Downsizing our homes for better financial health.

Hi AK,

My husband and i are in our late thirties. 

Right now we own a 5-rm hdb flat. 

We do not have children yet, but are planning to. 





We have plans to downsize our hdb to a 3-rm flat because:

1) there's only the 2 of us. 
Even if we have children, the size of a 3-rm flat is still considered ok.





2) we can pay off a bigger portion of our mortgage loan as the loan amount will be much lesser compare to our current one. 

We do not plan to buy a 3rm which is more expensive than our current 5rm. 

(However, we may have to take up bank loan as I have already used up my 2times hdb loan quota - one with my family before i got married and the current one.)





3) i have a couple friend who downsize their hdb from 5rm to 3rm, fully renovated it nicely and was able to pay off the housing loan in full. 

Now their income are purely for living expenses and savings/investments. 

That also gave me the idea of downsizing.





Please advise if there is anything which i may have overlooked and anything to look out for.

Thank you!

Best Regards
Blue

Hi Blue,

I like the Tiny House movement. 

Very often, people over-consume when it comes to housing. 

In a country where housing is so expensive like Singapore, over consuming on housing can really set us back financially, everything else remaining equal.





1. If you feel that a 3rm flat gives you ample space, then, you don't need any flat bigger than a 3rm flat. 

You might want a bigger flat but you don't need a bigger flat. 





2. If you would like to have a smaller mortgage, downsizing and downgrading definitely makes sense. 

Keep the monthly repayment for your new home loan the same amount as what it is for your current home loan and you will pay up the mortgage faster.





Alternatively, you might want a longer term loan, taking advantage of the low interest rates now and improve your cash flow. 

However, you should have the resources to pay down the loan rapidly in case interest rates go much higher.





3. To have a home fully paid means you have both control and ownership. It is an asset. 

As long as a home is not fully paid, we do not have ownership despite claims to the contrary. It is a liability.

Related posts:
1. My home is a hut in the sky.
2. Housing and my CPF money.

Wife wants to sell HDB flat to buy condo (Part 2).

Thanks ak.

Sorry, didn't make myself clear.

She's intending to sell current HDB to buy condo for own staying.

So rental probably not a big concern.

I'm just trying to consider when is a good time to do such "upgrading".

Sell HDB now will not lose but won't earn much.

But selling HDB during recession would save more if condo prices fall more so perhaps make sense to wait for recession.

Do you (just your own thoughts) think govt may lift ABSD if recession hits? 

Hi R,

The health of the rental market will determine the market prices of real estate to a large extent. So, if the condo rental market continues to soften, condo prices will continue to come under pressure. For own stay or rental, this is something to bear in mind.

Our home is a consumption item. It would not be wise to overstretch our finances to stay in a more expensive home and I know a few people who overstretched.

If we are able to afford a condo quite safely (i.e. it does not impact our balance sheet badly and it is not reducing cash flow to a trickle), then, good.

If I had to sink further into debt and if my monthly cash flow is reduced drastically because of this purchase, I would worry.

Of course, always think about the opportunity cost. For example, if I had to dispose of income producing assets in order purchase this condominium, I would think twice.

Staying in a condominium does not give any financial security.

Personally, I do not think that the ABSD will be lifted soon. When interest rates start rising in a sustained manner, maybe. Just a guess.

However, you might want to ignore all that I have said as keeping your wife happy might be worth the price to you.

This is where I should stop talking to myself.

Best wishes,
AK

Related post:
Wife wants to sell HDB flat to buy condo.

Wife wants to sell HDB flat to buy a condo.

Hi ak,

My wife had been hankering me about buying a condo coz her sisters all have multiple condos. All renting to service loans. I just feel we are late to the properties game and don't want to get caught in a bloodbath.

In order not to pay ABSD, she thinks we should sell our current flat. But the market is so bad now I don't know whether we could sell at all.

Her argument is if we wait for market to worsen,  though we may get the condo cheaper but our flat price would also drop. So there is no best time.

What would you do if you are in similar position?

Thanks.
R

Hi R,

1. Fact. Rental market is getting softer and softer. Even if prices of condos come down a bit more you could be setting yourself up for disappointment as vacancy rate continues to go up and rental market stays soft.

