Couple chose to service loan using cash

Mrs. J.S. Yee's proudest achievement is that her family is able to pay for the mortgage instalments entirely with cash.

Jul 12, 2020

Tan Ooi Boon
Invest Editor


Is it tough to service your mortgage entirely with cash? Not when you know why you are doing so and that you have planned for it.

Like many property owners, when Mrs J.S. Yee and her husband bought a two-bedroom apartment in Marine Parade about 10 years ago, they used their Central Provident Fund to pay the bulk of the 20 per cent down payment.

As the price of the apartment then was $700,000, they used $35,000 cash and $105,000 from their CPF to make the purchase.

They secured a loan for the remaining sum of $560,000 with monthly mortgage payments of about $1,800.

The 40-something couple, who are living in the home of Mrs Yee's parents with their three children, bought the unit as an investment.

They initially also used their CPF to pay the mortgage, but as the property is part of their retirement planning, they soon realised that it did not make sense to withdraw money from their CPF, which is earning 2.5 per cent interest, while spare cash was earning next to nothing in their savings accounts.

So a few months after the purchase, Mrs Yee, who works in the finance industry, switched to using only cash to pay for the monthly instalments.

"This was something that I had no regrets doing as it allowed my CPF to grow," she says.

While using cash meant less spending money, Mrs Yee said they had sufficient savings until they found tenants for the unit.

"We are very blessed to be able to stay in our parents' house, while being able to invest in property. We live a simple life and do not spend lavishly on branded goods."

To date, they have spent around $216,000 in cash to pay the mortgage over the past 10 years.

And to ensure that they can continue to make loan payments without touching their CPF, they have even set aside around $20,000 to ensure they can always pay the mortgage in cash.

The value of the apartment has gone up, but they do not have any plans to sell.

So what lessons did she learn from her purchase?

"Property purchase for investment purposes is like playing a game. You need to plan how to win the game. A lot of planning is involved," says Mrs Yee.

"You also need to know your strategy for this property purchase. For us, we intend to hold it long term, so rental play will be our strategy."

DO YOUR SUMS

Before they bought the apartment, they calculated to make sure that they could make a profit when they rented out the unit.

That meant ensuring that the rent would be higher than the monthly mortgage instalment and maintenance fees.

Even if there is a "profit", you have to make sure that it can cover other costs such as furniture for your tenant, repairs and property tax.

Another consideration for Mrs Yee was to have a buffer for times when they were not able to get tenants. "We have to be prepared to fork out cash to cover for the monthly mortgage," she says.

Like many parents, one of their main considerations for investing in a property is to allow them to leave the asset to their children.

But Mrs Yee does not have immediate plans to buy a second property.

"Properties are very expensive nowadays and it is tougher to play this game due to cooling measures."

Being a landlord has its challenges as well. "You will face difficulty in managing both the tenant and the property. It's a lot of work. So it helps if you can find a good property agent to help you to find and manage the tenant."

She says they were fortunate in having made the purchase early because there are real risks of property investments turning sour.

"It is very important for families to do their maths to see if it's really a good investment. Is the rental more than your monthly mortgage payment?

"If it is not, you better avoid it otherwise it will be a negative investment as you have to put in more money to cover for the monthly mortgage payment or maintenance fees."

KEEPING YOUR CPF INTACT

But her proudest achievement is that her family is able to pay for the mortgage instalments entirely with cash.

She hopes more home buyers will do likewise. "Try to use cash to pay for the monthly mortgage if you are able to. Cash doesn't earn much interest in the bank account, but CPF earns 2.5 per cent interest," she says.

She has come across many people who still say that using their CPF for the monthly mortgage payment is the better move, because they can cash out from their CPF before hitting 55.

But those who do so will miss a chance of letting their money grow and get even more than any bank account.

So how much more can you gain?

Take someone who has been withdrawing $500 monthly to partially pay for his home loan.

In 10 years, he would have withdrawn $60,000 from his CPF. But if he had paid cash in that 10 years, he would not only have $60,000 more in his CPF, but also an additional gain of almost $8,000 in interest for that sum alone.

Says Mrs Yee: "We are blessed that we have CPF to cushion our retirement so that we can retire comfortably.

"I am now looking at making small payments monthly to refund into my CPF for the amounts I used for the property purchase."