Should You Apply For Rochor River Peak BTO

Should You Apply For Rochor River Peak BTO?

Winning the BTO lucky draw is a bonus for many of young married couples. Pinnacle @ Duxton, Natura Loft @ Bishan, The Peak @ Toa Payoh are among the few that has made headlines for being sold at over a million dollars. These BTO are typically are matured areas.

The government then came up with the PLH model to discourage property inflation especially in the matured area.

In this article, I hope to share whether you should apply for River Peaks @ Rochor in the aspect of financial planning (affordability). I will seek to illustrate how much you should be earning monthly to be able to afford this property comfortably.

Should You Apply For Rochor River Peak BTO
Should You Apply For Rochor River Peak BTO

The Assumptions

Buying price for River Peaks is $635,000 (Average of $582K to $688K).

The couple is eligible for BTO application, no debts, no grant whatsoever. They pays for equal portion of the HDB downpayment and the loan. They starts from zero with no help from parents.

We are using HDB loan that requires the couple to pay at least 10% downpayment ($63,500) of the purchase price. We do not use bank loan as it require 25% downpayment and we assume that it is not an easy sum to pay.

We do not include stamp duties and misc expenses.

Illustration #1: Young Couple that just started working

If your partner and yourself are young with a few years of work experience, HDB loan might be the only option if you do not have capital.

Taking the medium monthly gross $3468 for the age group 25-29, your CPF-OA contribution will be $797.85 monthly. It will take you roughly 40 months / 3.5 years to have $31,750 in your CPF-OA. This means that you can consider applying for this BTO if you have already worked at least 3.5 years. Of course, if you have a good saving habit, you can use cash to pay for the downpayment (see #1A).

However with the monthly gross salary of $3468, the available HDB loan that is $458,400 and this is insufficient as the loan amount required is $571,500. There is shortfall of $113,100.

In this case, you cannot apply for the Rochor BTO unless you have saved an extra $113,100.

Should You Apply For Rochor River Peak BTO HDB Loan Estimator
Should You Apply For Rochor River Peak BTO HDB Loan Estimator

Illustration #1A: Young Couple that just started working and are savers

Let’s push the assumption one step further and assume that the young couple saves 30% of their income for downpayment. This translates to $1040.4 cash and $797.85 CPF-OA per person per month.

Shortfall: $635,000 (property value) – $458,400 (potential loan amount) = $176,600

Monthly Couple Saving Towards Property: [$1040.4 + $797.85]*2= $3,676.5

This translates to 48months or 4 years.

Their estimated monthly mortgage repayment will be $2,080 for a 25 years payment at 2.6%. This works to be cash of $242.15 per person monthly.

This is doable but not easy. However, majority of their equity will be in their house.

Illustration #2: Young Couple that just started working with higher median monthly income

Given that the constant is the amount of loan that can be obtained, I did the reverse calculation and found out that a monthly income of $4,400 will produce the HDB loan of $576,000.

Should You Apply For Rochor River Peak BTO HDB Loan Estimator 2Should You Apply For Rochor River Peak BTO HDB Loan Estimator 2
Should You Apply For Rochor River Peak BTO HDB Loan Estimator 2

In this case, a monthly income of $4400 would mean your CPF-OA would have $1012.09 being contributed monthly. It will take around 32 months or 2.7 years to have $31,750 in your CPF-OA.

Similarly, their estimated monthly mortgage repayment will be $2,080 for a 25 years payment at 2.6%. This works to be cash of $55.82 per person monthly.

Definitely suggest that you probably need a higher income to be comfortable to afford this property.

Final Thoughts

I expect that people applying for this BTO is probably going to be couples that have worked for at least 4 to 6 years (maybe 28 to 32 years old). I expect that their income to be at least $4000 to consider this project.

This assumption means that they have both time to save in their CPF and their saving account to afford for this project.

The downside is that the project have a waiting time of 71 months or close to 6 years (without delay). This means you would not be able to have a home until you are close to the mid 30s.

What do you think about this project? Let me know in the comment below.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

CPF Accrued Interest Trap Can You Downsize and Retire

CPF Accrued Interest Trap: Can You Downsize and Retire?

“My plan is to downsize my house to use the (capital appreciation) money for retirement.”

I was walking past a coffee shop and I happened to hear the above statement. The man who looked like he was in his 50s seemed to radiate confidence about his statement. I wonder if it was possible. While we are going to explore that today, do check out my most popular blog post in 2020 so far: 5 mistakes people make using their CPF.

