What does it take to fully pay off your HDB flat by 40?

One common daydream among first-time home buyers is to have the HDB flat paid off by 40. But is this really plausible for the average Singaporean, and what does it take?

First, some basic assumptions about the “average” Singaporean

To represent our “average Singaporean”, we will use someone who buys a four-room flat at the age of 30, with a spouse of the same age. This would mean a very short (10 year) loan tenure, if they want to pay off the flat by the age of 40!

We’ll also assume both parties are employed full-time with a combined income of $5,600 per month, including all CPF contributions. (We chose this figure because the median household income per person in 2019 is $2,792, including all CPF contributions.)

So, is reasonable to assume, for our example, an average Singaporean couple who brings hoem a monthly salary of $4,625 (excluding employer CPF contribution). This would consist of $3,700 a month in take-home pay and $1,288 (23% of total wage) entering the CPF Ordinary Account (CPF-OA) every month.

Now a typical four-room HDB resale flat might cost roughly $400,000. So we would get:

Initial downpayment: $40,000 (minimum 10% of total purchase price, if taking a HDB Concessionary Loan)

Eligible grant amount (assuming first-timer living near parents): $115,000 (Made up of $20,000 in PHG, $50,000 Family Grant and $45,000 in EHG)

Remaining outstanding amount to loan: $285,000 (Grant is also used to pay for downpayment)

Monthly loan repayment: $2,670 per month (2.6% interest per annum, with 10 year tenure)

With a monthly loan repayment of $2,670, this couple would have to spend 100% of their monthly CPF-OA contributions and 37% of their take home pay on servicing a 10 year bank loan every month. This leaves quite a measly $2,318 for monthly living expenses and savings. It’s possible for them to live with this amount, but certainly not enjoyable (and certainly puts having more than one child out of the equation).

However, even if they wanted to have this loan arrangement, they can’t for one simple reason: the Mortgage Servicing Ratio (MSR). Under the MSR, home loan instalments cannot exceed 30% of gross monthly household income, which excludes employers’ CPF contributions.

So, earning $4,625 per month, a couple’s MSR cap will be at $1,387.50 per month. This is the maximum monthly instalment amount they will be allowed to bear, if buying a HDB flat.

For a $400,000 resale flat, that means taking the full 25 year loan tenure with $1,293 in monthly instalments*.

*Bear in mind that, as you pay up your flat (and even afterwards), a negative balance with an accrued interest of 2.5% will build up in your CPF account. (This is why some people argue that a flat owner never truly pays off the flat if it’s paid using CPF monies.)

[Recommended article: 3 mega-benefits of taking a home loan that can set you up for a comfortable life]

But what if you really want to pay off your HDB flat by 40 years old?

The easiest way is to make a bigger downpayment. But if this is not possible, there are a few other methods:

• Take a longer loan tenure, but aim to redeem the loan early
• Try a bank loan
• Raise your assessable income
• Just get a smaller flat, lah!

Method #1: Take a longer loan tenure, but aim to redeem the loan early

HDB loans do not have a prepayment penalty. This means that, if you want to pay more to redeem the loan early, you won’t be penalised for it. As such, one method is to apply for a housing loan with a longer loan tenure (e.g. 25 years), but save up/invest money to pay off the loan early.

For example, if the abovementioned buyers with $4,625 in monthly income take a 25-year loan tenure, the required monthly payment is actually just around $1,293 per month, 99.6% of which can be paid via CPF-OA.

If they can set aside $1,200 monthly—about one-third of their $3,700 take home pay—for a low-risk investment or savings plan yielding 5% per annum, they’ll have a lump sum of $183,076 by the end of 10 years.

Coincidentally, by the end of that 10 years, the couple in question would have just $181,910 outstanding on their home loan, based on a 2.6% interest rate.

So, they’ll be able to use the fruits of their savings/investment to fully pay off the flat, with change to spare!

If this approach sounds appealing to you, you can talk to a qualified financial planner about 10-year savings or investment plans (they can work out the math for you, if you explain your intention to repay your home loan early).

Method #2: Try a bank loan

Let’s say you use a bank loan, instead of an HDB loan. Yes, you have to make a downpayment of 25% for bank loans instead of the 10% for a HDB Concessionary Loan, but it’s something that your grants can help you cover.

The most important thing to note is that interest rate will be lower if taking a bank loan. Bank loans have, for a long time, been cheaper than HDB loans (which are always pegged to 0.1% above the CPF savings rate), with a rate averaging about 2% per annum at the moment.

If the abovementioned couple borrows $285,000 over a 10 year tenure, they’d be looking at payments of about $2,622 per month, which still makes this impossible due to MSR restrictions.

If they borrow $285,000 over a 25 year tenure, they’d be looking at payments of about $1,208 per month, which means it’s fully payable via CPF-OA. After 10 years, the loan amount outstanding would be $176,878, less than the amount for a HDB Concessionary Loan.

But here’s the catch about bank loans: To keep rates low, borrowers typically have to refinance after the three-year lock-in period is over. Some might see this as a hassle.

Also, unlike HDB loans, there is a prepayment penalty (typically 1.5% of the prepaid amount) when redeeming a bank loan early. For a sum of $176,178, this would amount to $2,653. That said, the prepayment penalty may only apply for the first few years of a bank’s home loan package. Check the terms and conditions!

Those who elect to take bank loans, or switch to bank loans, cannot switch back to a HDB Concessionary Loan. Bank loans are also tougher on payment defaults, and may resort to repossessing your flat should you be unable to pay your instalment for two month’s straight.

Method #3: Raise your assessable income

Ah, the old school “work till your fingers bleed” method. If you insist on signing up for a $285,000 home loan with a ten-year tenure, you’ll need to raise your income to about $8,900 per month.

The thing is, those who earn $8,900 per month often make the choice of paying as little as possible every month towards their home loan. They opt for max tenure because they know that they can reap greater wealth by putting their spare cash into any savings instrument or investment that outpaces their home loan interest rate.

This is upward mobility, folks.

Method #4: Just get a smaller flat, lah!

You’d be surprised how many Singaporeans could manage to pay off their flat by age 40 if they opt for a 3-room flat. A 3-room resale flat can be had for as low as $350,000, and that’s before adding grants into the equation.

Buying a 3-room flat initially may also leave you with more cash in hand, which is valuable dry powder for you to grow your wealth and upgrade to a condo/achieve other goals down the road.

A 3-room flat in an accessible location (e.g. near MRT) will also benefit from high rental demand, should you decide your next step is to buy a second property and retain your HDB to rent out for passive income.

A parting note

Even if you can pay off your flat early, it’s not necessarily a good thing. Pouring so much money into your flat, at a time when home loan rates are so low, could leave you with cash flow issues.

You should never risk doing this if it would leave you completely without savings. (If you get retrenched suddenly, your flat can’t pay for lunch.) Seek professional financial advice before you attempt to pay off your flat ASAP.

 

Would you try to pay off your HDB flat by 40? Share your views in the comments below!

Find the home of your dreams today on Singapore’s largest property portal 99.co! You can also access a wide range of tools to calculate your down payments and loan repayments, to make an informed purchase.