2. If I could, I would have bought a BTO HDB flat. If I had a HDB flat, I wouldn't sell it, especially not because I want to avoid paying ABSD on a second property if I am going to buy one.

3. When a crash happens, condo prices will drop more than HDB flat prices in absolute dollar terms. 

OK, now comes the difficult part.

If I were in your shoes, my stress level is probably through the roof because I am not the type to throw pragmatism out the window to please my other half.

Good luck. :)

Best wishes,
AK

See Part 2: here.

Related posts:
1. Disastrous property investments.
2. If we are not rich....

Fixed rates, SIBOR, FHR18 or HDB housing loans?

Over the last year or so, I received quite a handful of emails and messages from readers on the subject of home loans. I think this blog post is probably overdue.

The banks can come up with fancy acronyms or names for their offers but there are basically two types of home loans: fixed rate or floating rate.

This is my take:

Fixed rates are for people who want to have a higher level of certainty and are quite happy with the lock in period. 

Floating rates are for people who wish to have the flexibility that comes from not having any lock in period.

I believe that which option we choose should depend on our circumstances, our beliefs and, hence, our strategy.

I choose a floating rate home loan pegged to the 1 month SIBOR (+ 1%) because I believe that I have the resources to pay down my home loan rapidly if interest rates should spike. 

For example, when interest rate on my home loan spiked to 5.1% many years ago, I chose to pay down the loan for my previous home. 

5.1%? Yes, I know this might look unbelievable to younger readers but ask the older folks and they should remember and, for some, it might have even been higher.

However, if I did not have the resources to pay down my home loan, I would have been stuck with the relatively high financing cost. 

I was not eligible to re-finance my home loan as the quantum was lesser than $200K by then. Banks weren't interested in refinancing relatively small loans.

This was a chat I had recently with a reader:

• Reader: Hi Ak, are you able to update on your home loan vs bank loan blog. Do you think is advisable to get dbs bank loan. 1st year fhr18 + 0.4%, 2nd year onwards, fhr18 + 1.2%. Lock in for 2 years. Cpf is still 2.6%.
• 
  
• 

  11:16am
  

  Assi AK

  Sounds like a good deal. The worry is the FHR18 and how high it could go but interest rates are likely to stay low for a while.

  
  
• 11:21am
  

  Reader:
  

  
  

  
  

  I read your blog about paying home loan within 10 year. Lower interest. Is there a ideal year that we should finish our loan

  
  

  Number of year. Or a formula we can used
• 

  11:23am
  

  Assi AK

  10 years was because the fixed rate would end by then.

  
  

  It was an offer by POSB.

  
  
• 11:23am
  

  Reader:
  

  
  

  
  

  That offer ended. So this is the current promotion. I hope it wouldn't go up more than 2.6 percent
• 

  11:25am
  

  Assi AK

  The first 2 years, you are probably safe but the FHR is floating. So, in the 2nd year, if it does not go to 1.4% or higher, you are safe. Further along the road, it would be harder to say.
• 11:26am
  

  Reader:
  

  
  

  
  

  So in the other words. Hdb will be a better opinion
• 

  11:31am
  

  Assi AK

  Nope. I didn't say that. ;p It depends on our strategy, our circumstances and our beliefs. If we have the resources or are actively preparing the resources to be able to pay down our home loan rapidly in the event interest rates spike up, then, bank loans with the lower interest rates now are viable options to consider. Why not? Remember that once we opt for bank loans, we cannot go back to a HDB home loan.

  
  

The offer made to the reader by DBS here is pretty interesting because it is a floating rate with a lock in period of 2 years. Floating rates don't usually have a lock in period. 

What's the catch?

If the FHR18 should spike in these 2 years, bad luck, although it seems unlikely that it would.

What is FHR18?

The FHR18 is basically the interest rate on an 18 months fixed deposit offered by DBS. This is currently at 0.6% per annum. 

So, in the above example, first year interest rate is effectively 1% and for the second year and beyond, effective interest rate is 1.8% as long as the FHR18 stays unchanged.

