Flats with remaining leases of less than 60 years are problematic. (Financing the purchase of a HDB flat, new or old.)

I revealed in my last blog post that I have been exploring HDB's website and there is really plenty of useful information for anyone who is thinking of buying a flat, new or resale.

One question that some might wonder is whether they can afford a flat. 

Another question some people might wonder is how much of their CPF-OA money can be used to pay for a flat.







I would like to share what I have found with anyone who might be interested:

"Some measures of housing affordability use the Home Price-Income ratio (HPI), where a figure of 6, for instance, would indicate that the property being purchased is priced at six times the buyer’s current annual income.

"In Singapore, HDB uses the Debt Servicing Ratio, or DSR as a more accurate indicator of actual housing affordability. The DSR refers to the proportion of the monthly household income set aside for housing instalments.. This measurement takes into account interest payments, which the HPI does not. It is calculated on an assumed 30 year loan, and the figure would rise if the loan tenure were shortened.





"HDB’s commitment to Singaporean households centres on the provision of new BTO flats. A typical first-time home buyer of a new flat in a non-mature estate used on average, less than a quarter of their monthly income (at the point of application) to pay for their housing loans. This means that most buyers are able to pay for their monthly instalments using CPF, with no or minimal cash outlay. 

"For example, a buyer, with a lower monthly income of $2,500 may opt for a smaller 3-room flat in a non-mature estate, to be financially prudence. This buyer will only need to come up with a very minimal cash outlay of $4 for the monthly instalments."

Click to enlarge table.
Source: HDB speaks.

Actually, it is all about being financially prudent. 

Some people had trouble with money because they overstretched their finances, over-consuming on housing, and it usually happens during the boom years because stories of how people made tons of money selling properties would be plentiful. 

Being greedy at the wrong times and getting the purchase of a property wrong is likely to tie us down and hold us back for a long time.





Of course, it really doesn't pay for us to keep up appearances. 

Living below our means might not be glamorous but, financially, it will give us a lot less to worry about.

What about the amount of CPF money we are allowed to use for the purchase of a flat? 

Generally, there is less of an issue, if any, when purchasing BTO flats with fresh 99 year leases or resale flats with remaining leases of 60 years or more.

The problem is with the purchase of flats with remaining leases of less than 60 years. 






In fact, for flats with remaining leases of less than 30 years, CPF money cannot be used in their purchase at all.



I have a found a very nice info-graphic to help explain this:

Click to enlarge.

Source: Using CPF for a property.

So, as conventional wisdom goes, if we are considering the purchase of a resale flat, try to avoid very old flats especially if we want to keep the option of reselling the flat open. 





If our flat should have a remaining lease of less than 60 years by the time we want or need to sell, it could be more difficult.

Searching for solutions to a reader's predicament has led me to learn quite a few things and I hope you have found this blog post useful too.

Related post:
Retiring comfortably with a HDB flat.

Retiring comfortably with a HDB flat.

A recent comment by a reader with a predicament led me to searching the internet for possible solutions. 

While unsuccessful, I came across an info-graphic by HDB which I find very good. 

So, I am sharing it here:

"If I sink my money into my flat, how will I be able to retire comfortably?"

Source: HDB Speaks.

I also wish to say that if we do the right things, we could possibly retire a millionaire without ever having to monetise our HDB flat. See:

1. Retiring a millionaire is not a dream.
2. What is $1 million at retirement?
3. $1 million in retirement funds.

If we want something badly enough, we will work towards it. If we are determined, our chances of success will be higher. Believe it.

Other related posts:
1. Housing and the CPF.
2. Buying an apartment: Considerations.
3. POSB HDB Loan: Peace of mind.
4. Balancing returns, risks, facts and fallacies.
5. Retiring before 60 is not a dream.

Accordia Golf Trust: At what price is it a BUY?

Some readers asked me at what price would I be interested in Accordia Golf Trust since I have said that I was not willing to pay the IPO price of 97c a unit, believing that it did not represent good value for money although it promised a 7% distribution yield.

