How Young Singaporeans Can Save For a Million-Dollar Home

Just last year, Singapore was the second-most-expensive city in the world to buy a private property, with prices averaging at $1.1 million. This leads many young Singaporeans to underestimate what they can afford. Take this three-bedroom condominium in Sengkang; its hefty $1,000,000 price tag may seem unattainable – but here’s how you might buy it:

First, how much do you need?

Let’s assume you’re in your twenties, and looking to own a private property with your partner in 10 years.

Using bank loans, your maximum Loan-To-Value (LTV) ratio is 75 per cent. For a $1,000,000 house, the maximum loan quantum is $750,000, leaving you with a $250,000 down payment. Another 20 per cent of the property can be financed using your CPF Ordinary Account (OA), and a minimum of five per cent has to be paid in cash.

How much will you need to save?

Let’s assume that you earn $3,800 per month. 23 per cent* (of your total income contribution) goes into your CPF OA annually. After 10 years in the workforce, you are likely to have accumulated around $100,000+ in your CPF OA (with CPF’s 2.5 per cent interest rate). If both you and your partner use $50,000 from each of your CPF OAs,  that leaves $150,000 to be covered using your hard savings.

Here’s how to get there:

1. Save about 20 per cent of your monthly income, after CPF contributions

Sticking to an income of $3,800 per month for you and your partner, you’ll need monthly savings of around $1,250, over 10 years, to finance your down payment. This means that you and your partner will each need to save about $625 per month (approximately 16 per cent of your monthly income). Saving 20 per cent of your monthly income will probably enable you to afford your down payment in a decade.

This calculation assumes that your savings do not earn interest, so there’s an inflation rate risk to consider (if the prices of goods rise too high over the coming decade, you may still miss your financial target).

*Total CPF contribution rate is 37 per cent, but we only consider the portion going into your OA, as the SA and MA cannot be used for housing.

2. Voluntary top up of your CPF account

Topping up your CPF improves the odds that you can cover the 20 per cent portion of your property. Depositing an additional $500 per month into your OA gives you approximately $67,000 more at the end of ten years. The more down payment your CPF can cover, the less you need to fork out in cash.

3. Buy an Endowment Plan

Endowment plans are insurance schemes with a lump-sum payout upon maturity. They are typically used to save up for big ticket items such as a car or house. When you purchase an endowment plan, expect to pay regular premiums over the time period of your plan.

An endowment plan also provides additional insurance coverage while you are saving up for your goals. This is a sum assured, that’s paid out upon death or disability (check the terms and conditions).

Endowment plans normally give a three to four per cent return, which is higher than fixed deposits in the bank. This way, you can also finance your down payment without depleting your CPF funds, which can be kept for retirement.

Let’s assume you pay a monthly premium of $600. A three per cent return over 10 years comes to approximately $80,000. If both you and your partner take on an endowment plan, that is $160,000 of savings, enough to meet the $150,000 savings goal. You can also use it to pay the five per cent cash minimum.

4. Singapore Saving Bonds (SSBs)

SSBs are for Singaporeans who want a higher interest rate, but still want to retain flexibility.  Need cash in a pinch? Sell your SSBs back at the end of any month, without losing the accrued interest.

SSBs also have a minimum investment amount of just $500 and interest rates that step up each year. They generate two to three percent return on your savings if held to maturity (10 years) – the interest rate is based on the current Singapore Government Securities (SGS) rates. If you are looking for a liquid and low-risk investment option to save up for that dream house of yours, investing in SSBs may be the right option for you.

Similar to endowment plans, it is likely that the returns on SSBs will help you to achieve your desired savings to successfully finance your downpayment.

5. Blue Chip Stocks

You may also consider investing in low-risk blue-chip stocks, given that blue-chip companies are well-established and highly capitalised. Understandably, it may be stressful to identify specific companies to invest in if you are just starting to build your investment portfolio. An alternative is to invest in the Strait Times Index Exchange Traded Fund (STI ETF), a basket of 30 blue chip stocks.

The STI ETF has had annualised returns of as high as 8.4 per cent per annum. Assuming you put in $500 per month for 10 years, the end amount at this rate could be as high as $88,500+. Combined with your CPF OA, this could be more than enough to meet the $150,000 shortfall.

The low minimum buy-in (as little as $100 per month under blue chip investment programmes) provide a viable alternative to young investors. However, there is more risk involved in ETFs, as returns fluctuate based on market conditions.

It is possible to afford a million-dollar home

To afford highly priced private properties, the key is to start planning and saving early on in your career. Stay aware of the various saving options available and determine what best suits your needs. Speak to a qualified financial advisor to find out suitable options for you to achieve your saving goals.

Are you confident of affording a million dollar home? Voice your thoughts in our comments section or on our Facebook community page.

Looking for a property? 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.