There are debates on whether using the SIBOR (1 month or 3 months) plus a spread is better or whether FHR18 plus a spread is better. Central to the debates is the matter of transparency with the FHR18 being the winner. 

However, to me, what is more important in the decision making process apart from getting a good deal is to consider our circumstances and what we are able to do in the event that interest rates should spike. 

I always say that we cannot predict but we can prepare. If we are prepared, all is good. Peace of mind is priceless.

Related post:
POSB HDB Loan: Peace of mind.

Unemployed, almost 55 and worried about CPF.

Reader says:

I have been following your useful CPF blog and learn alot. Lately I noticed something quite disturbing and what i deem as unfair.

We live a in HDB flat which had been fully paid off about 8 years ago. 

But I only noticed recently that the accured interest (supposed this is the amount I owed to CPF Board) has been increasing every month even after I fully paid off my flat long ago. 





I feel that this practice is unfair.

The accured interest should stop increasing the year that we pay off our loan. 

This kind of contradict the saying that the CPF money is ours. Seems that we always owe the government something somewhere.

It appears quite ridiculous because we had already paid hundred of thousands in interest during the loan term but still have to pay interest even after paying off the loan completely. 

If we borrow from banks, the interest would had stop once we clear the loan right?

I am unemployed and will reach 55 in a few years' time, how will this affect me? 

Kind of worried as retirement approach and without a job for sometime now.

I believed many Singaporean are unaware of this because we don't really track this item. 

How can we deal with this government policy? 

Do we have to pay CPF Board that substantial amount of interest if we sell off our HDB or downgrade to a smaller unit? 

Or when we reach 55 or 65? I get the feeling that one day I have to pay back that huge interest amount. 





How to retire peacefully without worrying about money in this place?

If I give the flat to my son later when I pass on, does he has to take over that accured interest?

Hope you can advise and share your thoughts.

Many thanks AK.

Best Regards

AK says:
The CPF is to help us with retirement adequacy. If we use the CPF money to pay for our homes, there is an opportunity cost. 

The government stops paying us interest and if we should sell our home, we have to pay ourselves interest in order not to compromise on the original purpose of the CPF.

In your case, you might be interested in this blog post: http://singaporeanstocksinvestor.blogspot.sg/2015/09/how-to-stop-accrued-interest-we-owe-cpf.html


Although it might appear otherwise, we don't pay the CPF Board, we are paying ourselves.



Upon reaching age 55, if you already have the MS (now the FRS) in your CPF account, you don't have to pay yourself anything if you were to sell your flat. 

The objective of the CPF to help with your retirement adequacy has been met.




If you do not have the FRS yet, then, it is a different story. 

Some of the money from the sale of your flat will have to go to your CPF account to fulfil this objective. 

There is also the option of BRS in which you pledge the value of your flat but that is another topic.





As long as we remember what is CPF's primary objective, everything makes sense.

Related posts:
1. Use CPF savings or cash to pay for our home?

2. Changes to CPF: BRS, FRS, ERS.
3. Retirement funding adequacy.

He met the CPF minimum sum but has one regret.

Regular readers know that AK transferred all his CPF-OA money into his CPF-SA in the first few years of his working life. That provided a bigger base and a longer time for compounding to work its magic. Of course, I have shared the numbers here in my blog too.

Now, this was part of a chat this evening with a reader who is buying a HDB flat:

Reader:
do you mean that letting HDB wipe out the OA money first? My flat will be ready in 2019. So in this 3 years, do you have any views on what should be done using the CPF OA money?eg. Transfer abit to SA account? I will take your comments as opinions. Do not WORRY!"

AK:
That was what I told a friend. He transferred a large portion of his OA money into his SA about 10 years ago before he bought his flat and now his SA has already hit the minimum sum. But this will work for someone with an emergency fund on hand that would also cover the mortgage payment initially as his OA builds up again after the flat purchase.


The chat gave my memory a jog. I cannot remember exactly how many years ago but it was probably more than 10 years ago when a friend discussed with me what to do with his CPF-OA money. He was still single then and not buying a flat yet.

