I didn’t know something so personal and trivial like a home loan would make it onto a socio-political website. So it was with some amusement that I read this (MAINSTREAM MEDIA URGES S’POREANS TO TAKE BANK LOANS WITHOUT HIGHLIGHTING DANGERS) from The Real Singapore.

With a title (in caps and with words like ‘Danger’) to elicit a sense of urgency and importance, one would think that the POSB home loan is part of some greater conspiracy. Anyway, the article linked above is making a big deal out of nothing. Here are the ‘dangers’ they want you to be wary of (edited for clarity):

First, what the article did not mention is with the danger of taking a bank loan. TRS spoke to economic blogger and analyst Leong Sze Hian who said that if a person is unable to pay for their bank loans, “the bank will foreclose” the flat. In other words, the flat will be taken over by the bank.

Not only that, if the owner decides to sell the flat at some point, he or she would have to pay back another 2.5 percent interest back to the CPF. According to the CPF, this is known as the “accrued interest”. The CPF Board says that because the board was not able to pay the 2.5 percent interest on the money that had been taken out of the CPF for the loan, it would require homeowners to pay back this interest when they sell their flats.

My issue with the above is that Singaporeans need to get over their property fetish. If someone is unable to finance their home loan such that they fall into the risk of having their flat foreclosed, then a better question to ask is if they should be buying a property in the first place. Maybe a better option is to rent. Secondly, I’m pretty sure there is something called mortgage insurance. I’m not sure about the specifics but I had to take this out when taking my loan and I’m pretty sure it ensures that my wife does not have the burden of servicing my part of the loan as well in the event I expire prematurely.

The part about paying CPF back the 2.5% seems to be the real point of the article. Basically, the unhappiness (or is it now, Underhappiness?) of having to pay money back to one’s own account is the real issue here. I don’t have much comment on this because I’ve said it before that if anyone thinks the minimum sum is going to be a big issue, then he or she has bigger problems to worry about.

The current minimum sum is $155,000 and is set to increase to $161,000 for those who turn 55 after 1 July 2015.* The median gross monthly income (including CPF) of a Singaporean resident is $3,705.** This means that the current minimum sum is roughly 3.6x someone’s annual income. Wait! Of course, no one person puts his entire income into his CPF account. If we count only CPF contributions, then the minimum sum is roughly 29 years worth of CPF contributions. Now, this calculation is obviously flawed because it doesn’t take into account any pay raises nor does it account for the fact that the minimum sum is unlikely to be $161,000 some 30 years later.

What the calculation does show us is that, by just working, the median worker is probably unable to meet the minimum sum anyway hence the convoluted scheme of being able to pledge the value of your property to account for half of the minimum sum or something like that (the details bore me). So it’s pretty clear to me that depending on my CPF in the first place, is going to be a lousy proposition.

Now, why I took the POSB HDB home loan is really simple- it’s a good deal for someone like me.

I managed to structure it so that I pay off the loan in 8 years- well within the period where the cap will apply. This means that the interest rate that I have to pay will definitely be less than the interest rate charged by HDB’s concessionary loan. Further more, current interest rates are only about 1.8%.

In short, my downside is limited and my wife and I are likely to be working in the same line without fear of being retrenched in the next 7+ years. Furthermore, we actually have enough assets to pay off the entire loan if we wanted to, making it a virtual guarantee that we will be able to pay off our loan in almost every circumstance. What helped was that we got a BTO flat which is cheap to begin with and also gave us some time to build up our funds since we aren’t lavish spenders by any account.

The main point here is this- Don’t blame people for advertising their products if you aren’t suitable for it. Caveat emptor or Buyer beware is the norm as far as the financial industry is concerned and if one is prudent, one should not have to worry about one’s finances.

*Source: http://mycpf.cpf.gov.sg/CPF/my-Cpf/reach-55/Reach55-2.htm

**Source: http://stats.mom.gov.sg/Pages/Income-Summary-Table.aspx

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