Retirement Ready article

8/7/2019 Retirement Ready article

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Last Updated on: Monday, January 12, 2009


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Whether you have just started working or nearing middle age, the sooner you startyour retirement plan, the more money you will have to live the lifestyle you desire.Its easier to accumulate wealth when you start saving from

young! See how much you need to set aside to accumulate$500,000 by age 62 based on your age and an averagereturn of 5% in this chart

In this module, your three key takeaways are:

WHY PLAN FOR RETIREMENT? RETIREMENT PLANNING PROCESSREVIEW YOUR PLAN

WHY PLAN FOR RETIREMENT?You would probably have considered planning for your retirement at some point but have not quite gottenaround to it. At each life stage, you are likely to have a unique set of concerns that invariably pushed retirementplanning to the backseat.In your twenties, having just embarked on your career, you would naturally be more interested in building yourcareer.By your thirties, you might have bought a house, gotten married and started your own family. At this life stage,you would be more pre-occupied with attending to the needs of your children than with thoughts of planning foryour retirement.As your children grow up, you may now find yourself with aged parents who need more care that they didpreviously. Before you know it, you now find yourself in your forties.Whatever your lifes concerns, retirement will be upon us one day. Rather than meet it unprepared, take the firststep now to ensure a financially secure retirement. Come with us, take your first step to being retirement readyhere.

RETIREMENT PLANNING PROCESSWhether you have just started working or nearing middle age, the sooner you start your retirement plan, themore money you will have to live the lifestyle you desire.What is an ideal retirement? The answer to this question is a highly personal one. It really depends on how yousee yourself spending your time when you stop active work and how you intend to finance it.The following table gives a quick snapshot of the amount of savings which you might need at retirement.

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Assumptions Retirement age is 65 years old. Retirement income to last for 20 years. Return on investment during retirement is 4% pa. Inflation rate is 2% pa. Expected monthly expenses are in today's dollars. Lump sum figures are in future dollars. It is the lump sum that the CPF member should have when he reachesthe retirement age of 65, in order to afford the expected monthly expenses during retirement.

Take your first step to achieving your ideal retirement by asking yourself some questions.Retirement GoalsFirst, you need to determine your retirement goals. What is the lifestyle you plan to lead during retirement? Doyou plan to do a lot of travelling? Are there some hobbies that you would like to pursue? Do you intend todowngrade your property? You may wish to discuss this step with your spouse and decide just what your idealretirement will be.How Much To Put Aside For Retirement?

After establishing your retirement goals, the next logical question will be How much money will I need when Iretire? The answer depends on a number of factors, such as your desired lifestyle, your general state of health,and when you intend to retire. The Retirement Estimator gives you a simple way to estimate the lump sumsavings you may need for your retirement.The Retirement Calculator is a more comprehensive approach to working out how much you now have and howmuch you will need. It will take you about half-an-hour to complete the process.Your ideal retirement can be a reality. The sooner you take your first step at retirement planning, the more likelyyou are to making it a reality. Once you have determined how much you need, the next step is to understandhow to get there.

REVIEW YOUR PLAN

Retirement planning is not an exact science. It is a moving target simply because with time, a number of factorsmight change such as your salary, your mortgage interest, your childrens education needs, and yourinvestment rate of return.Your expectations of an ideal retirement may also change as your income increases and your lifestyle improves.For these reasons, you should take the time to review your plan from time to time. We thus recommend that youtry to do this at least once a year or whenever there is a major change in your life.

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4 music CDs a month $80 $960

1 PC/PS game per month $60 - $100 $720 - $1,200

Dining at a restaurant every weekend $200 $2,400

Mobile phone bill $100 $1,200

Spa and hair treatments $150 $1,800

Pubbing with friends once a week $200 $2,4004 packs of cigarettes a week $180 $2,160

b) Where Does Your Money Go?Hard-pressed to recall where your money went? You list down the regular expenses house andcar loan instalments, utility bill, handphone bill, and food. But after that, it starts to get fuzzy whathappened to the rest of the money?There is only one way to establish where your money went : Track your spending for a full month.Create a list of all your monthly expenses. If an expense occurs less frequently such as annualinsurance premiums, simply pro-rate it to a monthly figure. Be sure to include expenses such as:

housing, food, transportation, utilities, entertainment, etc. Keep your receipts and jot down yourexpenses for the day at the end of every day for a month.This may be a tedious job for those of us who are always somewhat financially challenged. But it isa necessary step to gain an accurate reflection of your actual expense and working out a realisticbudget that works best for you.The good news? You only need to do this once in order to start your budget going. But who knows,you might actually enjoy doing this on a regular basis once you get started.

c) Budgeting Basics

Basic budgeting starts with a simple financial plan that sets the amount you would like to spend oneach category of expenses such as food, transport and entertainment in a given month. It will alsotake into consideration other factors such as your income, outstanding debts, regular savings, andan emergency fund.Budgeting and tracking your expenses might feel like it's cramping your lifestyle, but if you work outa budget that suits you, it can be one of your most powerful tools for getting ahead financially -whether it is to save for a downpayment on a house, starting an education fund for your children,planning for retirement, paying off credit card debts, or saving for a family trip.

d) Five Steps To A Basic Monthly Budget

Without a budget, many of us just muddle through, trying to stay one step ahead of our bills. Abudget is simply a tool to increase your awareness of how and where you spent your money. Itprovides you with a guideline to help you spend your money on the things that are most important toyou. Here are five simple steps to working out a basic monthly budget for yourself.Step 1 Create A List Of All Your Monthly IncomeHow much do you have? Aside from your take-home pay, if you have other sources of income thatare received annually (such as bonus and dividends), simply divide the amount by 12. This figure willset the cap on your total budget.

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Step 2 Create A List Of All Your Monthly ExpensesTake time to carefully list down all your monthly expenses, including expenses that occur on anannual basis.Step 3 Compare Your Total Income With Your Total ExpensesHow much of your income are you left with after deducting all your current expenses? If you have atleast 10-20% left over, good for you! You are on the right track to good money management. Ifthere is little left over, or worse, your expenses exceed your income, then make sure you take Step

4.Step 4 Adjust, Adjust, AdjustAdjust expenses according to the amount you have left.If it is a small shortfall, it may simply be a matter of reducing someIf the shortfall is large, then you may have to seriously consider how you can reduce your fixedexpenses which may include moderating your lifestyle such as downsizing your home or doing awaywith the car.Start getting yourself on track financially today by working out a simple budget for your monthlyexpenses. Use our sample budget worksheet to work out your budget.

Step 5 Discipline And ReviewIt is important to realise that simply creating a budget is not enough. A good budget by itself is of nouse if you do not discipline yourself to stick to it. If executed properly, a budget will allow you tosimultaneously meet your expenses, place money into savings, and pay back outstanding debts. Agood budget also requires regular reviews from time to time, especially at different stages of yourlife.Once you have established a sound budget and are disciplined in sticking to it, you are on your wayto setting aside money for the next step.

e) Types of Expenses

Fixed ExpensesExpenses such as rent, mortgage, car payment and insurance premiums. Essentially refer toregular instalment payments for which you are committed for a period of time.Flexible ExpensesExpenses that change from month to month such as food, clothing and utilities. You have morecontrol over some of these items as compared with fixed expenses.

f) Budgeting Tips

Tip 1 Pay Yourself FirstTake away the temptation to spend everything you earn with the "pay yourself first" principle. Just

decide on an amount or a proportion of your income you're going to save each pay day beforepaying for anything else. You should ideally save at least 15% of your income.Tip 2 Keep Within Your Debt Servicing RatiosAs advised by MoneySENSE, keep your total debt servicing ratio to less than 35% of your monthlyincome. For further financial prudence, keep your non-mortgage debt servicing ratio to less than15% of your monthly income.Tip 3 Have Cash SavingsMaintain cash savings of three to six times your monthly income. A higher amount is recommendedif your income is not fixed and highly dependent on variables such as commissions.

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determine if you are on track to achieving your goals. If you're not making satisfactory progress on aparticular goal, re-evaluate your approach and make changes as necessary. This could meanrelooking at your budget or check out our Investment folder to learn more.

Your next step after setting your financial goals in your retirement planning is to prevent financialdisasters caused by catastrophic illnesses or other personal tragedies.

