Think Thrice before buying HDB Resale flat!

Most of us presumed that when we buy our HDB flats, we could well pay off ALL our HDB mortgage loans by using our CPF money. This MAY NOT BE TRUE for those of us who bought our flats from the resale market.

Even some property agents are either confused or unaware of the rules on how much money we could use from CPF to pay for our HDB mortgage loans. Some thought that this only applies to bank loans but not HDB loans. This is false. Most of the time, property agents won't even advise you on such matters even if they know about the rules.

You can only use your CPF to pay for your resale flat up to 100% of the valuation price of your flat at the time of purchase. There after, it will depend on whether you have enough money to set aside for the prevailing minimum sum, then you can use your CPF to pay up to additional 20% of the valuation price of your flat. In total, you could only use your CPF to pay up to 120% of the valuation price of your flat at the time of purchase (before 55 year old).

If you engage in a 30 year mortgage loan for your resale flat, you may find problem in servicing your mortgage even if you have money in your CPF because you won't be allowed to use your CPF to pay. i.e. you will have to service your HDB mortgage loan by cash alone. As a thumb of rule, normally you will face problem in paying your mortgage after 15 years of purchase. Generally speaking, the total amount of money you need to pay for your flat, with compounded interest rate, is about double the amount of the initial loan.

So please THINK THRICE before you decide to buy a RESALE HDB Flat!

The following is taken from an article at this blog.

It basically explains the restrictions and mechanism of CPF limits on usage for mortgage payment:

Property Valuation Limit and CPF Withdrawal Limit

If you depend on financing your home property loan using your CPF OA, do you know that you might be hit with a scenario where you can’t use your OA to pay for your housing many years down the road? (This does not apply to new HDB apartments purchased using a HDB loan)

Here are three terms you need to be aware of:

• CPF Withdrawal Limit
• Valuation Limit
• Available Housing Withdrawal Limit (AHWL)

CPF Withdrawal Limit

This is the maximum amount of CPF that you can use to pay for your housing. It varies from 150% to 120% of the loan amount depending on when you bought the property. From 1st Jan 2008 onwards, the limit is 120%. Note that if you refinance your housing loan, the prevailing CPF withdrawal limit will apply to your new loan.

Depending on the interest rate of the loan, the CPF withdrawal limit is likely to be hit towards the 2nd half or tail end of the loan.

Once this limit is hit, you can’t use any more CPF monies to pay for your housing loan.

Valuation Limit (VL)

This is the lower of:

• Purchase price of property
• Valuation of property at time of purchase

Once your CPF withdrawals (for paying the property) reaches the VL, you will not be able to use your CPF to pay for your housing loan unless you have the Avaliable Housing Withdrawal Limit (AHWL).

Obviously, the Valuation Limit will be hit before the CPF withdrawal limit is hit. It can also be reached in the early years of a loan if someone uses spare monies in the OA to pay down the housing loan rapidly.

Use this CPF calculator to estimate your CPF Withdrawal Limit and Valuation Limit.

Avaliable Housing Withdrawal Limit (AHWL)

For those below 55, the AHWL is the balance available after setting aside the Minimum Sum component. Savings in the OA, SA and amounts withdrawn for investment can be used to meet the prevailing Minimum Sum cash component.

CPF has a calculator that helps you estimate your AHWL.

While the terms might sound confusing, any potential property owner should definitely try to understand the implications of these limits on their housing loan repayments before they buy any new property (or refinance an existing one).

Not doing so might result in an unpleasant surprise many years down the road, especially if there is not enough free cashflow to be diverted towards the housing loan.

ONCE AGAIN, REMINDER: PLEASE THINK THRICE BEFORE BUYING A RESALE FLAT!

It is always more prudent to go for a BTO or new HDB flat if you are a young couple buying your first flat. This will allow you to accumulate more buying power or prevent you from over-committing yourself. For BTO or new HDB flat mortgage, the Property Valuation Limit and CPF Withdrawal Limit will not be applicable and you could safely use your CPF money to pay all the mortgage for this flat. This will allow you to have certainty in your financial planning.

Goh Meng Seng