Why Spending ALL YOUR CPF on Housing Downpayment is BAD
Hey guys, how’s it going?
Okay, so I decided one random vlog probably wasn’t gonna cut it for breaking down complex explanations about CPF and investing for you guys. So here’s an article about how I did my planning for the young couple I mentioned in my video!
Let’s call this couple Sam and Lisa.
So they were originally intending to take a 350k CPF loan on a 2.6% interest rate for 25 years. This was after all the initial government grants and what they originally intended to be a 90k down-payment via his CPF-OA. They had managed to lower down the loan amount from 528k to 350k which was pretty amazing in its own right.
So in comes me, waking up late on election day several months back because I was watching Indian Matchmaker past what most would consider a healthy sleeping time.
I book a Grab and hastily hop in to get to Boon Lay to cast my vote like the good citizen that I am. Then I realize why not put myself out there and tell people what I do for a living, because, y’know, Grab drivers are literally captive audience that can’t run away when you wax lyrical about your amazing career as a commission-based financial adviser.
We hit it off great. Life stories are exchanged, and we set up a proper meeting 2 weeks later.
I try to get this guy on some of our amazing cash investments that can outperform the S&P500 with our annualized returns.
How’d you like a 13.36% YTD return despite Co-Vid 19?
Oh, and 9.0% annualized since inception? (net-of-management fees)
OK, jokes aside, he couldn’t do it because he was strapped for cash due to Co-Vid 19.
However, he told me that he was keen on finding a way to not deplete his CPF-OA (Ordinary Account) because he was buying a resale HBD and had to make the down-payment by the end of the year. And here, ladies and gentlemen, is the most amazing part.
He actually asked me if it was possible to use his CPF-OA to invest and how to go about doing it.
You know what’s amazing? A client who actually knows what he wants. Too few of that in life.
Anyway, we sit down and a few discussions later, we conclude that the 350k loan they were wanting to take was awesome for a few reasons.
1. It reduced their overall loan interest to the smallest possible amount given their current finances.
2. Their monthly instalments are at the lowest possible amount with this option
With this arrangement, their interest payments are at $126,353 on top of the base sum of $350,000 that they have to repay. This makes the overall repayment amount of the loan $476,353.
So that sound’s amazing, but he had set aside that 96k in his CPF-OA painstakingly after 3 failed businesses over the past 4 years. Spending it all at one go on the housing down-payment didn’t seem wise to him. And for good reason too.
Conclusion: Put 50k in the down-payment and give us 40k to invest over this 25-year loan period.
What does this look like on paper?
Monthly instalments are at $1769/month, which are to be split equally between him and his fiancée. A small increase monthly.
But on the total payments, it balloons from $476,353 to $530,793. A whopping $54,440 increase in interest payments.
This is the gap I need to bridge as a consultant to make it worthwhile to actually take up what I am offering.
So what, then, happens to the 40k lump sum investment?
The answer is simple.
At a 6% annualized rate of return across a 25 year period, we can project returns such as these:
Straight off the bat, this beats the returns of the CPF-OA yearly interest of 2.5%...
…by a whopping $97,517.07 ($171,674.83 - $74,157.76) or 131%
Why I wrote the article:
If you are buying a new house because you are about to attempt a new form of business AKA marriage, you might want to consider NOT dumping the entirety of your CPF-OA into the down-payment.
Especially if you’re taking a CPF loan that you need to pay back at 2.6% interest per year.
Assuming your salary stays the same for the rest of your life, your CPF contributions to the Ordinary Account would be spent on servicing the loan instalments for AT LEAST 25 years AND THEN SOME.
Having a portion of that work passively to generate higher than a paltry 2.5% annualized would be a wise move, to say the least.
Moreover, if at any point in time down the road you need a lump sum of cash to clear a bulk of your housing loan (if not in its entirety), you can always sell off the investment to obtain the cash to do so.
I would be happy to answer any emails and questions you may have - especially about insurance and investing, due to my personal and professional interest towards it.
If you have any such questions about the article and how it may apply to your finances, you can feel free to leave a comment or message me at the links down below.
Do like and share my page, Dollartainment, if you enjoyed the video.
Erdem Ong is a Licensed Financial Consultant with MAS
The views, opinion and information in all articles are those of the blogger. These materials do not represent or reflect the views of Manulife Financial Advisors nor is endorsed by them. Manulife Financial Advisors shall not be liable or responsible for the materials of the author.