3. Manage Your Debts

Think before you get into debt. Getting in is easy. Getting out is a lot harder. Going into debt is a big decisionas it limits your life options. Debt comes in many forms - credit cards, hire purchase, mortgages, personalloans, and so on. There is no shortage of people out there wanting to lend you money in return for highinterest payment! Work Out Your AffordabilityShorten Your Loan TenurePay Off Debts With High Interest Charges First

a) Work Out Your AffordabilityJust because you earn enough to meet a loan repayment doesn't mean a loan is your best option. Makean informed decision. Dont be swayed by easy credit to spend more than you meant to. For example,you may be able to afford the monthly loan repayments for a brand new car, but have you worked outthe long term high cost of maintaining a car? Will your other expenses be affected by a new loan? Youneed to work out the full effect of the purchase on your budget before deciding if you can afford the loan.b) Shorten Your Loan TenureThe longer you carry your debts, the more interest you will pay. It pays to get out of debt as fast as youcan. This is simple math, not rocket science. Compound interest applies to borrowing too. Just as you

get compound interest on savings, you pay compound interest on the money you borrow.See if you can pay off your loan earlier by increasing the repayment amounts. Paying off your mortgageearly is a great financial decision. Small increase in repayments can have a big impact on the term ofyour loan and the amount of interest you save.c) Pay Off Debts With High Interest Charges FirstGet rid of your high-interest debts first. Credit cards charge much higher interest rates than mortgages!So it makes sense to clear your credit card debts first.

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02. INSURANCE

Insurance is a concept most of us ought to be familiar with. We may own some form of insurance or claimedfrom it, but we may not fully understand how insurance is relevant in our retirement planning.


Understanding Insurance

Covering Yourself Adequately

Your Common Insurance Questions Answered

1. Understanding Insurance - Knowing What Insurance Is All About

Insurance is really about protecting against risks. It protects you and your family against everyday risks toyour health, your assets and potential financial losses. Part of your retirement planning is making sure youhave all the necessary insurance cover and that you are adequately covered.

Life Insurance

Healthcare Insurance

Insurance To Protect Your Assets

a) Life Insurance - Why You Need Life Insurance

Most of us probably have some form of life insurance be it personal insurance or under yourcompanys term insurance or even Dependants Protection Scheme (DPS).

In life, anything can happen. A familys income from a breadwinner can suddenly be snatchedthrough death or disability. Hence, the objective of a life insurance is to protect against a loss ofincome upon the insureds death or total permanent disability. It is designed to replace the insuredsincome and provide cash to the dependants so that they can continue to meet important financialneeds like daily living expenses, mortgage payments and education expenses.

Generally, there are two types of life insurance term and traditional whole life. Not sure what is thedifference between the two? Well, our quick guide to life insurance cuts to the chase and gives youonly what you need to know.

Quick Guide To Life Insurance Term Vs Traditional Whole Life Insurance For You

Quick Guide To Life Insurance

Baffled by the difference between term and traditional whole life insurance? Here is a quickguide to steer you through.

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Term Insurance Traditional Whole

What is it? It provides insurance cover for a termor a specific period of time. Termperiod typically covers one year ormore.

It provides lifelong insuranceprotection (as long as the policyremains in force).

How much? Generally it costs much less thanwhole life policies.

Generally it costs much more thanterm policies.

What are youbuying?

You are buying life cover only. Uponthe death or total permanent

Besides life cover, the policy mayalso include an investment

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incapacity of the insured, it pays theface amount of the policy. The faceamount is the money that will be paidat death or policy maturity.

component which accumulates acash value that the policyholdercan withdraw or borrow against.

Any Surrender No Yes. Surrender value is alsoValue? known as the cash value. This is

what you would get if you decide

to stop paying the premiums andsurrender your policy before itsmaturity.

When to buy? Term insurance allows you to buyhigh levels of cover at relativelyinexpensive premiums. It is a goodoption if you are on a tight budget.

A typical whole life policy requiresyou to service the premiums overa long period. The policy willlapse (i.e. no longer be in force) ifyou fail to make your premiumpayment. For this reason, youshould only commit to a policyafter you have done your sumsand are confident of servicing thepremiums over the life of the

policy.

What to take noteof?

While term insurance is generallysubstantially cheaper than lifeinsurance in the initial years, takenote that the premium may becomeincreasingly expensive the older youare. Some term insurance policiespremium may remain the samebased on your age when you firstpurchase the policy. Also, bear inmind that you may not be able torenew or buy term insurance coverbeyond a certain age.

The cash value of a policy isdifferent from the policy's faceamount. The face amount is themoney that will be paid at death,total permanent disability or policymaturity. The cash value of yourpolicy may be affected by yourinsurance company's financialresults or factors such as mortalityrates, expenses, and investmentearnings.

Do note that if you surrender yourpolicy in the early years, theremay be little or no cash value.

Term Vs Whole Life Insurance For You

Now that you know the basic difference between a term and traditional whole life insurance, youare probably wondering which one you should buy. The answer to this is personal as it reallydepends on your needs and your financial circumstances.

If you have just started work or when you are just setting up a family and are on a tight budget,

term insurance may be a good option as the premiums are generally cheaper than whole life.You do want to take note that term insurance is generally renewable on a term basis dependingon your health status. This means that your insurer reserves the right not to renew your terminsurance policy if they deem you uninsurable. For this reason, you might want to consider awhole life policy which offers a lifelong protection while you are still financially able andinsurable.

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Integrated Plans

Eldershield

additional benefits on top of that provided by MediShield.It covers you for additional insurance protection such asstays in Class A/B1 and private wards.

Severe disability insurance plan that provides a fixedincome for a fixed period in the event of severedisabilities that require long-term care.

c) Insurance To Protect Your Assets - Why You Need Insurance To Protect Your Assets

As you accumulate savings and assets, do not forget to insure yourself against the financial loss ofthese assets. If you own a car, you will be familiar with insuring your car. But what about your homewhich is probably the single largest asset you own? Even if you do not yet own a home, you willprobably have accumulated some assets that you typically leave at home.

Here are some insurance plans that you should be aware of to ensure that your assets areadequately covered against any loss.

Mortgage Reducing Term Insurance

Fire Insurance Home Content Insurance

Mortgage Reducing Term Insurance

You have made your single most expensive investment your dream home. You are likely tohave made the purchase with the help of a mortgage. To ensure that you and your loved oneswill be assured of a roof over your heads in any eventuality, you should purchase a mortgagereducing term insurance to cover the loan. Mortgage reducing term insurances cover reducesevery year in proportion to the housing loan being repaid and pays the balance of the loan in theevent of death or total permanent disability of the insured.

If you have purchased a HDB flat and are serving the mortgage payment with your CPF savings,you would have purchase a Home Protection Scheme cover. If you have purchased the flat witha co-owner, we recommend that you get yourself covered for your share of the loan such thatthe HPS cover for your HDB flat add up to 100% of the loan.

If your budget allows, you can also wish to consider getting yourself and your co-owner(s) to becovered for 100% of the loan each. By getting a 100% cover, in the event of death or totalpermanent disability of the insured, the balance of the loan will be paid by the insurance and theremaining co-owner(s) need not worry about the loan subsequently.

Fire Insurance

If you own an HDB flat, you will definitely be covered by some form of fire insurance as it is aHDB requirement. What you should know is that your HDB fire insurance covers only buildingstructures and fixtures fitted based on HDBs standard specifications. Similarly, if you havepurchased a fire insurance for your private property, your fire insurance covers only the buildingstructures.

Many people make the mistake of assuming that their fire insurance also covers the renovationsand home contents in the event of a fire. If you wish to protect your home content andrenovations, you will have to get a home content insurance.

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Home Content Insurance

If you have spent a great deal of money on your home renovations, fixtures or have expensivehome contents, you certainly need to consider getting yourself a home content insurance.

Home content insurance protects the things that you own, including your renovation against anyfire damage, burglary or other catastrophe. It can also provide liability cover such as protectionfrom lawsuits resulting from harm that you, your pets or your family caused to other persons or

damage to their property.

If you stay in a rented home, dont make the mistake of thinking that your landlords insurancewill cover your possessions in case of fire, burglary or other catastrophe. You need your owninsurance to protect your household contents.

