At a glance...
There are various grants you can look into when purchasing a HDB flat. The compulsory savings scheme is a major factor in Singapore, helping citizens achieve a high homeownership rate. On top of using your CPF money, HDB grant and the HDB housing grant are important policies that can help Singaporeans with the high cost of purchasing a home.
September 2019 saw changes made to HDB grants, allowing more affordable home purchases for first-time homeowners. These changes include:
- Increased income ceiling to $14,000 for HDB BTO flats
- Enhanced CPF housing grant (EHG) to replace the additional and special CPF housing grants
- First timers can benefit from the EHG when buying a new or resale flat
Although HDB grants may bring multiple benefits, there are situations where you may not need to take the grant. In this article, we discuss some implications of the HDB grant.
Your grant money needs to be ‘returned’
As nothing is free, these grants will be credited into your CPF account, and not in cash. Furthermore, when you sell the property, you will need to return this HDB grant money to your CPF account. This also includes a 2.5% accrued interest — the interest you would have earned if the grant amount was in your CPF Ordinary Account.
You may also incur a resale levy if you decide to sell your flat. This resale levy is used to allow for a fair allocation of public housing subsidies between buyers, by reducing the subsidy Singaporeans may enjoy for their following HDB flat or executive condo (EC) purchase.
Fortunately, this resale levy is applicable only if you dispose of your HDB BTO and buy either a second subsidised flat from HDB or an EC from a developer.
This means that you would not need to pay a levy is you are purchasing a HDB resale flat, private property, a Design, Build and Sell Scheme (DBSS) flat or an EC launched before 9 December 2013.
As mentioned, you will need to pay an accrued interest when using your CPF money to purchase a property. Accrued interest refers to the interest amount you would earn if your CPF money was not withdrawn.
When one uses their CPF money, regardless of the reason why, they will incur accrued interest that needs to be returned to the CPF account.
There are three scenarios which we will explain to show the difference in how much one will pay using CPF for a down payment, CPF for both a down payment and a monthly home loan repayment, and without using CPF at all.
- CPF down payment only
Assuming you buy a $500,000 HDB flat, paying a 5% cash down payment and the remaining 20% with CPF. If you were to hold onto this flat for 30 years, you will have to pay $42,244 of interest, assuming an interest of 2.5%. This means the total sum you will need to return to your CPF will be $142,224.
- CPF for down payment and monthly home loan repayment
This scenario assumes that you use your CPF money for monthly home loan payments. Assume that you use $100,000 as down payment and took a loan of $400,000 from a bank. If your bank has a loan interest of 2% for 30 years, your loan interest will amount to $132,252. This means the total amount you will need to pay is $532,232.
However, this amount is merely what you will need to pay the bank. You will also need to repay the accrued interest for your monthly loan with your CPF, which will amount to $124,842. This mean the total amount you will need to return to your CPF account is $224,842.
This will mean that your total home loan will amount to $757,094 for a $500,000 flat.
- Without CPF
Although CPF money is indeed helpful for those short on cash during the initial down payment period, you can also consider not using CPF to purchase your flat and not taking any grants.
Taking a $50,000 HDB grant will result in an accrued interest of $13,588 over 20 years. This means you will need to pay a total of $127,177 for a $100,000 HDB grant after 20 years.
There are various reasons why you may need to use CPF to purchase a home, whether it be not wanting to live with parents or expecting a kid. That being said, you should take note of any potential financial costs in the future. The more grants you take, the more money you will need to return in the future.
You can consider taking HDB grants if you plan on holding onto the flat for life. This will mean that you will not need to return your grant or pay accrued interest.
Reduce the Amount You Need to Pay Back
Given the high property prices in Singapore, it may be difficult to not use any CPF money at all. It is important to understand the risks of using CPF money and find ways to purchase your property without incurring too much accrued interest.
It is good to note that using your CPF for your home loan may be good if you have a savings and investment plan that allows you to yield higher than your home loan and accrued interest.