Wise to pay in cash for a property instead of using a loan or CPF?

Wise to pay in cash for a property instead of using a loan or CPF?

Grace Leong

MAR 1, 2020


After agonising for more than two years and enduring more than 15 viewings, I finally sold my 43-year-old, five-room family flat in Dover last October and bought a four-room flat in Tiong Bahru with 95 years left on its lease.

And I am all paid up in full for my new home as of Dec 18 last year. With cash.

Thankfully, my property agent's commission for both the sale and purchase transactions came to less than $3,000 in total. That confirmed my belief that one doesn't necessarily have to pay a 2 per cent commission on the sale price of one's HDB resale flat for a good agent's services.

But my joy at being debt-free was momentarily quashed. This, after two economists and a well-meaning former supervisor pointed out that I should have taken advantage of still-low interest rates to finance my flat purchase and weighed the opportunity costs of not investing those funds in real estate investment trusts (Reits), DBS shares or even bitcoin, which could have earned a higher rate of return to offset my borrowing costs.

But, two months on, I am thanking my lucky stars I didn't invest my sale proceeds in the stocks I had my eye on, or bitcoin, or oil, given how many asset classes, except maybe gold and Swiss francs, are being decimated by the coronavirus outbreak.

This black swan event is still unfolding and will at some point yield fantastic buying opportunities.

But for now, I am just glad I don't have a mortgage loan to service, despite signs that interest rates could drop further, given fears that the outbreak could trigger a worldwide recession. Being saddled with a monthly mortgage payment at a time when there are strong signs that a recession is looming and job security is not guaranteed, is not a good thing.

In any case, I have my doubts on how much more the US Federal Reserve can cut interest rates further as it has done in past recessions, given that rates are already so low, and the effect may be limited as lower rates won't restart factories and correct supply chain problems; ergo, get the economy going again.

I had also considered using Central Provident Fund (CPF) savings to buy my new flat.

But after using the CPF calculator to determine how much compounded interest I would have to put back into my CPF account when I sell my flat in, say, 25 years, I decided I would be better off paying in cash.

For example, if I had withdrawn $300,000 to fund my property purchase, the CPF interest I would have forgone would have come to about $260,000 over the 25-year period. That's a huge chunk of change to forgo for someone who is single and doesn't have family to depend on.

Then there is the consideration of having to meet the Basic Retirement Sum (BRS), Full Retirement Sum (FRS) and Enhanced Retirement Sum (ERS), which are $90,500, $181,000 and $271,500 respectively for members who turn 55 this year.

For members turning 55 from 2017 to 2022, the BRS will be increased by about 3 per cent from the cohort in the previous year to cater for long-term inflation and improvements in standard of living. Correspondingly, the FRS and ERS will be set at two times and three times the BRS respectively.

When I reach 55, I am quite sure those three numbers will be much higher. That is because the BRS is adjusted every year in line with expenditure patterns reflected in the Household Expenditure Survey and income levels.

According to the CPF Board, if I sell my flat at age 60, I will need to refund the CPF principal amount withdrawn for the flat's purchase and the accrued interest to my CPF account.

The CPF refunds will be used to top up my Retirement Account (RA) up to the Full Retirement Sum, and the balance will be paid out to me if I did not apply to retain my balance housing refunds in my CPF account.

But there is an escape clause. If I wish to refund only the shortfall amount in my RA, if any, to my CPF account upon my flat's sale, I can write to the CPF Board after my first appointment with HDB for the sale of the flat, and my request will be subject to approval.

Having a good agent is critical if you are an HDB seller doing contra, which is a process in which you are looking to sell your unit and buy another, and want both transactions to be executed at the same time. This allows you to move from one HDB flat to another without having to rent in the interim.

There are typically three parties involved in a contra case - the seller, the person who bought his old unit, and the person the seller buys his new unit from. All three parties must go through the entire process together until the keys are properly handed over. Any delay in either transaction could derail the contra and potentially add to your costs.

If you had used CPF money to finance your existing home purchase, the sale proceeds will have to go back to your CPF account first, before they can be used for the next purchase.

In my case, it helped that I had also used cash to pay for my share of the family flat, which meant my agent and the HDB lawyer didn't have to factor in extra time to wait for my sale proceeds to arrive and be deployed to my new flat.