2. Covering Yourself Adequately - Are You Over-Insured Or Under-Insured?

The amount of insurance cover you need will vary according to your life stage, your personal health, yourdependants if any, your financial situation and the type of assets you own. There are many types ofinsurance available each serving a different insurance need.

Not sure what insurance coverage you might need? Use our insurance need checklist or the InsuranceEstimator to assess your basic insurance needs and learn more about how each form of insurance isrelevant to you.

Insurance Need Checklist

How Much Life Insurance Do You Need?

a) Insurance Need Checklist

Single:Your basic insurance need will include:

Life insurance Healthcare insurance

Married:Your basic insurance need will include: Life insurance Healthcare insurance

Rents a home:Even though you dont own the flat, you will still need to consider home content insurance for yourpersonal valuables.

Owns a home:You will need insurance for: Fire insurance Home content insurance Mortgage Reducing Insurance

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b) How Much Life Insurance Do You Need?

No Dependants

Generally, you wont need any life insurance if you have no dependants. However, we do suggestthat you check with you insurance agent or financial planner for a comprehensive review of your life

insurance needs.

With Dependants

Anyone who depends on your income is considered a dependant. Dependants can include parents,siblings, spouse or children. To determine how much life insurance you will require, first work out theamount your dependants will need together with other sources of income (if any) if you were to die.Here are some points for consideration:a) Ongoing living expenses for dependants (Food, clothing, transportation, healthcare, etc)b) Final expenses (Funeral costs, estate duty taxes, etc)c) Outstanding debts (Credit cards, mortgage, other loans, etc)

d) Future expenses (Your childrens education, spouse retirement income, etc)You may wish to contact an insurance provider to work out in detail the amount of life insurance you need. If you are already covered by some form of life insurance, this may also be a good time to meet up with your insurance agent or financial planner to review your life insurance cover.

3. Your Common Insurance Questions Answered Do You Need Other Healthcare Insurance If You Are Covered By Medishield Or Medisave-

Approved Private Integrated Plans?

Do You Need Other Healthcare Insurance If You Are Covered By Your Companys Medical

Plan? Should I Get A Term Or Traditional Whole Life Policy?

What Is Total Permanent Disability?

What Is Deductible?

What is Co-Insurance?

a) Do You Need Other Healthcare Insurance If You Are Covered By Medishield Or Medisave-Approved Private Integrated Plans?

If you are covered by your companys medical plan, you should still consider getting yourself somehealthcare insurance. It might appear as a waste of money or duplication of cover at first glance,but you need to aware of three major considerations.

Lack of Portability

You are covered by your companys medical benefits only as long as you are with the company.Most group health insurance plans offered by employers in Singapore are not portable. What thismeans is that if you leave the company, you will lose your medical cover. Your healthcare insuranceplan, whether it is MediShield or a private healthcare plan, on the other hand, is independent of youremployment status.

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Becoming Uninsurable

If you suffer from an illness or a chronic health condition, you may not be insurable or may beinsured with an exclusion for the pre-existing condition. For this reason, you should seriouslyconsider getting yourself covered with some other form of healthcare plan while you are still healthyinstead of depending solely on your companys medical benefit. This way, you will not be caught inan uninsurable position when you change employers.

Medical Cover May Change

Your companys medical benefits and cover are subject to change. You dont want to be caught in asituation where you suddenly find yourself unable to afford certain medical treatment. Having yourown healthcare plan gives you the security of not having to worry about changing benefits.

b) Do You Need Other Healthcare Insurance If You Are Covered By Your Companys MedicalPlan?

First, you need to understand how MediShield and Medisave-Approved Private Integrated Plans

work. MediShield and Medisave-Approved Private Integrated Plans have deductible and co-insurance features.

What this means is that you will still need some out of pocket expense. You can use your Medisaveor your immediate family members Medisave to pay for the deductible and co-insurance.

Some private insurers also offer rider plans to cover the deductible and co-insurance of theMedisave-Approved Private Integrated Plans.. This means that you would not need to fork out anyadditional cash or Medisave for deductibles or co-insurance. Whether you should get a privatemedical expense insurance on top of your MediShield, or an additional rider plan on top up a privatemedical of your MediShield, or an additional rider plan on top up a private medical insurance is apersonal decision. If you prefer the assurance of not having to worry about additional out-of-pocketexpenses, then you should consider buying one. If you have savings or a comfortable amount of

Medisave set aside, then you may find that having a MediShied or Medisave-Approved PrivateIntegrated plan will serve you just fine.

c) Should I Get A Term Or Traditional Whole Life Policy?First, you need to understand what is the difference between term and traditional whole life policybefore deciding on the appropriate policy. Ideally, you should discuss this with your financialplanner who would be in a better position to advise you after analysing your own and yourdependants needs.

d) What Is Total Permanent Disability (TPD)?TPD usually applies when the insureds illness or injury cause the insured: not to be able to sufficiently do any work, occupation, or profession not to be able to earn or obtain wages, remuneration or profit to become totally blind to lose both limbs at or above the wrist or ankle (by complete severance) to lose the sight of one eye and one limb (by complete severance) at or above the wrist or

ankle.

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e) What Is Deductible?

Deductible is the minimum claimable amount that you would need to pay when you make ahealthcare insurance (e.g. MediShield, or Medisave-approved Private Integrated Plan) claim - thedeductible applies on the claimable amount rather than the incurred hospital bill. You will only needto pay the deductible once in a policy year.

f) What Is Co-Insurance?

Co-insurance refers to a percentage of the claimable amount less the deductible that you will alsohave to pay before the insurers pay the remaining amount.

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03. HOUSING

Buying a home may be the biggest financial commitment you may make. Most of us will use CPF savings to payfor our homes. Yet at the same time, CPF savings are meant to be our old age savings. This could mean that ifwe overspend on housing, we might have little savings left for retirement.


Financial Aspects Of Housing Using CPF For Housing Your Common Housing Questions Answered

1. Financial Aspects of HousingIts useful to equip yourself with basic information on the dollars and sense of owning a home. Werecommend that you know about these.

How Much Can You Borrow? Avoid Being Asset-Rich, Cash-PoorMortgage Loan Basics Using Your Property for RetirementIncome

a) How Much Can You Borrow?

Most of us do not have enough cash to pay the full cost of a property and would need a housing loanto finance our purchase. As you start hunting for a home, you should have an idea of your budget. Itmakes financial sense to have some figures in mind, even if they are just estimates.

When assessing the housing loan they are willing to lend, banks may assume that about one-third ofyour gross monthly income will be used to pay debts (which includes housing instalments). Eachbank may have its own credit assessment guidelines.

A housing loan is a long-term commitment, and you should feel comfortable with the repayment. It ishard to have peace of mind if you have little cash for living expenses after making large housingpayments every month!

Here are some factors that might affect your ability to repay a housing loan:

Change in housing loan interest rates Change in CPF contribution rates or policies (e.g. a reduction in contribution rates may mean

less CPF is available for housing) Spouse stops working or has to work part-time to take care of young kids or aged parents Company retrenchment Accident or illness resulting in inability to hold down a job Poor economy and unprofitable business, which could mean a reduction in income Death of the main breadwinner, and the property is not adequately covered by a mortgageinsurance

b) Mortgage Loan BasicsBefore you take up your mortgage loan, you should examine the terms and conditions of the loan.Make sure you understand the details. Talk with your loan provider, who would be most willing toclarify any uncertainties you may have.

Here are some basics you should know about:

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Interest Rate Loan Repayment Period Interest Computation Penalty For Early Repayment

Interest Rate

Banks typically offer mortgage loans with fixed interest rates in the first two to three yearsand variable interest rates thereafter.

A fixed rate loan charges the same rate of interest throughout the duration of the loan. Youknow exactly how much youd have to pay monthly. But your payments wont be reducedwhen interest rates fall. However, payments wont be increased either if interest rates rise.

In contrast, a variable rate loan is typically pegged at a fixed spread (a certain percentagepoints) above the banks prime rate. The prime rate is the interest rate charged by the bankto its best and most credit-worthy customers. If interest rates go up, so do your monthlymortgage payments. If interest rates drop, you save money with lower payments.