CPF Accrued Interest Trap Can You Downsize and Retire
CPF Accrued Interest Trap Can You Downsize and Retire

Context Setting

To buy a home in Singapore, I would say a good majority of us will take a loan. As we are able to take up to 90% (HDB loan) or up to 75% (Bank loan) of the property prices, this means we have to put a down-payment. To illustrate, a $400,000 HDB property would require us to fork out at least $40,000 as down-payment.

To pay for this down-payment, I know most people would use their CPF-OA to pay for it. At the same time, most people will also use their CPF-OA to service their home loans.

This means that our CPF-OA might be wiped out throughout our loan bearing years.

What most people fail to recognized is that we are charged interest for using our CPF-OA, this is known as accrued interest.

 

CPF Accrued Interest

Accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing. The interest is computed on the CPF principal amount withdrawn for housing on a monthly basis (at the current CPF Ordinary Account interest rate) and compounded yearly.

(Source: How does the Board calculate the accrued interest on the amount of CPF used for my property?)

As CPF is meant for our retirement in our planning of Wealth Management, to safeguard the “loss of interest” during the years the monies are used for property, we need to refund the CPF-OA the following.

  1. The down-payment that was used
  2. The monthly installment that was used
  3. The accrued interest (interest that we would have received from our down-payment and installment if we didn’t withdraw from CPF)

 

Will the plan work? Let’s put it to the test

Let’s fixed a few reasonable assumptions to form an illustration. We will looking at downsizing from a 4 bedded HDB to a 3 bedded HDB after the loan tenure of 25 years.

HDB 4RM Value: $400,000

Down-payment: $40,000 (10%). Buyer Stamp Duty (BSD): $6600. Legal Fee: $3000.

Loan amount: $360,000. Monthly Installment: $1634. HDB Loan: 2.6%

CPF Accrued Interest Trap Can You Downsize and Retire Calculations
CPF Accrued Interest Trap Can You Downsize and Retire Calculations

In month 1, we add the down-payment, BSD, legal fee and the first monthly installment of $1634 to get $51,234. From day 1, the accrued interest would already be $106.74. In 25 years time (300 months), the total accrued interest would have already accumulated to $184,698!

Assuming the property market grows at 3% annually, your $400,000 property will now be worth $837,511. Isn’t that great? Your profited $437,511!! Before you think that your profit will be $437,511 and can be used for retirement, here is when the accrued interest trap comes in.

When you sell your house, you have to return back to your CPF the down-payment, the monthly installment and also the accrued interest. This would mean that you have to return $724,498 ($539,800 + $184,698) into the CPF. Your cash proceeds will only be $103,013.

Wait there’s more! 

Because you are downsizing, you can use your existing CPF-OA to acquire a HDB 3RM. Using time value of money, a HDB 3RM wroth $300,000 now will be worth $628,133 in 25 years time if it grows at the same 3%. You have to make sure that you have enough money to acquire that HDB 3RM.

Wait there’s even more!

You have to pay the HDB resale levy of $30,000 (as of 2020), agent fee of $8,375 (1%) and also legal cost of $3000.

Wait there’s even some more!

After the age of 55, you have to set aside your Full Retirement Sum (FRS) which is a combination of your Ordinary Account and your Special Account. This might post some problems to use your CPF-OA to acquire a HDB 3RM if you are unable to reach your Full Retirement Sum.

And lastly..

Assuming that you can acquire the HDB 3RM without problems, would $113,013 be enough for retirement?

CPF Accrued Interest Trap Can You Downsize and Retire
CPF Accrued Interest Trap Can You Downsize and Retire: Oh Damn

 

Conclusion

Retirement planning is often more than a single solution. There are many caveats that stumble the best of us. To ensure your retirement is secure, work together with someone that you trust and exhibit good expertise in this matter.

In my experience helping people plan for retirement, I realised those that retire in comfort usually have a combination of retirement tools ranging from properties, stocks, annuity and also insurance.

Thank you the uncle at the coffee shop who inspired me to write this article. Please help to share this article so that this article may find its’ way to him.

 

No one will care about your money as much as you do.

In Wealth Management, it is important to Pay yourself first. Beware of scams. Before you invest in any company or popular investment opportunity, be sure to do your own due diligence. If you wish to learn more about investment, I hope to nurture genuine relationships with all of my readers.

Check out my most popular blog post in 2020 so far: 5 mistakes people make using their CPF.

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