During a meet up a few months ago, he told me that he already hit the CPF minimum sum and to a large extent, it was thanks to the hefty interest payments received for his CPF-SA savings. He basically transferred all his CPF-OA money into his CPF-SA after the discussion we had and did nothing to his CPF-SA since. 

So, apart from the mandatory contributions from employment, the money in my friend's CPF-SA really grew through compound interest!

Did my friend regret anything?

Well, it was something like this:

"I should have transferred more money from OA to SA in the following years. Then, I would have received even more interest and hit the MS even earlier."

Alamak. If AK had done that, he would have even more money in his CPF now too. Aiyah.

Of course, all our circumstances and motivations are different. We have to question if this route is something that is good for us too.

This would work for someone who is not thinking of buying a property soon or is able to buy a property without using money in his CPF-OA. 

In the latter case, to be safer, he should have emergency cash on hand which also allows for 12 to 24 months of mortgage repayments as his CPF-OA savings is rebuilding.

For a more complete picture, please read the related posts below.

Related posts:
1. CPF-OA to CPF-SA transfer before buying flat?

2. If I had done this, I would have hit MS too.

3. A lot of my CPF-SA money...
...the interest I received in my CPF-SA has been higher than my mandatory contributions to it for many years by now... 

New money habits led to saving $100K in 18 months.

In quite a few emails I have received, I found that some married couples have been inspired by my blog to improve their financial health.

I find this very heartening because it is not always the case that both parties are on the same page when it comes to money matters.





One person might want to make changes while there could be resistance from the other person and I have heard many such stories before. It could even lead to arguments and disharmony at home.

However, here is a positive example which I find even more heartening because the couple's money habits were very different before reading my blog.

Hi AK,

This blog (7 pertinent questions to help build our wealth) has really come in as a timely reminder to me. Especially now it's towards the end of the year when im doing a wrap up of my finances for 2015.

Although i dont leave comments on your blog often, i check your blog every day. I started reading your blog since JUL 2014 and since then i have never regretted spending my time on it.

Trust me, your posts are really informative and its also the time where me and my hubby bond our time together reading new updates, sitting down together discussing how can we improve our finances. =)

Like your most recent blog on food, we have also started doing our own salads and bringing it to work now. We started packing home cook lunch to work in 2014. 

When we first started this, all my colleagues were saying that this routine wont last because it is too much of a hassle. Haha, but i had proved them wrong.

Me and my hubby seldom eat out now unless its a weekend. Even if we eat out, its at hawker centre. Dining at a restaurant is almost NIL in a month except if we are going out with friends for gathering. Even then, it was always ME who choose the location so that i can control the cost indirectly. Haha

Also in 2015, both of us started contributing to our SRS account and topping up our CPF. The only regret is we started this late (I am 32 this year and my husband is 35). If we had started to transfer all our OA account to SA before the purchase of our HDB flat, i think we could have reached the MS sum quite pretty soon.

We live in a nice cozy 4 room HDB flat and are left with about $50K loan for the house. We do have some funds now to fully pay up this 50K but we were thinking if we should do so. If we do so, it will definitely dip into our emergency funds.

We have about 100K of emergency funds and we were thinking of paying the remaining loan via cash instead of CPF now because i feel that CPF earns more interest than the cash sitting in the ocbc bank.

My husband and I save about 4K per month into our emergency funds (thanks to your blog post that we started this). Prior to 2014, our savings were almost negligible. Now that we are towards the end of 2015, looking back, sometimes I find it amazing how far we have come.

Although there are still a lot of areas for improvement, I am happy that we took our first step on our journey and I wish that you will continue to inspire us through your posts. Thank you AK!

Regards,

Happy Doggy

AK's reply:

Hi HD,

Emails like yours really cheer me up. It makes me feel that talking to myself in cyberspace is the best thing I have ever done in my life. ;)

I would like to talk to myself about whether I would dip into my emergency fund to pay the remaining $50K in my HDB home loan.

First point, an emergency fund is for emergencies. Is paying the rest of my home loan an emergency? ;)





Second point, savings in OCBC 360 could pay me 2.2% per annum (if I do not invest or insure with them). This is slightly lower than the 2.6% per annum in interest which a HDB home loan charges.