For example, using a 25-year monthly-rest loan of $300,000 (monthly-rest means that theprincipal amount is reduced every month as you pay the instalment), this table shows howthe instalment amount changes as the interest rate changes.

Try it yourself! Use this simpleMonthly Instalment Calculatorto work out your monthlyinstalment.HDBs concessionary interest rate is pegged at 0.1% point above the CPF Ordinary Accountinterest rate. It is revised quarterly, when the CPF interest rate is revised.

Loan Repayment Period

Depending on the borrowers age, housing loans can stretch up to 30 years or more. Alonger repayment period means youll be paying lower instalments every month but the totalinterest payment will be higher.

For example, assume that you are taking up a $400,000 housing loan, and the interest rateis a fixed 4% pa.

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Interest Rate (%) Monthly Instalment ($)

2.0 1,272

2.5 1,346

3.0 1,423

3.5 1,502

4.0 1,584

Repayment Monthly Instalment Total Repayment Total % of InterestPeriod (Years) ($) (Principal + Interest) Interest ($) in Total

($) Repayment

15 2,959 532,575 132,575 25%

20 2,424 581,741 181,741 31%

25 2,111 633,404 233,404 37%

30 1,910 687,478 287,478 42%

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https://www.cpf.gov.sg/cpfhsg/Hsg_mnthlyInstal_calc.asp?src=RNRhttps://www.cpf.gov.sg/cpfhsg/Hsg_mnthlyInstal_calc.asp?src=RNRhttps://www.cpf.gov.sg/cpfhsg/Hsg_mnthlyInstal_calc.asp?src=RNR


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For the 20-year loan, the total interest charge is $181,741. In contrast, for the 30-year loan, youllpay interest of $287,478 thats $105,737 extra, and with interest forming 42% of the totalrepayment!Try it yourself! Use the Total Interest calculatorto work out the total interest on a housing loan.If you are using CPF to repay your loan, it would be ideal to pay it off by the time you reach 55.

This is because of the reduced CPF contribution rates for workers above 55. You should alsonote that the contribution rates for workers above 50 to 55 are lower than for those below 50.Clickherefor information on CPF contribution rates.Interest ComputationThe cost of a loan largely depends on the loan repayment period, interest rate and how theinterest is computed. Here are two ways of computing interest that you should know about:

Monthly Rest (also known as monthly reducing)

When you pay an instalment, the amount comprises: a payment for the interest charge, and a payment towards the principal (the loan amount).Monthly rest means that the principal amount you pay every month is deducted whencalculating the interest rate for the following months. Interest is thus computed on theprincipal outstanding at the start of each month.Annual Rest (also known as annual reducing)Annual rest means that the total principal repaid by the end of the year is deducted whencalculating the interest rate for the next year. Interest is thus computed on the principal

outstanding at the start of each year.In general, the interest charge will be the lower for monthly-rest, and higher for annual-rest. A useful rule of thumb: The more frequently the interest is computed, the better.

Penalty For Early RepaymentBanks earn money by charging you interest on your mortgage loan. The more time it takes youto pay off the loan, the more interest the bank earns.Some homebuyers may want to pay their mortgage early, partially or fully, to save on interest.However, banks may charge them a fee, known as a pre-payment penalty. The penalty variesamong banks (eg. it could range from 0.5% to 1.5% of the loan principal, if repayment is made in

the first few years of the loan, within the pre-payment period).This penalty is designed to persuade homeowners to continue to pay interest for a certainperiod, instead of paying off their loan early. Banks impose such penalties to ensure they havean opportunity to recover their costs on the particular deal that they gave to homebuyers.Be aware of any penalties when choosing your loan. Ask about pre-payment penalty fees andthe length of the pre-payment period.

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c) Avoid Being Asset-Rich, Cash-Poor

Many home buyers use CPF for housing. Unless you are confident that you will have adequate cashsavings for your old age, it is not prudent to maximize the use of your CPF for housing.You may end up being asset-rich, cash-poor where you have little cash for day-to-day expenses,especially in retirement (this is even more so if you have also used your cash savings/income for

housing).We recommend using the following calculators to get a peek into your financial future!

How much money do you need to retire? Get a lumpsum estimate here. Thinking to rely only on your CPF Minimum Sum for old age needs? See how much income you

may get monthly. Planning to take a housing loan and using CPF to repay the loan? Project your CPF balances at

age 55 here!

d) Using Your Property for Retirement

Some people find that while they have a fully paid-up home, they might not have enough cash forliving expenses during retirement.If you wish to use your property to get funds for your old age, here are options to consider:

Rental Income From PropertyDowngrading PropertyReverse Mortgages

Rental Income From PropertyHDB flat owners who meet certain conditions will be allowed to sublet their whole flat with HDBs

approval. Alternatively, flat owners may also be able to sublet bedrooms in their flat. More information

on subletting HDB flats and bedroomshere.Downgrading PropertyThis means downgrading to a smaller property. The net cash proceeds can be used for dailyexpenses, and perhaps invested in low risk investment products to generate some investmentreturns.Downgrading can be done at one go, or in stages (eg. from a private property to a 5-room HDBflat, and then to a 3-room flat), depending on the persons financial and lifestyle needs.

Downgrading to a smaller property is also sometimes done after a couples grown-up childrenhave moved out. The older couple might not need the larger space or may not wish to spendtime on maintaining the larger property. Downgrading may not always be financially-motivated.More information on HDB Studio Apartment Scheme for elderly HDB flat lesseeshere.Reverse MortgagesA reverse mortgage is a type of home loan that allows you to convert some of the value in your

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https://www.cpf.gov.sg/cpf_trans/ssl/retirement/Ret_Est_home.asp?prof=mem&src=RNRhttps://www.cpf.gov.sg/cpf_trans/ssl/financial_model/mss_cal.asp?prof=&src=RNRhttps://www.cpf.gov.sg/cpf_trans/ssl/financial_model/mss_cal.asp?prof=&src=RNRhttps://www.cpf.gov.sg/cpf_trans/ssl/financial_model/NewHAC/Home_Afford_calc.asp?src=RNRhttps://www.cpf.gov.sg/cpf_trans/ssl/financial_model/NewHAC/Home_Afford_calc.asp?src=RNRhttp://www.hdb.gov.sg/fi10/fi10206p.nsf/WPDis/Subletting%20Your%20Flat%20/%20RoomOverview?OpenDocumenthttp://www.hdb.gov.sg/fi10/fi10206p.nsf/WPDis/Subletting%20Your%20Flat%20/%20RoomOverview?OpenDocumenthttp://www.hdb.gov.sg/fi10/fi10201p.nsf/WPDis/Buying%20A%20New%20HDB%20Flat%20(e-Sales)Overview?OpenDocumenthttp://www.hdb.gov.sg/fi10/fi10201p.nsf/WPDis/Buying%20A%20New%20HDB%20Flat%20(e-Sales)Overview?OpenDocumenthttp://www.hdb.gov.sg/fi10/fi10201p.nsf/WPDis/Buying%20A%20New%20HDB%20Flat%20(e-Sales)Overview?OpenDocumenthttps://www.cpf.gov.sg/cpf_trans/ssl/financial_model/NewHAC/Home_Afford_calc.asp?src=RNRhttps://www.cpf.gov.sg/cpf_trans/ssl/financial_model/mss_cal.asp?prof=&src=RNRhttps://www.cpf.gov.sg/cpf_trans/ssl/retirement/Ret_Est_home.asp?prof=mem&src=RNRhttp://www.hdb.gov.sg/fi10/fi10201p.nsf/WPDis/Buying%20A%20New%20HDB%20Flat%20(e-Sales)Overview?OpenDocumenthttp://www.hdb.gov.sg/fi10/fi10206p.nsf/WPDis/Subletting%20Your%20Flat%20/%20RoomOverview?OpenDocument


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home into cash while you retain home ownership.

It works like traditional mortgages, only in reverse. For example, rather than making a paymentto your lender each month, the lender pays you. The money can be used for living expenses,health care, children education expenses, etc.

Reverse mortgages are typically used by retired homeowners who need to supplement theirincome.

