We Make $510k Per Year And Own A Landed Home. Should We Redeem Our $1m Loan, Decouple To Buy Another Property, Or Rebuild?

Hi Ryan,

I saw your article at Stackedhomes and would like to seek your advice on a few questions.

Background.
My wife (49 years old) and I (53 years old) and we have 3 school going kids of which the eldest will be graduating next year.  We are both working full time and would probably have to retire about a decade from now.  We currently own a 999 leasehold landed house that is valued by SRX valuation at $6.93m.  My share of the house is 1% and my wife’s share is 99%.  I took a $1m housing fixed rate 2 year loan contract to purchase the house and the installment payment per month is $7,000 which I serviced by cash.  As I bought my house by cash, I didn’t utilise CPF for the purchase. In 2023 August, the housing loan contract would come to an end and I will either have to renew the loan arrangement with the bank or pay up in full.

Finances
Presently, both my wife and I have about $1m each in our CPF excluding SRS contributions which we have about $150K each.  In terms of cash savings, we have about $600K+.  We do not have any outstanding loan.  Our annual income is about $220K for my wife and $290K for myself.

Questions
1.  Should I pay up my housing loan using part CPF and part cash or full CPF/ full cash.  I expect to be able to save $900K from work income by next August but I will be very broke.
2.  Should I decouple and leverage more to buy a new house?  I am thinking of buying a HDB flat but not sure if that is possible.
3.  Should I take up a loan to rebuild my house. Currently, the quote for rebuilding is $2m.

Thank you.

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Hi there,

Thanks for taking the time to write to us and detailing your situation! There’s no question about it, you’re in a great position to be in, and it’s more about optimising your current position that should be the focus. The 3 questions you’ve posted all have different factors to mull over so let’s run through them one by one.

Should you pay up the housing loan using part CPF part cash/full CPF/full cash?

We have previously written an article on whether you should rush to repay your mortgage loan before the interest rate rises. You can read that here!

The assumption here is that you purchased the property a year ago since the existing loan contract has a 2 year fixed rate which will end in a year’s time. By reverse calculating the $7,000 monthly repayment with a 14-year tenure based on your ages last year, the interest rate would likely be around 2.4%. If so, by August 2023 your outstanding loan will be roughly $876,851.

Let’s look at the pros and cons of each option.

Using part CPF part cash

Rounding up the outstanding loan to $877,000 for easy calculation, let’s say you were to use 50% CPF and 50% cash to pay off the loan:

CPF remaining: $2m – $438,500 = $1,561,500

Cash remaining: $900,000 – $438,500 = $461,500

Pros	Cons
Still have a good amount of cash on hand in case of emergencies	CPF used plus accrued interest will have to be refunded to the CPF account when selling the house in the future
Still have substantial CPF funds left in the accounts which are earning a stable interest

One concern homeowners sometimes don’t think about when repaying their loan with CPF is the refunding of these funds when they sell the property. Depending on how much CPF you utilise and how long you hold the property, the accrued interest can sometimes be rather significant.

For example, if you were to stay in your house for another 15 years before selling, having used $438,500 of CPF, the accrued interest will be $196,578 (CPF’s interest rate is at 2.5% compounded annually). This means you’ll need to refund $635,078 into your CPF accounts upon selling your property. In 15 years, the interest accrued is almost 45% of your principal sum. Given that you’ve paid for the majority of the house in cash, you will still have a positive cash sale. Unfortunately for some owners, the accrued interest may be so substantial that they face a negative cash sale.

This leads us to the point of using full CPF to pay off the loan.

CPF remaining: $2m – $877,000 = $1,123,000

Cash remaining: $900,000

Pros	Cons
Cash on hand can be used in case of emergencies or put into other investments that can possibly offset the CPF accrued interest	CPF used plus accrued interest that has to be refunded when selling the house could amount to a considerably large sum depending on the holding period
Still have substantial CPF funds left in the accounts which are earning a stable interest

Using the same holding period of 15 years, having used $877,000 of CPF, the accrued interest will be $393,157, which means you’ll need to refund $1,270,157 back into your CPF accounts. Of course, this amount can be put into buying your next property, but the cash proceeds from the sale will be reduced. In your case, since both of you have $1m each in your CPF accounts, it is most likely that you’ll hit the full retirement sum by 55 and will be able to withdraw the excess of that in cash so it may not be a huge concern here.

