Using CPF to pay for your flat as you grow older – possible?

by Leong Sze Hian

I refer to the article “More help for low-income families to buy their first flat” (Today, Mar 4).

Ït states that:

“One household which will benefit is Mr Rosli Nodin’s family. Mr Rosli and his wife Saribanon Senin have two young children. They have been living in a one-room rental flat in Bukit Merah for the past 15 years.

Mr Rosli is the sole breadwinner with a take-home pay of about S$1,000 each month – of which S$110 goes towards paying the rent.

Under the SHG (Special Housing Grant), the family will receive S$20,000. They also qualify for another S$40,000 under the Additional Housing Grant (AHG) scheme. With the grants, the family will be able to afford a two-room BTO flat – priced at about S$100,000 – with a S$40,000 loan.

To service the loan, they will have to pay S$181 each month which can be met with Mr Rosli’s CPF contribution”.

With a take-home pay of about S$1,000, his salary is about $1,240, with $244 to his CPF Ordinary Account.

At $181 a month for the mortgage repayment, his S$40,000 HDB loan is for 25 years.

As the HDB normally gives loans up to age 65 (subject to a maximum of 30 years) plus the fact that Mr Rosli has been renting from HDB for 15 years already, we can safely estimate Mr Rosli’s age to be at least 40.

Issue of declining CPF OA contributions

Singaporeans’ CPF contribution that is credited to the Ordinary Account declines with age. That is, as you grow older, your contribution to your CPF OA is less. The OA is what you use to pay your housing mortgage loans.

Here’s a simple look at how much OA contribution you make as you grow older:

Age 35 & below – 23 %

Age 35 & above – 21%

Age 45 – 19 %

Age 50 – 13 %

Age 55 – 11.5%

Age 60 – 3.5%

Age 65 – 1%

Therefore, assuming that Mr Rosli’s salary remains at S$1,240, his Ordinary Account contribution will drop, as follows:

Age 51 – S$161.20

Age 56 – S$142.60

Age 61 – S$43.40

In short, his Ordinary Account contribution will be less than his S$181 monthly mortgage repayment.

His declining CPF contribution will not be able to service his loans as he grows older – unless his salary increases to S$1,392, S$1,574 and S$5,171 when he reaches age 51, 56 and 61, respectively.

As you grow older, you must earn more to pay the same amount of loan because your OA contribution rate gets lower.

With the statistics indicating that low-income workers like Mr Roslihardly hardly having any wage increase over the last ten years or so, what is the likelihood that his salary increase in the future will hit the amounts computed above?

I would also like to point out that even if nominal wages increase in the future, recent history indicates that low-income workers may not be able to catch up with the rising cost of living.

CPF service loan means affordable?

This example illustrates the flaw in the repeated exhortations to Singaporeans that HDB flats are affordable.

The obvious flaw here is the assumption that the entire monthly mortgage can be serviced from one’s CPF, at the contribution rate of the OA at the time of purchase. We should not forget the issue of declining Ordinary Account contributions as one gets older.

Of course, low-income flat buyers like Mr Rosli may have to risk defaulting on his mortgage and the loss of his flat, if he suffers a job loss, pay cut, illness, etc, over the 25 or 30 years of a typical HDB housing loan.

3-room flat example

For a family earning S$2,001, the new SHG is S$5,000 and the AHG is S$30,000.

In the latest Yishun January BTO exercise, the average three-room BTO price is $166,500.

The 30-year housing loan of S$131,500, after deducting the total housing grants of S$35,000, requires a monthly repayment of S$526.

Assuming the flat buyer is 30 years old, the CPF Ordinary Account contribution is $460. This means that $66 has to be paid in cash.

Similar to the example of Mr Rosli, the Ordinary Account contribution of the flat owner will drop as follows:

Age 35 – S$420

Age 45 – S$380

Age 50 – S$260

Age 55 – S$230

Similarly, the salary would have to increase to S$2,190, S$2,421, S$3,538 and S$4,000, at age 36, 46, 51 and 56, respectively, in order to get the same S$460 Ordinary Account contribution of the flat buyer when he first purchased the flat.

Three-room flat for low income families: buy at your own risk?

In other words, the flat owner’s salary would have to be double what he earned when he first bought the flat – if he is to be able to service his loan through his CPF.

If the flat buyer is older, at say 35, his salary when he crosses 61, would have to be S$13,143!

(Note: I have not factored in the current CPF wage contribution ceiling of S$5,000, which would make the future Ordinary Account contribution even less than my computation above, for age 61.)

I wonder how many flat buyers are aware or were told of the above, when they did their flat purchase financial counselling at HDB.

In this connection, even if the real wage growth target of 30 per cent (40 per cent nominal growth) in the next ten years is achieved, and in future years, his income would only increase to about S$2,801, S$3,922 and S$4,700 in the next 10, 20 and 25 years, respectively.

Would such wage increases be sufficient to cope with the rising costs of living, on top of having to service a mortgage with declining CPF contributions?

Low-income families should be allowed to use their CPF to pay for HDB rental flats, instead of being forced to buy a flat. Otherwise, they run the risk of having to use cash to top up for the shortfall in their CPF contribution, and run the risk of losing their flats and becoming homeless.

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