When the homeowner dies, sells the home, moves out or reaches the end of the pre-definedloan period (depending on the terms and conditions), the mortgage becomes due with interest. Itis typically paid off from the proceeds of the sale of the home.

Currently, one local bank and one insurer offer reverse mortgages. Access an overview ofReverse Mortgage (HDB)here.

2. Using CPF For HousingBuying a home is serious business. Unless you are cash-rich, youll be servicing the mortgage loan on your

home for years to come.

Thus, if youre using CPF to buy your home, it is important that you should familiarise yourself with theseinformation:

Rules Of Thumb For CPF Home Buyers Factors To Be Aware Of When Using CPF for Housing Limits On The Use Of CPF For Housing

a) Rules Of Thumb For CPF Home Buyers1. Know what you can afford before going home-hunting. The more you spend on housing, the lessyou will have for old age needs. Generally, your total monthly debt payments (including home loan)

should not be more than 35% of gross monthly income.

2. It is prudent to plan to pay off the loan by age 55. If you are using CPF for the instalments,remember you will have lower CPF contributions from age 50.

3. Generally, it is better to choose a shorter loan repayment period if you can. The longer therepayment period, the more interest you are paying.

4. You must understand how interest rates will affect your loan repayments. Ask your loan provider toshow you examples using different loan interest rates.

5. Changes in your income and in CPF contribution rates may affect your ability to pay your loan. Youshould have emergency cash savings of about six times your monthly salary to help tide you throughunexpected events.

6. Take the time to discuss your housing loan needs with financial advisers and banks. At the sametime, educate yourself so that you are able to assess what they tell you.

7. Get a few quotations, and spend time to study the different loan packages. Dont make hastydecisions based on advertisements or brochures. Request for a Customer Information Sheet when

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you are considering taking up a loan with the bank.

8. Make sure you understand the terms and conditions before taking up the loan, eg. is there a lock-inperiod or can you make capital repayments? Ignorance is not an excuse if disputes arise later on.

9. For peace of mind, get a mortgage insurance cover. Consider taking up the maximum cover for co-payers of the loan.

10. Finally, keep up with changes that may affect the use of CPF for housing. Read the information in

our website. It is in your own interest to be an informed CPF member.

b) Factors To Be Aware Of When Using CPF For HousingHeres a list of some factors you should know about if you use CPF for housing

Factors affecting all homeowners Factors affecting only homeowners below 55 years old Factors affecting homeowners aged 55 and above

Factors affecting all homeowners:

1. CPF Housing Withdrawal Limit.This is the maximum amount of CPF that can be used for a property. No further CPF can beused when the limit is reached. Note that if you make lumpsum repayments with CPF savings, itmay reduce the outstanding housing loan and interest, but you will reach the withdrawal limitearlier.Use theCPF Housing Withdrawal Limits Calculatorto check your limit

2. Private property with remaining leases of 30-59 years at time of purchase (from 19 July 2005).These properties havelower Housing Withdrawal Limits. If the housing loan is outstanding whenthe limit is reached, homeowners will have to pay future instalments fully by cash.

3.

Available Housing Withdrawal Limit (AHWL).

If the total CPF used for the property has reached the propertys 100% Valuation Limit, you maycontinue to use your CPF if you have the AHWL. This to ensure that members have at least theprevailing Minimum Sum cash component set aside for retirement. The AHWL applies to allhomeowners except those who buy new HDB flats using HDB concessionary loans.

If youve reached 100% VL, you can estimate your AHWLhere.

4. Housing loan interest rates.A rise in interest rates means you may have to pay higher monthly instalments on your loan.This could mean forking out more cash every month if you are already using your available CPFsavings for the instalments. Note also that interest rates for 90% home loans are usually higherthan those for 80% home loans.Use theMonthly Instalment Calculatorto estimate the monthly instalment.

5. CPF contribution rates and allocations .Both employer and employee do not have to contribute CPF on salary amounts which exceed$4,500. This means more take-home pay, but employees have to remember that they wont beable to rely on having more CPF savings for their housing.

6. Changes to CPF contribution levels.Remember that your level of contributions may change over the years. It could increase (e.g.salary rise); decrease (eg. pay cut); or even stop (e.g. unemployment). A useful rule-of-thumb isthat we should have emergency savings of at least six times our monthly salary to cater forunexpected events, if possible.

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7. Limit on Voluntary CPF Contributions.Remember that your level of contributions may change over the years. It could increase (e.g.salary rise); decrease (eg. pay cut); or even stop (eg. unemployment). A useful rule-of-thumb isthat we should have emergency savings of at least six times our monthly salary to cater forunexpected events, if possible.

8. Limit on Voluntary CPF Contributions.In addition to mandatory/compulsory contributions, some CPF members make voluntarycontributions to their CPF accounts. There is a limit to the amount of voluntary contributions aCPF member can make. Any voluntary contributions paid in excess of the approved limit will berefunded without interest.

9. Other commitments.Dont forget that you may also need your Ordinary Account savings for other purposes commitments under CPF Investment Scheme; Home Protection Scheme premiums;Dependants Protection Scheme premiums; usage under CPF Education Scheme.

10. Undischarged bankrupt.HDB flat owners who are undischarged bankrupts can continue to use CPF to pay their housing

loan instalments. From 15 June 2005, private property owners and owners of privatised HUDCflats who are bankrupts may continue to use their CPF to service their housing loans taken tobuy the property, if the CPF charge on the property is created before their bankruptcy.

Factors affecting only homeowners below 55 years old:

11. Transfer of Ordinary Account savings to Special Account.Members below age 55 can transfer savings from the OA to the SA, to earn more interest.However, such transfers are irreversible, and homeowners with outstanding home loans shouldthink carefully before making such transfers.

Factors affecting only homeowners aged 55 and above:

12. Lumpsum withdrawal at 55.You can withdraw your CPF savings when you turn 55 after you set aside your CPF MinimumSum. Before you withdraw your CPF savings, however, do consider how you intend to continuepaying any outstanding loan instalments. This is important as employees above 55 will havelower CPF contribution rates.

13. CPF Minimum Sum at age 55.The CPF Minimum Sum is being raised gradually to reach $120,000 (in 2003 dollars) in 2013(please seeTable A).Members can set aside the amount fully in cash or pledge their property for up to 50% of theMinimum Sum applicable to them. It has to be set aside at 55 even if members postpone or donot make any withdrawal of CPF savings at 55. This may thus affect the amount of Ordinary

Account savings available for housing.

14. CPF Minimum Sum shortfall.If members have a shortfall for their CPF Minimum Sum upon reaching 55, they will not have tomake-up the shortfall immediately. However, the shortfall could affect the use of CPF forhousing if the propertys 100% Valuation Limit has been reached. The amount that can be usedwould be the Ordinary Account balance less any shortfall in the Minimum Sum cash component.

15. Medisave matters.Although these do not have a significant impact on homeowners, it would be useful for members

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to note that their CPF withdrawal at 55 can be affected by the Medisave Minimum Sum orMedisave Required Amount. More information may be accessedhere.

c) Limits On The Use Of CPF For Housing

Buying a home means a long-term financial commitment. If you are using CPF for property, rememberthat the more you spend on property, the less you might have for old-age needs.

There are limits on the amount of CPF you can use. The limits are to:

Ensure that the CPF used is not way above the value of the property. Instil financial prudence so that members will not over-commit to property at the expense of

retirement savings.You should be aware of these housing limits:

100% Valuation Limit (VL)Available Housing Withdrawal Limit (AHWL)CPF Withdrawal Limit for Housing Withdrawal Limit for Private Properties with Remaining Lease of 30-59 years

100% Valuation Limit (VL)The VL is the lower of: the purchase price of the property, and the market value of the property at the time of purchase.You can use your CPF savings up to the VL, without having to meet any condition on your CPFbalances. Thus, even if you have just started working and have only a small amount in your CPF,you will still be able to use CPF to buy a home.

Example A Example B

Purchase price of property $200,000 $800,000

Value of property $230,000 $750,000

Valuation Limit $200,000 $750,000

Reaching the VL:

It is likely your housing loan would still be outstanding when your CPF withdrawal has reachedthe 100% Valuation Limit (VL).This is largely because you are using CPF to pay both the housing loans principal amount aswell as the interest charges. The higher the interest on the housing loan, the faster the 100% VLwill be reached.

