We investigate the numbers presented during the National Day Rally 2013 and what they mean.
In year’s National Day Rally, the Prime Minister touched on a variety of topics close to the hearts of Singaporeans. He highlighted matters like the planned restructuring of the Primary School Leaving Examination (PSLE) grades classification system, changes to remove ‘discrimination’ from the MediShield Plan (which is long overdue, in our humble opinion) and other more prosaic matters like a new airport terminal (which despite the best efforts of mainstream media to hype up, no one really cares about).
The issue that sparked our interest though, was housing. In particular, the Prime Minister (PM) declared that HDB flats are now extremely affordable thanks to the policies and efforts of his government and cited some ‘back of the napkin’ calculations to support his claim.
We are both Singaporeans and finance enthusiasts here at DollarsAndSense.sg. We cannot help ourselves but to explore some scenarios based on what the PM claimed and present our findings here. We’ll let you be the judge.
The mortgage repayment highlighted by the PM is not realistic
We have a couple of financial calculators that we are currently developing in-house and so we ran the example that the PM gave (you can look at the example on TR Emeritus) on affordability of HDB flats through our calculators.
The monthly mortgage repayment cited by the PM is not correct. Not if you are taking a HDB Loan.
At an interest rate of 2.6%, a $246,000, 25 year mortgage would required a monthly repayment of $1,116 and not $987 as cited by the PM and printed in various mainstream publications. $987 is only obtainable when a homebuyer decides to take a bank loan, which currently offers interest rates at record low level.
While there is no stopping any homebuyer from taking a bank loan today and enjoying the lower mortgage (the interest rate of 1.52% will give you the figure that the PM used), common sense would remind us that it would be unrealistic to expect interest rate to stay at 1.52% for the next 25 years. A homebuyer would have to manage the risk arising from interest rate fluctuation, which would cause their mortgage repayment to be substantially more than $987. National Development Minister Khaw Boon Wan has also highlighted this risk in more than one occasion.
However, if one were to take the more prudent approach and use the HDB Loan’s higher (but fixed) interest rate instead, a homebuyer would have to fork out $196 ($1,116 less maximum CPF contribution of $920) and not $67 as originally indicated.
Other Cost Associated with a Home
While the cash outlay for a prudent mortgage strategy is 3 times of what the PM claimed, we are sure everyone would agree it isn’t excessive. But we live in the real world, and for couples intending to buy their first flat there are costs to consider as well.
One of the major additional costs is for renovation that could easily cost about $30,000. If you include in the optional HDB component scheme items such as the doors and flooring fittings, that would set you back by about another $8,000. You’ll also need to add in the amount you need for furnishing because a flat with no bed and sofas isn’t much of a home. Thus your cash outlay can easily escalate to about $50,000.
It is tempting and very convenient to be ignoring such costs when giving speeches but families need to get real and ask themselves hard questions such as whether a household with a take home income of $3,200 can actually afford such an expensive? Even if we were to assume zero interest and the household does manage to somehow save $1000 a month, it would still take them more than 4 years to cough up that kind of money.
How the HDB Flat Mortgage will Affect your Retirement
Our CPF account is primarily used to ensure that we have a retirement nest waiting for us at the end of a long, stressful career. The sad thing is that if you are fully utilising your CPF ordinary account to pay for your 25-year mortgage, there would not be much money waiting for you during retirement.
Here are some numbers to think about.
Taking a household income of $4000, the monthly contribution to the ordinary account would be $920 (which would be used to pay for the loan) with the special account receiving $240. Assuming a starting age of 25, the amount in the CPF special account would be about $123,000 (assuming interest rate remains at 4%) at the age of 50. That is a combined figure. Obviously the couple will have nothing in their ordinary account due to their mortgage.
Thereafter the couple will need to start building up their retirement nest with their mortgage finally paid off. However at the age of 50, monthly contributions made to their CPF accounts will start decreasing and they will not be able to build up their savings as quickly. Concurrently they will also have to hope their health holds up so that they can continue to work till 65.
We are assuming in the scenario described that income for the household will not increase during the next 25 years. While that may seem unfair, bear in mind we are also assuming that there is no inflation as well which could easily erode any increase of salary one may enjoy. We are also assuming that a person will be able to work for the next 25 years without having any breaks in between, which may differ in reality.
In summary, while HDB prices have indeed gone down, owning a home is by no means cheap when one uses a realistic mortgage estimate and factors in additional costs for renovation. Also, with most of one’s CPF being locked into a mortgage, after 25 years or so, how healthy would your retirement nest egg be?
We hope that this article provides you with a different perspective and some insights aside from what is being reported on mainstream media. As always we love to hear from readers and welcome any feedback and comments that you may have.
Original photo by Benjamin Lim. Used with permission.
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