Of course, OCBC 360's higher interest applies only to the first $60K. If I had $100K in emergency fund, I would split the money into two OCBC 360 accounts, one under my name and one under my spouse's name to possibly maximise the benefits.

I could also consider setting up a UOB ONE account as the second account. The UOB ONE VISA credit card has a 3.3% rebate for a minimum spending of $500 a month too. If I had $50K parked in UOB ONE account, I could get paid 2.43% per annum in interest for my emergency fund.

Holding cash could be costly but it is important to have liquidity. As long as we can lower the cost of holding cash, it is good enough for me.

You are doing a good job and I am sure your story will inspire many other married couples. :)

Best wishes,
AK





It is never easy to change our habits. It takes a lot of determination. To change habits as a couple could be even more challenging for some.

The journey towards financial security and, ultimately, financial freedom is made much easier if both parties are on the same page, definitely.

Remind ourselves that others have done it, so can we.

It can be done.

PART TWO: HERE.

Related posts:
1. UOB ONE VS OCBC 360 accounts.
2. How big should be the emergency fund?
3. Do CPF OA to SA transfer before buying flat?

Aim to pay off home loan and hit the MS ASAP.

The title of the reader's email was "CPF Haywire". So, imagine my trepidation as I clicked on the email.

Hi AK!

I've been reading your blog here and there and my eyes go haywire... so many nuggets of gold! Kam Sia very much for your contribution to society.

I just bought my first HDB and OA start from scratch. I calculated I'd have about 10k in a year. 

In order to meet the MS when i turn 55 in 15yrs time (about $244k if at 3% yearly right?), would you suggest that every few years to transfer a bit (thinking about 10k) from OA to SA for the compounding effect to be greater and yet leave some in OA for financing the 30yr loan? 







I have about 4 years worth of monthly deductions from CPFIS (principal amount), and this is my backup plan to tap on in case I lose my job.

Like you I choose to be conservative with my CPF and not take any chances in the stock market (aside from the only investment I made before purchasing the flat on the advice of my insurance agent) so my aim is to finish my loan ASAP and be able to hit the MS for retirement payout. 

Would you suggest to make partial payments every few years to lessen the years of loan or to stretch it out to 30 years?

I'm aware about tax reliefs or incentives doing VC, MS top-up, contribute to SRS but am not considering these because I have limited cash on hand.

I have 6 months emergency fund and every month I save some (for holidays, etc) and invest some for dividends (Spore ETF, REITS). Its not much because I started late in life (wish can turn back time to tell my bochap younger years to buck up!) and I'm hoping that I can still 'fix things' to ensure I have an okay retirement. 

Do you have any advice on what else can I do to improve my financial situation?

Many thanks,

OhwhatcanIdo

AK replies:
Hi,

Welcome to my blog. :)

I hope you did not buy an ILP from your insurance agent. There is no way to guarantee that you will get back the same amount you put in if you need the money.

I say this because you are looking at it as a backup plan in case you lose your job.








Money in an investment should not be looked upon as money in your emergency fund.

Of course, I will have some other stuff to say about ILPs but you can do a search for these blog posts in my blog.

I shall talk to myself now:






1. I just bought a HDB flat. I want to make sure that I have enough in my OA to service 12 months of mortgage. If I am 40 or older, 24 months would be prudent because it could be more difficult to find a job. The rest of the money I have in my OA, I can transfer to my SA.







2. I bought some investments with my OA money. The money invested could have serviced 48 months of mortgage payment. I should look at possibly liquidating the investment if there is a gain or if it breaks even as my motivation was never to invest with my CPF-OA money. Then, I would have more money to transfer to my SA.







3. If the interest rate on my housing loan is less than 2.5%, it makes sense not to pay down the loan with CPF-OA money as the CPF-OA pays 2.5% in interest. I might want to consider the POSB HDB Home Loan.







4. I might want to contribute to SRS and use the money to invest for income. I will save on income tax and still be able to invest. Have my cake and eat it? Sure.

This talking to myself illness is getting worse by the day. Cham.