Some asked me if they should start buying once the unit price goes under the NAV per unit of 92c because with its IPO in Singapore just 0.7x subscribed, it could see unit price sinking quite rapidly on the first day of trading.

Of course, I almost never give a clear answer to questions like this.




However, I will say that although it could be nice to buy something below its NAV, when we are investing for income, we really want to see whether the level of income that is being generated is attractive enough and how much of that promised income to be distributed is sustainable.

To do this, I looked into the Trust's gearing. The first observation is the very high gearing level of about 53%. That is similar to Croesus Retail Trust's current gearing level and yet Accordia Golf Trust could only promise a distribution yield of 7%.

Next, I looked at the way its debt has been structured. Long term debt really consists of three term loans of JPY 15 billion each.

The first term loan is for 3 years and the cost? 1.25% +
The second term loan is for 4 years. 1.5% +
The third term loan is for 5 years. 1.75% +

What is that "+" for? Cost of debt is actually a base percentage + the 6 months JPY TIBOR. If you don't know what TIBOR is, it stands for Tokyo Interbank Offered Rate which is forecast to be about 0.3%.

I feel that the TIBOR is likely to stay low for some time as Prime Minister Abe keeps borrowing costs low to encourage economic growth and works towards a targeted sustainable inflation rate of 2% per annum for the country. So, there could be some comfort there despite the high gearing level.

Just like Saizen REIT's loans, the term loans here are amortising in nature. Per term loan, the Trust has to pay JPY 75 million half yearly starting 31 March 2015. This means JPY 75 million x 6 in a year starting 31 March 2015. Per year: JPY 450 million.

On top of this, interest payment if estimated on the high side using 2% is about JPY 0.9 billion or 900 million

With total annual comprehensive income at almost JPY 6 billion, yearly debt repayment will be about 22% of annual comprehensive income from March 2015 to July 2017. In August 2017, the 3 year term loan will have to be fully paid.

Of course, by then, let us hope that the Trust would have found some way of refinancing since it would probably be impossible for them to pay off the remaining JPY 13.6 billion or so in the first term loan using internal resources.

Accordia Golf Trust's guidance is to pay out 90% of its income to unit holders from the 2nd year onwards but what is the distributable income available then? Ah! That is a question people might not have asked as they simply assumed that it would be 90% of the first year's DPU.

At the exchange rate of S$12.20 to JPY 1,000, assuming an annual comprehensive income of S$73.2 million and almost 1.1 billion units in issue, we would get a DPU of 6.65c if 100% of income is distributed to unit holders. If we should expect that only 78% of comprehensive income would be available for distribution from March 2015, then, DPU falls to 5.2c. If we still want that 7% yield, then, unit price has to fall to 74c which is a 24% decline from the IPO price.

Now, if only 90% is to be distributed, DPU could be as low as 5.2c x .9 or 4.68c.

So, at what price would I be interested in initiating a long position in Accordia Golf Trust? Let me talk to my bowling ball and I hope it is in a talkative mood.

Related post:
Accordia Golf Trust: 7% distribution yield.

Pre-owned books Flash Sale!

How do these sound to you?

1. Free shipping worldwide.

2. Save on cost. Save the environment.

3. Help promote literacy amongst the disadvantaged.

Buy pre-owned books from BetterWorldBooks and we will be doing all of the above.

Now, till 31st July, BetterWorldBooks is running a DOUBLE DONATIONS FLASH SALE!



Shop the Better World Books Double Donations Flash Sale, save on used books and double your impact on literacy, all with Free Shipping Worldwide!

Related post:
1. Donate a book to the needy.
2. ASSI is a BetterWorldBooks affiliate.
3. Bought another book from BetterWorldBooks.

Blogs that show the ugly truth about AK.

People know that AK is frugal. 

People know that AK buys stuff when he sees value for money.

However, life is never perfect. 

Why? 

Well, it is just the way it is. 

It is about being human. 





AK is not perfect. 

AK is as human as any other... er... human being.