Using your CPF to make a lumpsum/capital repayment on your housing loan may make youreach the VL earlier, but it will reduce the interest charges.Use theCPF Housing Withdrawal Limits Calculatorto compute when you may reach yourwithdrawal limits.

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Available Housing Withdrawal Limit (AHWL)When you reach 100% VL, you may continue to use your CPF savings to repay the housing loan.The amount you can use is the AHWL.

Why AHWL? AHWL ensures that members have at least the Minimum Sum cash component set aside for

retirement. It is important as any CPF monies used beyond the value of the property stand a higher risk

of not being refunded to members' CPF when the property is sold, e.g. low property pricesduring a market downturn.

How AHWL is calculated:

CPF members below 55 years CPF members 55 years and above

AHWL is the available Ordinary Account balance

after setting aside the prevailing CPF MinimumSum cash component.*

AHWL is the available Ordinary Account

balance less any CPF Minimum Sum cashcomponent shortfall.

* Special Account balance (including the amount used for investment) and Ordinary Accountbalance are used to meet the Minimum Sum cash component.Important Points To Note: The AHWL is a moving limit. It increases with new CPF contributions, and is reduced with

usage of OA savings or when the Minimum Sum increases. Using your CPF to make a lumpsum/capital repayment on your housing loan may make you

reach the AHWL earlier, but it will reduce the interest charges. The Board informs members three months before the VL is reached and the AHWL

becomes applicable.

CPF Withdrawal Limit For HousingThere is a maximum limit to the amount of CPF savings that can be used for housing.

The limit applies to those who: Buy an HDB flat from 1 January 2003, financed with a bank loan. Refinance their HDB concessionary loan with a bank loan from 1 January 2003 Take a bank loan to buy a private property from 1 September 2002. Refinance an existing loan taken before 1 September 2002 for a private property.The applicable limit depends on when the property is purchased or when the housing loan isrefinanced.

Once it is reached, CPF members will not be able to withdraw any more CPF for their property(the limit applies to a particular property, so members can use CPF for other properties whichhave not reached the limit).

Date of Purchase or Loan Refinancing HDB Flat* (bank loans) Private Property^

1 Sep 2002 - 31 Dec 2002 Not applicable 150% of VL

1 Jan 2003 - 31 Dec 2003 150% of VL 150% of VL

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your Retirement Account (excluding interest earned).

For members who had turned 55 before 1 July 1995, the required CPF refund will be the principalamount pledged for part of the Minimum Sum plus the accrued interest on the pledge. However, ifthe property is not pledged for part of the Minimum Sum, no refund is required.

What if I sell my property before reaching 55, and have not fully paid-up the housing loan?

Generally, when you sell your property, you would need to refund the CPF savings you had earlierwithdrawn for the purchase of the property. This includes the interest you would have earned, hadthe savings remained in your CPF account

It is a straightforward matter when the sales proceeds are enough to pay the remaining loan to HDBor the lending bank, as well as making a full refund of your CPF savings.

What happens if the sales proceeds arent enough? Here is a simplified table showing the priorityof payments, ie. how the sales proceeds would be applied.

Priority ofPayment

HDB Flat Financedwith HDB Loan

HDB Flat FinancedLoan

Private PropertyBought Before 1

September 2002

Private PropertyBought or

Refinanced After 1September 2002

First Outstanding HDBloan and interest,and resale andresale applicable

Outstanding housingloan with bank

CPF savingswithdrawn forpurchase of property


Second CPF savingswithdrawn forpurchase ofproperty, and CPFinterest




Third* Outstanding HDB

upgrading cost if any

Housing loans

interest, and CPFinterest

Housing loans


Housing loans


* the housing loan interest here is applicable only in the event of a forced sale, and is calculatedfrom the date of payment default.

What happens when I reach 55, and have yet to fully repay the housing loan?

Please clickhere for the information.

b) Ownership of Property

What happens to a property owned by a person when he passes away? Does CPF Nominationcover property bought using CPF savings?

Properties bought with CPF savings are not covered by CPF nomination.

When a member passes away, the property will form part of the estate of the deceased member.The CPF savings withdrawn for the property need not be refunded to the deceaseds CPF account.

A homeowner can make a will and state who should get the property, in the event of his death. If aperson dies without making a will, he is said to have died intestate. The estate will be distributedaccording to the rules of intestacy as laid down in the Intestate Succession Act.

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For Muslim homeowners, Singapores Syariah Court has jurisdiction over the method of distributionof a deceased person's estate among his next of kin in accordance with Islamic law. The rules ofintestacy are not applicable.

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Person died intestate, leaving: Distribution

1 Spouse only (no children or parents) All to spouse

2 Spouse and children Half to spouse and half to children equally

3 Spouse, parents (no children) Half to spouse and half to parents equally

4 Parents and children All to children to be shared equally

5 Parents (no spouse or children) All to parents equally

6 Siblings and their children (no spouse,child orparent)

All to be shared equally among siblings and ifthey have already passed away, theirchildren

7 Grandparents (no spouse, child, parent orsibling)

All to grandparent(s) equally

8 Uncles and/or aunts (no spouse, child, parent,

sibling or grandparent)

All to uncles and/ or aunts equally

9 No spouse, child, parent, sibling, grandparent,uncle or aunt

All to Government

What happens when a property is owned by two or more persons, and one person passes away?Whats the difference between joint tenancy and tenancy-in-common?

The law provides for two forms of ownership: joint tenancy and tenancy-in-common. The form ofownership is stated on the title document for the property.

Joint tenancy

This is where all the owners have an equal interest in the property regardless of the amount ofmoney each co-owner had contributed towards the purchase of the property.

Married couples usually opt for joint tenancy when they buy a property. A joint tenancy overridesany will, and the survivor always gets the automatic right to assume ownership of the deceasedsshare.

Thus, if a husband passes away first, then the wife as the survivor automatically takes over thehusbands share of the property. Even if the husband had made a will which stated how hisshare of the property should be distributed, his wife will automatically get to inherit his share.

Tenancy-in-common

This is where each co-owner holds a separate and definite share in the property. Thisarrangement is more common where the owners are not related to each other, e.g. friendsbuying a property together for investment.

There is no right of survivorship in a tenancy-in-common. In other words, unlike a joint tenancy,the deceased's interest does not pass automatically to the remaining co-owners.

Upon the death of a tenant-in-common, the deceased's interest can be distributed in accordancewith his will (if any) or under the provisions of the Intestate Succession Act.

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c) Various Financial Matters

What is negative equity, and how does it affect a home buyer?

Generally, a home is said to be in negative equity when its market price is less than its outstandingloan.

Banks say that as long as customers pay the monthly instalments on time, they wont ask them totop-up the difference between the market price and the outstanding loan.

However, if payment isnt made for a few months, and the customer is unable to work out a paymentplan with the bank, the bank may get a court order to do a forced sale to recover the outstandingloan and unpaid interest.

While it is less common for HDB flats to be in negative equity, its possible for resale flat buyers tofind themselves in such a situation, especially if they had bought the flat when prices were at arelatively high level.

There are many housing loan packages offered by banks. How do I know which is best for me?

Loan Duration

Check the maximum loan duration or term that you can get. Some banks also set amaximum age limit, which would limit the loan duration. However, you shouldnt decide onthe maximum duration without careful thinking. The longer the duration, the more interestcharges you would be paying!

Monthly Instalment

Ask the banks to show the instalment amounts using different interest rates, includinginterest rates that are higher than those quoted in the loan packages. This lets you assess

whether you would be comfortable if interest rates were to fluctuate.

Interest Rates

Typically, banks offer fixed interest rates for the first 2 -3 years of a loan, with variableinterest rates for the remaining years. Ask the bank to provide you with the effective(average) interest rate figure over the entire loan period.

Initial Lock-in Period

Some banks impose a penalty if customers leave in the initial years of the loan. This refersto the customer paying off the old loan, perhaps by refinancing using a new loan withanother bank. The penalty could be about 0.5 to 1.5 per cent of the existing loan amount.

Fees

See if the banks charge a loan processing fee, pre-payment fee, or third-party fee such aslegal fee, valuation fee and fire insurance premium.

