By: Zeng Han Jun, CPCG, Singapore

Somebody whom I have met recently, asked me “How much CPF can I use for my property purchase?” When I reply that one can use up to 120% of the valuation or purchase price, whichever is lower, he got a shock. “120%! For what? Why do they allow me to use so much CPF?” These encounters have in fact been pretty frequent and normally they are young couples. I realized that many people assume that the price of their property is being derived from a set of values that ranges from the valuation and seller’s perceived value. That is only part of the equation. Another important factor that determines the price of your property is your home loan. Simply put, when you buy your property for $1,000,000, it does not mean that you are buying it for $1,000,000. You are only buying it for $1,000,000 when you pay for it in full cash, without any leverage.

For example, if you are buying a property for $1,000,000. You decide to take up a housing loan that is structured at 3.5% fixed for the whole loan tenure which is assumed to be 30 years. Based on these assumptions, you will be buying this house for $4,271,735. Of course it is not so much if we were to calculate its net present value, but to keep matter simple for this discussion, we will stick to $4,271,735. You are paying $4,271,735 for your house, not $1,000,000. Allowing you to withdraw up to 120% of the purchase price [assuming it is lower than the valuation], you can use $1,200,000 of your CPF to pay towards your property investment. What it means is that, at some point of time in the future, you will have to service your housing installment entirely by cash. Therefore 120% is not really that much after all.

This is the exact reason why people refinance their housing loan. For someone who just bought a property, and assuming he does not refinance his housing loan for the whole loan tenure, his interest rate will probably ranges between 4.5% - 6%. Compared to someone who bought the same type of property, but refinances as and when it is appropriate to do so, he effectively controls his interest rate at a range of 2% - 3.5% throughout the whole loan tenure. Simply put, the latter is buying the same type of property at a cheaper price.

It does not matter if you are a home owner looking to stay for long or an investor looking to sell off your existing properties for a profit. Keeping tab on your investment will definitely pay off in the future. The home owner will be able to spend less cash for his or her property purchase, while the investor will be able to realize a greater potential in profit margin when he unloads his investments.

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