I try to be rational but I have weaknesses too. 

It is a drag to be rational all the time, anyway. 

So, how? 

I give in to weaknesses from time to time lor.

Banana? Stunned?

Don't believe me? 

You want evidence of AK's wrong doing?

Where got criminal provide evidence to incriminate himself one?

What? Evidence is in my blog?

Cham. How like that?





The proof is in the pudding... er... ice cream (and more).

1. Ice Cream! See: High class ice cream.

2. Restaurant visits! See: Soup Restaurant.

3. Rolex watch! See: Vintage Rolex.

4. Tag Heuer watch! See: Repairing a watch.

5. Stayed in a Junior Suite! See: HK Hotel.

6. Bought a car! See: Bought a new car.

7. Stayed in condo! See: Photos of AK's home.

8. Added in 2018: Bought a gaming laptop!

See? 





I don't bluff you, right?

You can say plenty of stuff about AK but at least he is honest about being weak.

Bad AK! Bad AK!

Anime fans might know this scene from 
One Piece.
Stuck on a rock in the middle of an ocean, they ran out of food but had a whole sack of treasure. 
What use was all that treasure when what they really needed was food?

In our modern day society, having more money is good. 





Having more money gives us more options. 

However, remember that money is used to exchange for goods and services which we need or want in life. 

That is what money is for.

Don't be a 守财奴 (i.e. scrooge). 

There is no point in having a lot of money and have no happiness.





Please read a story from AK's past: 
How rich is rich? (14 NOV 2010)

P.S. While avoiding being a 守财奴, try to insist on having value for money. Sorry, I couldn't resist saying this. -.-"

Related post:
Kopi with Song Stonecold: Getting value out of everything.

An annuity proposal: A case study.

I would like to share this exchange which happened on Facebook just now and see if readers who do not follow me on Facebook have anything to say:

"I happened to ask for an annuity proposal recently. put in one lump sum at 50 and start drawing down at 55. AK, do you think this is a good deal?"

Click to enlarge.

My response:

"Basically, we are giving them $150,000 and letting it accumulate for 5 years before they start paying us.

"Conservatively, if we were to invest $150,000 for just a 4% dividend yield which is doable, we would receive $6,000 a year or $30,000 in 5 years, assuming we do not re-invest.





"So, in this case, at age 55, we should have $180,000 in the kitty (assuming investment value stays the same but I believe this is something of academic interest since we won't be able to sell the annuity and so, we have to assume, we won't need to sell the dividend paying stocks).

"Now, if we were to receive a 4% yield on $180,000 at age 55 onwards, we would get $7,200 a year. This is quite a bit more than the annuity payment of $530 x 12 = $6,360 a year. 

"Of course, we can argue that there is a non-guaranteed portion to the annuity. 

"Well, whether that portion will be paid or not is almost in the realm of speculation, isn't it?






"This annuity is, in my opinion, probably a good choice for people who are not very savvy when it comes to investments.

"I will also say that they want to consider a quarterly, half yearly or yearly payout instead of a monthly pay-out.

"If they choose a yearly pay-out, they get $20 more a month.

"They have to be quite disciplined and, of course, don't fall prey to the "magic stone sect"."Just for the sake of comparison, for someone who is currently 55 years old and who has $155,000 in his CPF-RA, 10 years later, at age 65, under the CPF Life Standard Plan, he would be able to withdraw $1,221 a month. (This is more than double that of the private annuity plan.)





"If you like, ask the insurance company which proposed this annuity plan to provide another table which allows an accumulation period of 10 years instead of 5 years so that you can directly compare against the CPF Life which we are automatically covered under."

CPF Life Estimator.

I am just sharing my own thoughts and this is not meant to be any sort of advice.

If you have any thoughts on the matter, please leave a comment. 

I am sure we will all appreciate a constructive and civil discussion on the matter. :)




Related posts:
1. An annuity plan for retirement needs.
2. Achieving level 1 financial security.
3. Retiring before 60 is not a dream.

9 wealth building blog posts!

