~By: Leong Sze Hian~
I refer to the Straits Times article “He earns $850 and owns a two-room flat” published on the 9th of Mar 2012. Here
The question on our minds is whether one can pay off the HDB loan.
After the $40,000 Additional CPF Housing Grant on the $99,220 flat, the HDB loan is $59,220. On a 30-year mortgage at the HDB Concessionary Loan rate of 2.6 per cent, the monthly repayment is $237.
At age 33, his CPF Ordinary Account (OA) contribution is $179. However, his OA contribution will decrease to $140, $127, $87, $76 and $23, at age 36, 46, 51, 56 and 61, respectively. Therefore, his CPF OA shortfall to pay for his monthly mortgage may increase gradually from $58 initially to $214 at age 61.
At the current rates and after deducting his employee’s CPF contribution, his take-home pay is only $706. With so little income to support his family, it may be difficult for him to pay for his monthly mortgage CPF shortfall in cash.
Of course, with the likelihood that his pay may rise in the future, there seems to be a viable solution in sight. However, if he belongs to the category of Cleaners, Labourers and General Workers, their median gross wage dropped from $1,277 to $900, over the last 10 years. So, it is unlikely that his pay will increase sufficiently to offset his increasing mortgage cash shortfall.
What is the likelihood of mortgage default?
As the sole breadwinner who may be unlikely to have any savings as a reserve to fall back on, for such lower-income workers, the probability of job loss, pay cut, sickness or accident, may be relatively higher than others.Therefore, the likelihood of him defaulting on his mortgage over the next 30 years may be high.
He may have no CPF to retire
In any case, utilising almost all his CPF, may render him broke without any CPF savings for his retirement.
Allow CPF for rental
Perhaps a better solution to his housing needs may be to allow his CPF to be used to pay for his $44 HDB monthly rental.
Note: It was reported in the article that the monthly mortgage is only $83 which can be paid fully from his CPF. On this basis, the HDB loan is $20,732 – probably using $38,488 from the household’s $40,000 holdings. I would like to point out that what this case illustrates is perhaps not so much that a family earning $850 can afford to buy a HDB flat, but rather the unique situation that only a $20,732 HDB loan is required.