Best wishes,
AK






Related posts:
1. POSB HDB Loan.
2. How much to have in emergency fund?
3. OA to SA transfer before buying a flat?
4. SRS: A brief analysis.

Tea with Ms. Y: Single, turned 35 and getting a resale flat?

A guest blog by Ms. Y who recently turned 35 and got herself a resale HDB flat:

I'm just a regular white collar worker with not bad a job. Work hard and long hours and get decent pay. However, I do need to provide for my parents as they age. My biggest concern is that they do not have much insurance coverage (but might be different now with Medishield life!) Anyway, they both have some medical condition which doesn't allow them to get insurance coverage now. I'm also now eligible to buy a hdb flat!

I don't worry abt a 1 time operation need. 30k or 50k, it's not difficult to fork out of my savings or even if I have to borrow, it's not difficult. What I worry is about the long term chronic illness such as chemo for cancer and kidney dialysis that is very cash draining. Who knows? I may even have to take no pay leave to look after my parents. Or at least until I can arrange nursing home, domestic help, etc. I don't know how much all that will cost but if I have to fork out 2 to 3k per month, my finances would be drained surely.

So, my plan is to buy a cash generating asset. Need to generate 3k cash per month by renting my flat in the event of need (moving back to parents' place to take care of them as reason for renting out whole flat b4 meeting 5 years minumum occupation period can be approved by hdb).

Of course, my plan needs to be backed up by a good financial standing by complying with the TDSR and MSR. MSR is only applicable to hdb flats purchased. So, I'm using less than 30% of my monthly salary to service my loan calculated at an imputed interest rate of 3.5% by regulation. Tip: b4 buying property, get a mortgage broker to calculate all these. I did so even when I studied the regulations and calculated a couple of times.

Anyways, after getting an approval in principle from 2 banks (w help of mortgage broker), I went shopping for a flat. To yield 2 to 3k of cash flow, it has to be at least 4 room flat and at a good location. Then I checked hdb website for such rental yield and decide amongst them one of a cheaper place for such yield.

Also, I'm quite sick and tired of the >1 hr travel each way to and fro work. So, I'm getting a flat near to town area. It is expensive no doubt, but it is serving my purpose. 

Oh yeah, another reason why I do this is because I know myself. I'm not such a stock whiz that I get great returns in the stock market. Not so good in fact. I do well by squirreling cash away. Out of sight, out of mind. So, I don't spend it. Haha....I have most of my savings tucked away like this. I can say that I can afford this flat quite comfortably. In fact, after I have bought it, another transaction was done with price higher than mine.....hit above the 1 year high. Seems property market is going up again.

My flat is less than 5 years old. So, I plan to stay in it as long as I can. I will downgrade when I am retired to realized gains for retirement (hopefully). Or I'll just leave it and rent it out to finance my stay in a nursing home when I need it.

I have some amt in OA tied up in investments and paid 15% downpayment, stamp duty and lawyers fees. Found that I still have a small excess in OA. I just transferred them to my SA. My mortgage loan is ending when I am 60. So, I plan to pump up my SA now with min sum cpf top up and any excesses in my OA will be trf to SA. Trying to get govt to pay for part of my flat when I am 55.  4% interest in SA vs the around 2% mortgage interest....decision making is a piece of cake.  ;)

A nursing home in Singapore run by First REIT.

Now I have half the current prevailing min sum amt in SA and hit the ceiling of my MA. The only issue I have is that as my SA hits min sum earlier, I may not be able to make further contribution for tax relief purposes.

So, this is the story of my flat. :)

Congratulations, Ms. Y!


TDSR:
Total Debt Servicing Ratio refers to how much of our monthly income do we use to pay our debts. MAS policy is that TDSR cannot exceed 60%.

MSR:
Mortgage Service Ratio refers to how much of our monthly income do we use to pay our debt secured by properties (i.e. mortgage).  Applies to HDB flats and ECs only. MAS policy is that MSR cannot exceed 30%.


Related posts:
1. Buying an apartment: Considerations for first timers.
2. Build a bigger retirement fund with CPF-SA.
3. Don't see money, won't spend money.
4. National Day Rally: Retirement funding adequacy.
5. Millionaire or not, plan for retirement.