"Most people believe the key to wealth is a high-paying job.

"Yes, it's easier to amass assets if you have more money coming in each month, but the true secret to increasing your net worth is to spend less than you make.

"It is a cliche; but it is the fundamental, absolute, non-negotiable reality of money.

"To escape this trap, you need to understand that income is not wealth.





"The level of your wealth should be measured by the length of time you could maintain your standard of living without an additional paycheck." J. Kennon

I see, I want, I buy?

Want to see how someone in his 20s is becoming wealthier by the day?

I am talking about Matthew Seah.

The chart he shared with me will blow your mind away:


Becoming a millionaire next door.





It is about saving as much money as we can by keeping expenses low.

This means that we should not buy luxury goods especially not in order to impress people when we have made some money!

I understand that we are human and sometimes we need to pamper ourselves a bit but, please, don't go  Buying a $500,000 watch after 3 years of work to make a point.






The long and short of it, If we are not rich, don't act rich.

Chances are that once we are rich, we won't bother.


Finally, don't get tempted by the dark side. Learn The secret to avoiding financial ruin.







5 more and we make 9 wealth building blog posts complete:
1. Two questions to help us build wealth.
2. An essential habit to becoming richer.
3. The millionaire next door.
4. A fast track to wealth building.
5. From rich to broke?

IPS forum on CPF: Something light and something dark (purple).

I have been doing quite a bit of heavy duty blogging on the "IPS forum on CPF and retirement adequacy" and I am glad I decided to focus on the 8 expert speakers at the two panel discussions because there is not enough coverage provided by the media.

If you would like to read what was reported in the media, here are links to ChannelNewsAsia's reports:

When the CPF system was introduced in 1955, the retirement age was 55. Life expectancy then, was between 60 and 62. Today, for those turning 65, one in two will live beyond 85, and one in three will live beyond 90. 

"What happens if you are that one in three? What happens if you are that one in two?,” said Mr Tan. “So when we talk about shifting goal posts, I would say it is actually not about shifting goal posts. I think the game has changed, it is the same game but the rules have changed. The playing pitch has enlarged in very significant ways, the game is played slightly differently."

The Minimum Sum provides for a basic level of retirement payout. As people live longer, the Minimum Sum goes up too, to ensure adequate payouts. Currently, the Minimum Sum stands at S$155,000, after adjusting for inflation, for those who turn 55 in July. How the sum will be calculated beyond that is being reviewed.

Source: ChannelNewsAsia




Speaking at a forum on CPF and Retirement Adequacy organised by the Institute of Policy Studies on Tuesday (July 22), Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said options like private pension plans have to be studied carefully and it is important that people understand the risks involved.

Mr Tharman said the CPF system has served Singaporeans well, and it will keep evolving to meet their changing needs. However, even as improvements are being made, it is important to keep the basic strengths of the CPF system, he added. These strengths include giving a fair return to ordinary CPF members, without exposing them to financial risks they cannot carry.

For those who can stomach higher risks, he said he agreed that the Government should study how to provide options so that they can try to earn higher returns than what is currently provided under the CPF investment scheme.

Source: ChannelNewsAsia




Anyway, enough of heavy duty blogging for now. Here is something light to give my brain a break.

Photos of lunch at the forum:

Garden salad.

Chicken, carrots, cucumber and potato.

Fruits and some French sounding dessert.

Everyone had the same 3 course lunch and I hope Roy enjoyed the lunch treat as well.

Roy?

Which Roy?

This Roy:

Roy Ngerng at the forum.

I saw him during the coffee breaks but the face did not register until he stood up, identified himself before putting questions to DPM in the afternoon.

Till now, I still think his current situation could have been avoided. Seriously. 

Many have questioned the CPF system before. Many have criticised the CPF system before. However, not many, if any, were foolish enough to defame the Prime Minister in the process.

Still, I wish him the best of luck and I hope he does not do anything foolish again.




Related posts:
1. "Return our CPF" protest in Hong Lim Park.
2. "Return our CPF" protest? Why not a contest?
3. We can manage our money better than CPF can.

