAP, and keep moving on. This way the accrued interest on the CPF will not get in your way, the CPF helps fund your moves, only as an instrument. Then when you are ready to ‘settle’, use CPF to settle an old HDB paying up 100% and live there till you die. When you die, the value is gone, and CPF cannot ask you to repay back the accrued interest. In the meantime, all that ‘flipping’ has made you a tidy sum in Cash, and you can use that to either continue to pay up for a private property (upkeep with cash installments if necessary – can even rent out your OLD HDB flat after 5 years, and use the rental to pay for your private property) that you can either ‘sell’ again for capital gain, or pass on down to your descendants. I regret not realizing all this at an earlier stage in life.