What is refinancing, and why do people refinance their housing loans?

Refinancing means getting a new housing loan to pay off the current loan. This is usuallydone because people believe they would pay less interest on the new loan.

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A lower interest rate will decrease your monthly instalment. But you may have to stay withthe new loan for some time before the lower payments will offset the costs of refinancing.

If you are thinking of refinancing, ask the bank to show you why their loan package is betterthan your existing loan. You should also check on any lock-in period that might come withrefinancing, the legal fees, and other refinancing costs.

Some financial advisors say that if you have an HDB concessionary loan, you should think

carefully before refinancing to get a market-rate bank loan. This is mainly because theHDBs loan interest rate is pegged to the CPF interest rate, and may fluctuate less thanbanks interest rates. Also, it is likely that HDB may be willing to exercise more flexibility thanbanks when there is a loan default.

What is cash-back, and is it allowed?

Cash-back arrangements occur when the buyers, sellers and housing agents collude toinflate the declared purchase price so as to enable the buyers to take a higher housing loanand/or to withdraw more CPF savings. These arrangements are supported by valuationreports, which are also on the high side.

Such "cash-back" arrangements are illegal. They are also not financially prudent for thebuyer. The buyers retirement savings are eroded by the withdrawal of more CPF moniesthan is needed for the actual purchase. Buyers also expose themselves to greater financialrisks by taking on bigger mortgage loans, which will result in more interest being incurred.

From April 2005, all members using their CPF savings for the purchase of HDB resale flatsfinanced with a bank loan and/or servicing of the loan will require a valuation report from aprivate valuer assigned by HDB. This requirement will also apply to transferees who aretaking bank loans to effect transfer of ownership of an existing HDB flat at market valuation.

What are some of the costs which I may incur when I own a home?

The housing loan may be your largest financial commitment when you buy a home. Butthats not the only housing cost.

In addition to renovation and decoration costs, and housing agents commissions (if you usetheir services), here is a list of the other main expenses you should know about. It applies toboth HDB and private properties, though the costs for private properties are usually higher.

Legal fees

This is also known as conveyancing fees.

If you are buying a private property, you would need to engage a lawyer to advise you onthe process, and later to handle the necessary legal work to transfer ownership of the

property. Legal fees could range between 1% and 1.5% of the property purchase price.

Some banks may offer a legal fee subsidy as part of their loan package. You can use yourCPF savings to pay the difference in legal fees after taking into account the bank's subsidy.

Some banks may offer a legal fee subsidy as part of their loan package. You can use yourCPF savings to pay the difference in legal fees after taking into account the bank's subsidy.

HDB provides legal services when you: Buy an HDB flat Sell your HDB flat

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Refinance your HDB loanFor HDB flat financed with bank loan, you can either choose HDB or your own private lawyerto provide the legal service. CPF savings cannot be used to pay the legal fees if you areselling your property.

Estimate legal fees for your HDB transactionhere.

CPF Conveyancing Panel for Residential Properties Scheme and HDB Flats Financed withBank Loan may be accessedhere.

Stamp Duty/Fee

Stamp duty is a government tax. It is payable by a buyer who buys a property in Singapore.It is a tax on commercial and legal documents, and not a tax on transactions.

The stamp duty payable is calculated on a scale: 1% on the first $180,000 2% on the next $180,000 and

3% thereafter.

CPF savings may be used to pay the stamp duty.

Valuation Fee

When you apply for a housing loan from a bank, it usually requires a valuation report of yourproperty. Valuations are done by professional property valuers, and valuation fees may vary.Some banks may absorb the fee for their customers.

If you are using your CPF to buy a resale HDB flat, you will need to submit a valuation reportby a private valuer assigned by HDB together with your resale application to HDB.

The value of your property is one of the factors used by banks to determine the housingloan amount. Factors taken into consideration in assessing the property include location,size, condition of building, availability of facilities, etc.

Mortgage Insurance

HDB flat buyers who are using their CPF savings to pay their monthly housing instalmentshave to be insured under the CPFs Home Protection Scheme. The insurance schemeprotects CPF members and their families against losing their homes should membersbecome physically/mentally disabled or pass away before their housing loans are paid up.

While it is generally not compulsory for private property owners to buy mortgage insurance,they should consider buying one especially if they are taking up housing loans with long

repayment periods. As buying a private property is a large financial commitment for manyhome buyers, they should prepare for unfortunate events and provide financial protection forthemselves and their families.

Fire Insurance

It is mandatory for HDB homeowners to purchase a fire insurance policy with HDB'sappointed insurer if they have taken a mortgage loan from HDB after September 1994 andhave yet to fully repay the loan.

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The policy covers the cost of reinstating the damaged interior of the flat built by HDB fordamages caused by fire, lightning, explosion, bursting and overflowing of water pipes, etc.

For HDB homeowners who are taking a mortgage loan from the banks, the banks wouldnormally also require them to purchase a fire insurance policy.

It is advisable for private property owners to have adequate fire insurance to protect themagainst losses or damages resulting from a fire, especially as such properties could be

expensive.

Read more about fire insurancehere.

Maintenance/Conservancy Charges And Utilities

HDB homeowners pay monthly service and conservancy charges to their town councils forthe maintenance of their housing estates. Charges vary according to the town councils andthe flat types, ranging roughly between $55 and $80. Owners of larger flat types pay highercharges.

Owners of private properties like condominiums and apartments typically pay monthly

maintenance fees ranging from $100 to $1,000, depending on the number of units in theestate and how lavish the facilities are (eg. swimming pools, tennis courts, saunas, andgardens).

Utility charges (power, water, gas) depend on usage.

Property Tax

The property tax payable annually is computed based on a percentage of the annual valueof the property. The annual value is the estimated annual rent that your property can fetch,regardless of whether you are able to rent it out or not.

If you own and occupy the property, the tax rate is 4% of the annual assessed value. If yourproperty is rented out, the tax is currently 10% of the annual assessed value of the property.

To read more about property tax, visit theIRAS website.

What are some factors to consider when investing in property?

Financial Commitment

While banks may accept debt servicing ratios ranging from 40%-60% for the loan, somefinancial advisers suggest to keep within 50% or less so as not to overstretch ones financiallimits (the ratio refers to the proportion of a borrower's monthly income taken up by total

monthly loan payments). Another suggestion is for the total loans not to exceed 50% of totalassets, which include salary, savings and equities.

Bank Loan

Banks typically do not grant loans of more than 80% of an investment propertys value (ie.the home loan amount divided by the property valuation). Note that while rental income frominvestment property is taken into consideration when granting the loan, only a portion ratherthan the entire rental income might be considered. Also, investment properties generallyhave a higher interest rate than a loan for residential properties.

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Economic And Business Conditions

If you are cash-rich, you could probably buy a property even during bad times whenproperty prices are likely to be depressed, and hold on the property until prices have risen.But if you are not certain about having a guaranteed income during an economic downturn,then you should think twice before investing.

Timing Of Investment

Time your investment so that you buy as prices are starting to increase, and sell before theydecline. This is, of course, easier said than done. But experience and constant monitoring ofmarket movements would help. You must have the financial resources to stay invested forsome years, and shouldnt bet on being able to make a quick profit on the property.

Housing And Land Policies

Keep in touch with government policies, property developers plans and commercial banks

practices as these may affect property prices.

Understand Profits And Risks

Work using realistic figures when you do your sums on the cost of purchase and theexpected return or income from the investment. In particular, you should assess how youdbe affected if the property market falls. Thats when your expected return/income would fall,while youd still have to keep paying the housing loan.

Objectivity

Be objective when you compare and analyze property investments. While emotions mayinfluence your investment decisions, eg. you are attracted to the premises or locality, youshould always keep in mind your reason for wanting to invest most of the time, this wouldbe to get an investment profit or rental.

Good Location

A well-maintained property in a good location enhances its ability to produce a good rentalincome or a good price at the end of the investment. It is thus important to make a physicalinspection to ensure that the environment is suitable for occupation or investment.

Maintenance Of Property

Good maintenance should enhance the value of the property. For a landed property such asa terrace house or bungalow, you may want to consider appointing a professional tomanage your property if you do not have the time. For condominiums and HDB flats, you willpay the management corporations and town councils to take care of the common propertyand common areas.

