Sunday, February 3, 2013

Avoid Cash Top-Up For HDB Monthly Mortgage Instalment

According to HDB's website, 

"Buyers must use all the available savings in their CPF Ordinary Accounts for the purchase of or taking over the flat before any housing loan is granted by HDB."

This means that you have to deplete your CPF Ordinary Account (CPF OA) before a HDB loan can be granted. Your subsequent monthly CPF contribution will then be used to service the HDB monthly mortgage instalment. If your monthly contribution to the CPF ordinary account (23% of gross income) is insufficient to cover the monthly mortgage instalment, you have to top up the shortfall in cash. 

Assuming you bought a HDB BTO flat for $400,000, the 10% down payment, stamp fees and other fees will to approximately $50,000. You and your partner have accumulated $70,000 in your CPF OAs. According to HDB regulation, you have to deplete this $70,000 before any housing loan is granted by HDB.  However, the required amount you have to pay is only $50,000. This excess $20,000 is used to offset the purchase price, thereby reducing the loan you need. This sounds like a good idea but in the event that either you or partner gets retrenched, a substantial amount of cash-top up will be needed every month and this can put a huge strain on your finances. What you need is a buffer in your CPF OA for any unexpected circumstances. 

So how do you build a buffer when HDB requires you to deplete your CPF OA before a loan can be granted? With reference to the example above, all you need to do is to transfer the excess $20,000 into a CPF Investment Account by buying some investment products before you pay the down payment. After the HDB loan is granted, you can liquidate the investments and transfer the money back to your CPF OA. This excess $20,000 should be enough to cover at least a few months of mortgage instalments. Also, if your monthly contribution to the CPF OA is insufficient to cover the mortgage instalment, the $20,000 buffer can cover the shortfall and no cash top-ups will be needed. However, do note that the first $20,000 in your CPF OA cannot be used for investments in the CPF Investment Scheme. 

While paying a higher down payment can reduce the amount of the mortgage loan and monthly instalment, a buffer in the CPF OA provides more security and acts as an insurance to safeguard your finances against any unforeseen circumstances. At the end of the day, it all boils down to personal preference and balancing the trade-offs.