Using full cash

CPF remaining: $2m

Cash remaining: $900,000 – $877,000 = $23,000

Pros	Cons
Substantial CPF funds in accounts which is earning a stable interest	Loss of liquidity as funds are locked up in the property

To fully pay off the loan with your savings would leave you with $23,000 in cash which is a rather risky move in our opinion. A property is an illiquid asset and you can never predict how long it will take to sell the place (as hot as the market still seems right now). In the event of an emergency, you may have to take up a home equity loan or sell the house (might even be at a loss if you have to do it quickly and depending on the time in the market) in order to cash out.

Frankly speaking, there’s no real pressing need to fully pay up the property in cash when the loan arrangement comes to an end next year. Even if the interest rates do rise again, you aren’t in a position where the monthly repayment will be detrimental to your cash flow. Of course, this is all on the presumption that both of you have no issues on the job front.

That said, we do understand the peace of mind that comes with fully paying up for your property. It can be a weight off your shoulders, and the feeling of being debt free is something that some people feel is priceless. Judging by the fact that you paid most of the property in cash (and are even considering the option to pay off the remainder as quickly as possible) this could still be worth it. We suppose it’s down to what makes you comfortable ultimately, and if you have a job that you both feel secure about for the next 10 years then by all means.

2. Should you decouple and leverage more to buy a new house?

First things first, buying an HDB flat as a second property will not be possible. In order to purchase an HDB flat, you’ll have to sell off your existing place. The housing regulation is such that if you want to purchase an HDB, it has to be the first property. Once it reaches its MOP, you can then go on to purchase a second property.

Whether you’re thinking of buying a second property for investment or legacy planning, decoupling is definitely an option you can consider given your financial situation. You’ve probably toyed around with this idea seeing that the shares of your current house are split 99/1. Here’s a simple breakdown of the decoupling costs:

Using the valuation of $6,930,000 with an outstanding loan of $877,000 and if the decoupling is to be done next year, SSD of 4% is payable (presuming you bought the place in 2021).

Selling party (Husband)		Buying party (Wife)
Shares	1%	Shares	99%
CPF usage	$0	Current CPF OA	$1,000,000
Seller Stamp Duty	$2,772	Buyer Stamp Duty	$693
Valuation	$69,300	Valuation	$6,860,700
Outstanding loan	$8770	Outstanding loan	$868,230
Option & exercise fees received (5%)	$3465	Option & exercise fees paid (5%)	$3465
CPF refund	$0	Completion fees payable by CPF/cash (20%)	$13,860
		Legal fees	$6000
		New loan	$920,205
Cash proceeds	$57,758	Total cash + CPF outlay	$24,018

Based on your wife’s age of 50 next year and assuming a fixed monthly income of $18,000, her maximum loan quantum will be $1,384,843 with a loan tenure of 15 years which is more than sufficient to take on the new loan. If she were to take up the new loan of $920,205 for 10 years (you mentioned that you guys are planning to retire in a decade) at an interest rate of 3.5%, the monthly repayment will be $9,100.

As for yourself, at 54 years old with a fixed monthly income of $24,000, your maximum loan quantum will be $1,444,463 with a loan tenure of 11 years. If you were to take up the full loan with a 10-year tenure at a 3.5% interest rate, the monthly repayment will be $14,284. Together with your CPF funds of $1M and $900,000 of savings, you probably will have a good selection of units to choose from. Of course, this doesn’t mean you need to maximise it, as always want to practice prudence and avoid over-stretching ourselves.

These are some new launch units that fall within the $2 – 3M bracket:

Project	District	No. of bedrooms	Size (sqft)	Level	Price	PSF
Hyll on Holland	10	2	700	#10	$2,000,000	$2,857.14
Leedon Green	10	2	700	#11	$2,000,000	$2,857.14
Ki Residences	21	3	1,152	#12	$2,248,000	$1,951
The Reef at King’s Dock	4	3 + S	1,076	#04	$2,702,000	$2,511
Bartley Vue	19	4 + S	1,539	#16	$2,797,000	$1,817.41
Avenue South Residences	3	4	1,496	#04	$2,965,000	$1,981.95

Let us just caveat this by saying that we aren’t saying that any of these are specifically good investments (or that they are bad), just a spread of different developments in that price range for you to be aware of. For future launches coming up, you can view our collated list here.