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04. INVESTMENTSPerhaps you wish to earn higher returns on your monies. Maybe you want to have enough funds for your childstertiary education in 15 years time. Or you want to grow your retirement nest egg so that you will have anadequate retirement income.Whatever your reasons for investing, it pays to know some investment basics. While you will not become aninvestment guru, the basics would help you make better investment decisions.In this module, your three key takeaways are:Investment Basics You Must Know Rules of Thumb for Investing Costs of Investing1. Investment Basics You Must Know

We recommend that you familiarise yourself with a few basic investment concepts. The concepts can beapplied to most investment products.

Investment Time HorizonAsset AllocationRisks & ReturnsDiversificationCompound InterestDollar Cost Averaging

a) Investment Time Horizon

It is the time period between when the investment is made and when the proceeds from theinvestments are needed. There are three typical time periods.

Long Term

You need your investment proceeds 10 or more years from the time of investment. Stocks andunit trusts can be considered as you have enough time to ride-out any fluctuations in prices

Medium Term

You need your investment proceeds 4 9 years from the time of investment. Investors with thistime horizon should pursue a combination of bond, unit trusts and stock investments. On anaverage, bond investments as a savings will grow at a rate of return that is slightly ahead ofinflation. Stock and unit trusts investments can also be considered as a complement for highergrowth.

Short Term

You need your investment proceeds within 3 years.If you need your money in a short time, you cannot take chances with your investment. Youshould place more emphasis on cash equivalents such as time deposits or bond investments.You might even not invest your CPF savings, as there is not much that the investor can do interms of averaging out the ups and downs of investing.

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c) Risks & Returns is of a higher level than Investment risk, Investment returns etc.

Investment risk is the possibility that the ACTUAL return on an investment will vary from theEXPECTED return, or that the initial principal amount will decrease in value. A simple way oflooking at risk is that it is the possibility of losing money!

Investment returns are the profits or losses made from the investment. For example, if you

buy stock for $10,000 and sell it for $12,800, your return is a gain of $2,800. Or if you buy abond for $10,000 and sell it for $9,200, your return is a loss of $800.

Long-term investors are interested in total returns, which is the amount your investmentincreases or decreases in value, plus any income you receive. If you have dividends of $180 fromthe stock investment above, your total return would be $2,980 ($2,800 investment gain + $180dividend income).

Risks and returns go hand-in-hand. Higher returns mean greater risk, while lower returns offergreater safety.

Extra! Read more about risks here.

1) Types of Risks

Risks can be broadly categorized into: Systematic risk Non-systematic riskSystematic risks are external factors affecting investments, e.g. general economic conditions,changes in interest rates or a sudden change in market sentiment. Usually, such risks cannotbe avoided.

Non-systematic risks or specific risks are those that are linked directly to the investment itself.

For example, it might include the quality of the companys management and the sustainabilityof a companys product development strategy. Spreading your investments among a variety ofinvestment products can minimize non-systematic risks.

2) What is risk tolerance?

Risk tolerance or risk appetite means the amount of risk you are comfortable with and canafford to take. Can you still sleep comfortably at night if your investments suffer a short-termloss? Do you have enough savings that you can financially afford to take some investmentrisk?

3) The Risk Return trade off

Generally, the higher the risks, the higher the returns. A start-up business could becomebankrupt or it could become a multimillion dollar company. If you invest in this start-upbusiness, you could lose everything, or you could make a fortune.

On the other hand, a blue chip company (this generally refers to companies that are stable,well-established and financially-sound, and which have demonstrated their ability to paydividends in both good and bad times) is less likely to go out of business but you are less likely

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to get rich because their stock price movements are generally less volatile.

You can balance risk and return by having a mixture/combination of different types ofinvestment products in your portfolio. Thus, you would have some investments that have thepotential for better returns and others that are safer.

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d) Diversification

Diversification or spreading your investment over a combination of several investments allows you toeven out the ups and downs in your investment returns. This means that you should not puteverything into stocks and unit trusts, or everything into bonds.

In this way, if one investment does not perform well, there are other investments that may do better.As the saying goes, do not put all your eggs in one basket.

You can diversify your investments in two ways:

According to asset classes, i.e. have a combination of cash equivalents (e.g. fixed deposits),bonds and stocks. This is known as asset allocation.

According to markets, i.e. having investments from various geographic regions, countries,various currency denominations, industries and companies.

With diversification, your investment portfolio will be better able to weather the ups and downs ofeconomic cycles and market volatility.

Extra! Check out the CPFs Risk Classification System(highly recommended if you invest your CPFin unit trusts, investment-linked insurance products or exchange-traded funds)

e) Compound Interest

Compound interest is the interest earned not only on the initial principal but also on the accumulatedinterest of previous periods.

For example, if you have $1,000 in your Special Account and it earns 4% interest each year, youllhave $1,040 at the end of the first year. But at the end of the second year, youll have $1,081.60.

Not only did you earn $40 on the $1,000 you initially deposited (your original principal), but you alsoearned an extra $1.60 on the $40 in interest. Even if you never add another cent to that account, in10 years youll have over $1,480 through the power of compound interest, and in 25 years youll have$2,665.

Hence, long term investing can really add up.

Check out the power of compound interest for yourself withthis calculator.

f) Dollar Cost Averaging

As most investors know, market timing - aiming to buy low and sell high - is very hard to accomplish.Dollar-cost averaging is a technique to help soften the impact of fluctuations in investments, andtakes a good portion of the emotion and guesswork out of investing.

It involves investing a sum of money regularly over a period of time, regardless of whether the marketis up or down. This means your money automatically buys more units of your investment when the

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is up or down. This means your money automatically buys more units of your investment when theprice is low and fewer units when the price is high.Generally, the average cost of the investment will become lower over time. This lessens the risk ofinvesting a large amount in a single investment at the wrong time. While you may not get the idealresults from buying at the market's low point and selling at its high point, neither will you suffer theconsequences of doing the opposite.

2. Rules of Thumb for Investing

Investing your CPF or cash savings can be a difficult thing. With so many investment products, marketingpromotions, and well-intentioned tips from friends, how do you know where to invest your money?To get you started, we offer you a few rules of thumb (or guidelines) for investing. Note that while our list is auseful guide when investing, it will not guarantee that your investments will always be profitable.

Know YourselfThink Long TermDiversify Your InvestmentsAsset Allocation Is KeyKeep An Eye On Expenses

Review Your Investments RegularlyIf You Can, Invest EarlyDo Your Groundwork Before InvestingKnow your Real Rate Of ReturnUse Time, Not Timing

a) Know Yourself

Know your emotions, fears and whether you can tolerate investment risks. Make sure you chooseinvestments that are suitable for your long-term goals. You should feel comfortable putting yourmoney in them (and you should be able to sleep easily at night without having to take sleepingpills!).

Even if your time horizon is sufficiently long that you can afford to invest in riskier products, youshould be comfortable with the short-term fluctuations (price changes) youll encounter. If youre not,you should rethink your investments.

b) Think Long Term

CPF savings are for old age needs. You should thus invest your CPF with a view to growing yournest egg instead of taking risky decisions to earn a quick profit.

As a long-term investor, you want to focus on longer trends, not temporary fluctuations. Thinkinglong-term can help calm fears caused by short-term market movements.

c) Diversify Your Investments

Consider spreading your investments among asset classes (stocks, bonds and cash equivalents)and within each class (different products). Doing so can spread risk over a variety of investmentsand may minimise the impact of unpredictable market downturns. In other words, do not put all youreggs into one basket!

d) Asset Allocation Is Key

Experts say that deciding on asset allocation is generally more important than deciding whichproducts to buy. To decide on a suitable asset allocation, youd need to consider your investmentgoals, time horizon and risk tolerance.

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1) Real Rate of ReturnWhen we talk or read about investment returns, the figures we see are usually the nominalreturns. This means that the figures have not been adjusted for inflation.One of the risks associated with any investment is the effect of inflation. When you take

inflation into account, you would get the real rate of return.An example: Your return on an investment was 8% in the first year and 9% in the second year.In which year did you do better?In order to properly answer the question, you would need to know the annual inflation rates. Ifinflation was 2% in the first year and 4% in the second year, the real

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