IPS forum on CPF: Improving the CPF system.

The final speaker in the afternoon session's panel discussion was Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy. He tried to suggest ways in which the CPF could help to meet not only the basic retirement needs of Singaporeans but to maintain their current lifestyles at retirement.

Prof Hui said that in order for people to maintain their current lifestyles at retirement, they would have to have a retirement income that has an IRR (income replacement rate) of 60 to 80%. 

He shared that the CPF provides a higher IRR for lower income groups than it does for people who command higher salaries, typically, of more than $5000 a month due to a contribution cap set by the government. 

In his opinion, this cap should be raised and CPF members should be allowed to contribute more to their CPF accounts if they want to.

I feel that Prof Hui missed the point that the CPF is primarily meant to cater to the needs of lower income Singaporeans. This is the reason for the extra 1% of interest paid only on the first $20K in our CPF-OA and the first $40K in our CPF-SA. 

If we are financially more capable, we will have to find ways to make more money for our retirement years ourselves. We shouldn't burden the system.

I also wonder if there is a need to maintain pre-retirement lifestyle at retirement. Is an IRR of 60 to 80% really necessary? Could we not lead a simpler life during retirement? In my case, although  some would argue that I already have a simple life, I could give up my little car when I retire, for example.



With the purchase of housing, the IRR falls naturally.
I feel that monetisation is a solution in funding retirements for some.

It is difficult to have our cake and eat it too. Although Prof Hui does not seem to like the idea of monetisation of our homes as an option for retirement funding, we have to be pragmatic. 

Prof Cherian said that the Americans are quite pragmatic when it comes to downsizing their homes if there is a need and why shouldn't Singaporeans be pragmatic too?

Prof Hui made a point about raising the CPF withdrawal age for younger workers who are likely to live a longer life on average. I do agree with this as life expectancy increases some 2 to 3 years every decade. This helps to address the issue of increasing longevity and keeping CPF retirement payouts more sustainable.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Young working Singaporeans, you are OK.
3. Why a wealthy nation cannot afford to retire?

IPS forum on CPF: The CPF-IS and its alternatives.

The afternoon's third speaker was Mr. Alfred Chia whose job was to talk about the CPF-IS. 

He had to walk carefully through his presentation because people could feel that he had vested interests to protect if he was not objective enough. 

To his credit, I think he did quite well in toeing the line.

Mr. Chia said that whenever the CPF Board liberalised rules to allow members to use their CPF funds for investments, it would be the insurance companies and banks who got very excited. Their motivation is to make money from fees, after all. 

Plenty of products would be pushed out then to entice CPF members. Unfortunately, these have happened more often than not during market peaks.

Click to enlarge.

Anyway, very unfortunately, 85% of CPF members have lost money under the CPF-IS. 

This is due to a cocktail of factors but such a high percentage could be reduced if CPF members are better educated on things investment.

Mr. Chia also talked about Dollar Cost Averaging and how, for the average guy, this could be the best way to go. Of course, this should not be a new concept for regular readers.

I believe that sales people will always be sales people. They have to sell things to make money for themselves. 

We have to take on the responsibility of deciding for ourselves if a financial product makes sense at all. So, increasing our financial literacy, like it or not, is important in our society.

Personally, I have always said that the CPF pays risk free rates of 2.5% to 5% per annum. Unless a certain investment product is able to do better, it is better to leave our CPF money where it is. 

Indeed, I find the risk free rates in the CPF-SA so attractive that I would encourage anyone to do Minimum Sum Top Ups if they are allowed to. Of course, they would enjoy income tax relief at the same time.




"We can never be too sure about our investments and how they will do. However, the CPF gives us a measure of certainty which we need in our golden years. So, it is a good tool in retirement planning and we should make good use of it." AK, 24 March 2014 in Securing risk free returns early for retirement.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Dollar Cost Averaging and expected returns.
3. Nobody cares more about our money than we do.
4. Double your income, not your income tax.