With 45 million-dollar HDBs being snapped up last month, I’m sure you’ve been wondering…
“Who are these people?!”
While we know there are many Crazy Rich Asians living among us, it can still be difficult to understand the profile of such homeowners to cough up more than a million dollars. (That’s plenty of Yusof Ishaks).
So, let’s try and understand the potential age, income level, CPF balances, and loan required for a family to comfortably afford a million-dollar home.
Here I’m breaking down the absolute basics.
Firstly, 20% of the home value must be paid in cash or CPF. The remaining 80% can be financed using a HDB Loan.
This means your downpayment is $200k and your HDB Loan is $800k.
Scenario #1: The young couple fresh out of college
Assume a young couple, both 30 years old who have been working for 5 years each with no existing assets to tap on. How much would they need to earn to afford a million-dollar home?
Looking at CPF Ordinary Account (OA) contributions rate first: 23% (the amount contributed to your CPF OA at this age) of $6,000 monthly (Ordinary Wage Ceiling) will be contributed to each OA.
Let’s also assume each couple makes 3 months of bonuses or Additional Wage Supplement. That’s 15 months of $6,000 totalling $90,000.
23% of that is $20,700 each or $51,400 together. 5 years of contribution compounded at 2.5% p.a will already total just north of $270,000.
So, at a monthly income of just $6,000 each for 5 years, the couple would already have enough in each of their CPF OA to pay down the deposit required.
However, will HDB give the loan required of $730,000 from a combined income of $12,000?
Taking into account the Mortgage Service Ratio (MSR) cap, where a maximum of 30% of your gross pay can be paid for your mortgage. A $730k loan at 2.6% p.a for 30 years would equal to a monthly payment of $2,922.50.
That’s just 24.35% of a combined income of $12k/mth, falling in line with the MSR requirements.
So, what does this mean?
A young couple aged 30 years old, who makes $6,000 monthly income each and have worked for just 5 years, would have enough CPF savings to pay for the downpayment and take a loan from HDB to finance a $1 million home.
In fact, they can save this without needing to save any extra cash or even topping up to pay the monthly mortgage as all can be financed with CPF.
Now whether this is realistic, I’ll let you decide. I’m just here to report the numbers.
In fact, this young couple likely wouldn’t need the 5-room/Executive apartment that’s a prime candidate for the $1m price tag.
#2: The second-time buyer with young kids
Now on to a more realistic profile.
Let’s look at a 35-year-old married couple with 2 young kids; definitely in need of a bigger space for the growing family.
Here, let’s assume they are selling an existing 4-room flat to right-size to a bigger flat and thus, have some existing assets from the sale of the home.
Moving the time dial back a few years, let’s also assume this couple purchased a $400k flat 5 years ago using their CPF OA and have now hit the minimum occupancy period.
After 5 years, their $400k flat appreciated to $500k, with a 25% growth. (Quite a realistic figure.)
If they were to sell it today after accounting for…
- A Loan Balance of $282,383.33
- Accrued Interest of $15,560.15
- Agent Fees of $5,350 (1% + GST)
- Legal and HDB Resale fee of $580
The couple will receive $39,261 in cash proceeds and an OA refund amounting to $172,425.
That’s $211,686 in total returns — sufficient for the downpayment of a million-dollar HDB.
If they were to borrow the balance of $788,314 from HDB at a rate of 2.6% p.a for 30 years, they’ll have to repay $3,156/mth. Considering the MSR, they’ll need to earn a minimum of $10,520/mth in combined income.
And just like that, with no additional savings in cash required, a married couple selling off a $500k home, right-sizing to a $1m home and earning $10,520/mth in combined income can comfortably afford a million-dollar home.
#3: Single-income breadwinner’s final purchase
Now I want to explore a profile of a single-income breadwinner with slightly older kids.
Our hypothetical breadwinner is 45 years old with a spouse and 2 children aged 16 and 20.
Like the profile above, let’s also assume the family is selling to buy.
This time, they’re selling the 15-year-old, 5-room home that they bought at just $350,000 all those years ago.
Today, that house is worth double at $700,000.
If they were to sell it today (and deducting all the same factors as above), they’ll receive cash proceeds of $178,683 and an OA refund of $346,315. That totals up to $524,998.
This means our breadwinner has to borrow the remaining $475,002. Now at 2.6% p.a for 20 years, that’s a repayment of $2,540.25/mth.
To fall in line with the 30% MSR, he will need to earn a monthly income of $8,467.50.
This time, however, as a 45 yr old, only 19% instead of 23% is contributed to his OA account. Or 1140/mth. This means he will need to top up another $1,400.25 of cash, every month, to finance the mortgage payments.
If he doesn’t want to pay any cash, he must only borrow $210k instead. That means needing to top up $265k from his sale proceeds either from excess CPF or from cash.
In conclusion, the elusive million-dollar HDB is almost exclusive for households making a monthly income of more than 5 figures. If you don’t, you’ll need a significant amount of cash and CPF balances.
And if there’s dual income instead of a single breadwinner, the easier it is with more CPF assets to tap on when planning the purchase of your home.
And this is why, ultimately, financial planning is so important. Even if you’re making big bucks, having a clear understanding of your existing assets, cashflows, and making sure you fall in line with MSR or TDSR is of utmost importance.
You don’t want to turn an asset into a debt nightmare.
(This is foreshadowing another article coming up soon.)
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