Plan your finances together.
With proper planning, you can manage your finances well into retirement.
By Colin Lim
Suppose you turn 30 this year. You and your partner may well be preparing for the next stage of your lives together, i.e. tying the knot and moving into a home together.
With bills, a mortgage, as well as all other costs associated with starting a new family and building a home, it is important to stay financially prudent. A property purchase may very well be the biggest ticket item you’ll purchase in your lifetime, but with proper planning, you’ll realise that you are able to manage your finances well into retirement.
Initial payment on the property
When it comes to purchasing a property, the first train of thought that comes to mind is tackling the down payment. For the rest of this article, let’s assume that the property you’ve selected is priced at $1 million. The initial amount you and your partner would have to front is about $224,600, having taken into consideration the 20% down payment and buyer’s stamp duty.
After you have settled the down payment, the next thing you might find yourself concerned about are your monthly repayments, where you can choose between paying with your Central Provident Fund (CPF) or cash.
Monthly repayments with CPF vs cash
On one hand, the sound option might be to use your CPF to finance the monthly instalment. After all, this means you don’t have to dip as much into your hard-earned savings, and have more cash on hand that you might have considered putting into other needs, or even sink it into an insurance savings plan.
However, don’t forget should you choose to sell the property, you’ll also run into the issue of having to return the principal amount used to fund your home, plus accrued interest. Sure, this money still belongs to you since it’s returned to your CPF account, but your final cash proceeds will be largely reduced.
On the other hand, paying with cash means that while you’re paying for a mortgage with interest rates at about 1.7 percent, the savings in your CPF Ordinary Account (OA) are growing at 2.5 percent, which is a much higher rate than deposit rates across the board. This, multiplied by a 25-year tenure, and the amount of savings in your CPF for your retirement would easily proliferate as compared to if you had used the money in your CPF OA to pay for your mortgage.
Outstanding loan at age 55
Upon turning 55, you can start withdrawing your CPF savings as long as you have set aside the Basic Retirement Sum (BRS) with a property pledged in your Retirement Account. Given that the retirement sum increases every year, the BRS in 25 years’ time would be at an estimate of about $148,000.
If you are 30 today, that’s 25 years from now. If you have been paying an interest rate of about 1.7 percent per annum on your mortgage, your outstanding loan by then would be at about $167,000. Here’s where you’ll notice the difference between having utilised your CPF or not. The folowing table will serve to illustrate both scenarios.
Should you and your partner choose to sell the property at age 55, the amounts above would give you a rough estimate of your collective retirement sum. With this amount, you can purchase a retirement home and then keep the rest of the money for retirement.
Mortgages vs. other loans
With the consideration of a property out of the way, you should also think about other loan products that you might eventually need, be it a renovation loan, a car loan, or even a personal loan.
As of January 2018, mortgages are still considered to be in a relatively low interest rate environment. Aside from that, when you pit mortgages against other lending facilities offered by banks, you’re faced with varied methods of calculating interest rates as well as penalties when you redeem your loan before it reaches its maturity.
Financial planning is never a one-off process
As you progress to subsequent stages of your life, priorities are bound to change and you may find yourself having to re-look at your financial portfolio time and again. Therefore, it is important to start planning while you’re still young and time is on your side!