Yes, I could have taken a bank loan of $300,000 with a 15-year loan tenure to finance part of the new flat purchase. Based on the HDB concessionary rate of 2.6 per cent, the total interest would come to around $62,000. But spread over 15 years, the interest alone would come to about $350 a month, which is affordable.

In hindsight, I should have done that, especially since the virus-led market sell-off means there will be assets at bargain basement prices. For instance, I can invest in blue-chip industrial and commercial Reits, whose prices have dropped significantly in the past week, and the yield may likely cover more than my monthly borrowing costs.

But for me, a bird in the hand is worth two in the bush.

I count my blessings that I don't have to worry about losing the roof over my head if, God forbid, job security becomes an issue.

Buying a new flat with a 95-year lease in a hip neighbourhood and within a two-minute walk to Tiong Bahru MRT station and the future Havelock MRT station means I have locked in some investment value and also bought myself some time, while I consider my next purchase.

By the way, here you can take a loan for buying a car, real estate or whatever you like. https://maybeloan.com provides a big diversity of financial services.

The quality of advice and information in our news media baffles me sometimes. Poor wealth management is a sure fire way to not getting your dough when you need to use it.

And I am all paid up in full for my new home as of Dec 18 last year. With cash.
- Bitcoin dec 18, $3k USD he never buy, now US$7.9k

Yes, I could have taken a bank loan of $300,000 with a 15-year loan tenure to finance part of the new flat purchase. Based on the HDB concessionary rate of 2.6 per cent, the total interest would come to around $62,000. But spread over 15 years, the interest alone would come to about $350 a month, which is affordable.
- He could have took loan of S$300k paying $350 a month interest and par back the same by depositing S$50k worth of USDC stablecoin in crypto and farm 8.6% yield (many in non-crypto world will sound scam at such yield giving USD FD less than 1% APR now). All this could have done without touching his CPF. In fact he can also compliment by putting all his CPF monies in SA to farm 4-5% APR yield to hit 1M65(1mil at age 65)

Today when interest rates are nearing zero (or negative depending on where you are), it is very strange how people think of current vs future value of money versus leverage. To all the young investors in their 20s, this article is a cautionary way to show what not to do in 2020.

Thankfully, my property agent's commission for both the sale and purchase transactions came to less than $3,000 in total. That confirmed my belief that one doesn't necessarily have to pay a 2 percent commission on the sale price of one's HDB resale flat for a good agent's services.

Buy-Sell don't even need $3,000. Just need to pay $20 dollar to attend HDB seminar.

The Lost is on this. Pennywise pound foolish.

"But my joy at being debt-free was momentarily quashed. This, after two economists and a well-meaning former supervisor, pointed out that I should have taken advantage of still-low interest rates to finance my flat purchase and weighed the opportunity costs of not investing those funds in real estate investment trusts (Reits), DBS shares or even bitcoin, which could have earned a higher rate of return to offset my borrowing costs."

The least the writer could do is to put the money in CPF OA or OA earning minimum 2.5 and max 4 plus % while borrowing at below 2%.

The loss is huge over the years.

Quote:

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Originally Posted by Arcachon

Thankfully, my property agent's commission for both the sale and purchase transactions came to less than $3,000 in total. That confirmed my belief that one doesn't necessarily have to pay a 2 percent commission on the sale price of one's HDB resale flat for a good agent's services.

Buy-Sell don't even need $3,000. Just need to pay $20 dollar to attend HDB seminar.

The Lost is on this. Pennywise pound foolish.

"But my joy at being debt-free was momentarily quashed. This, after two economists and a well-meaning former supervisor, pointed out that I should have taken advantage of still-low interest rates to finance my flat purchase and weighed the opportunity costs of not investing those funds in real estate investment trusts (Reits), DBS shares or even bitcoin, which could have earned a higher rate of return to offset my borrowing costs."

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I was once a DIY owner who never believe what others can offer.

After I pass my RES then I know there are so many opportunities I have missed.

How to share with the DIY owner who is so happy to save a few thousand dollars and miss the opportunity to profit Hundred more.

Do you want a few thousand or a few hundred thousand talks to someone who knows?