Another alternative you can look at is taking a home equity loan and cashing out on your current property. A home equity loan is essentially taking out paid-up equity from your property in a lump sum and servicing this loan through monthly repayments.

The maximum loan quantum in Singapore is currently at 75% of your property value minus any outstanding mortgage loan and CPF usage. The interest rate will be the same as that of a normal mortgage or personal loan as you’re using your property as collateral. But this means in the event that you’re unable to make payment, the bank has a right to foreclose on your property.

One important point to note is that banks do not allow you to purchase a property with the cash you receive from taking a home equity loan. However, it is not uncommon that people do this but it is at your own risk as the bank can charge for fraud should they get wind of this.

3. Should you take up a loan to rebuild your house?

Rebuilding a property has its perks like building equity and creating a more functional space that better suits the living requirements of your family. For instance, if the property is a single-storey house sitting on a piece of land that has a height control of 3 storeys, it would be logical to rebuild and utilise the allowable building height. Of course, you will be paying for construction costs that is at a high right now, but things aren’t expected to get any cheaper in the future either. A few things to take note of when contemplating to rebuild:

1. Construction loan

You can loan up to 75% of the total rebuilding cost and the remaining 25% downpayment will have to be paid in cash. Let’s say you’re eligible to take up the full 75% loan and the rebuilding cost is $2M, the downpayment will be $500,000.

Construction loan interest rates are usually higher than most other loan types and this will last through the duration of construction. Once the property obtains its TOP, the construction loan can then be converted to an equity loan with a lower interest rate.

2. Timeline and costs incurred

Rebuilding a house can take anywhere from 1-2 years depending on how extensive the works are. During this period, if you do not have somewhere else that you and your family can move into, you will likely have to rent a place. At this point, rental prices are at a high so this will not come cheap.

The most affordable 4 bedroom HDB on the market at the moment is asking $3,500/month. Over a period of 2 years, that will be $84,000. A 4 bedroom condo could be something like $5,000/month, which is $120,000 over 2 years. For an equivalent landed property, you could be looking at $8,000 and up.

Ultimately, we think that this choice is really dependent on the potential of the home. As we don’t have information on the location, land, or size of the current property, it’s hard to give an accurate overview of this. So this decision will depend on the situation of your current property.

If it’s an old one that is getting run down and could face significant repair and upkeep work in the next few years, it could make sense to bite the bullet and revamp the home right now. Especially if it’s a 2-storey home with stairs and bedrooms on the second floor, you might want something like a lift to future proof it as you age.

So this depends on how much that $2m can add in value to your home. Building more internal living space, adding a home lift, and perhaps even a swimming pool can add further equity to your home. As such, given that landed homes (and especially 999-year lease or freehold ones) are a rarity in Singapore, this is only likely to appreciate in the future.

If the numbers work out here, rebuilding the landed home could also be a viable option. In your retirement years, this appreciating asset could then be sold, and the cash used to right-size to a smaller apartment and to fund your retirement as well.

Conclusion

All of the 3 pathways you listed are feasible, but it boils down to the objective behind doing each one.

Paying up your loan quickly as interest rates are on the rise would seem to be a smart move, but it is imperative that you get professional advice on the planning of your finances to avoid disruption to your cash flow and future plans.

Similarly with decoupling and purchasing a second property. If your plan is to retire in ten years’ time, will serving two property loans for the next ten years be too heavy a financial burden? As you still have 2 other school-going kids to worry about, this may not be as feasible if you value peace of mind. If the tradeoff of having an investment property or being able to leave behind a place for your kids is worth the grind, we would suggest you consult an agent to assist with this process.

As we have mentioned for rebuilding, it’s subjective and dependent on whether the current house serves your needs and if the rebuilding costs add up to enhance the value of the home.

If it’s between purchasing a second property or rebuilding, it may be that rebuilding the property will possibly give you a better return when you sell it in the future as compared to buying an investment property at $2 – 3M.

Have a question to ask? Shoot us an email at stories@stackedhomes.com – and don’t worry, we will keep your details anonymous.

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