I’m trying to make sense of this VL and WL HDB stuff that was usuallly ignored by many. This is in response to some Facebook questions. I don’t own a flat, I am not well verse in this. Just trying to take some time and sort it out in the head. If there are any mistakes, do let me know.
Financial Planner Wilfred Ling posted this video citing the risks that many home owners in Singapore are unaware of.
The prevalent mindset is that as long as my monthly home loan payment comes from CPF it is ok. What they are unaware of is that there are limits on how much CPF can be used such that you will need to use cash to pay your home loans even if you have ample money in your CPF.
The repercussion is that this occur a long time after you first purchase, and if you are a poor money planner, you could be in trouble.
The limits that he talks about are the Valuation Limit and Withdrawal Limit.
Per CPF these are the definition:
The Valuation Limit (VL) is the lower of the purchase price or market value of the property at the time of purchase, as assessed by the Board. You and your co-owner(s) may use your Ordinary Account (OA) savings up to the VL to buy the property and/or pay the monthly installments of the housing loan.
When the total CPF withdrawn by all the owners reaches the VL, every owner must individually set aside the half of the prevailing Minimum Sum in his OA and Special Account (SA) if he wants to withdraw more CPF to service the outstanding housing loan. Any owner who does not meet the above condition will not be allowed to do so.
The VL is not applicable to new HDB flats financed with HDB concessionary loan
The Withdrawal Limit (WL) is the maximum amount of CPF beyond the VL that you and your co-owner(s) can use for the property. Once the WL is reached, no further withdrawal of CPF by any owner will be allowed. If the housing loan is still outstanding, you and your co-owner(s) will have to service it fully with cash. The WL is not applicable to new or resale HDB flats financed with HDB concessionary loan. The WL is determined by the date of purchase or refinancing of loan as follows: 120% (1 Jan 2008 onwards)
When you purchase your home, an independent valuer will put a value on your home. This is the VL. Your WL will be 120% of that VL.
There are 4 scenarios that Wilfred identified:
New HDB BTO Flat
If you have a new flat bought under BTO, you will be eligible for HDB concessionary loan and you have no worries but will be able to use ALL your CPF-OA for your housing loan.
Suppose you have John and Mary purchasing a new BTO flat for $350k. They put a down payment of $35k and loan $315k.
In this case, in total forecast at the end of 25 years, they would need to pay $427k. This is above the VL and greater than the WL (122%). Since it’s a new HDB, they won’t be affected by such limits.
Resale HDB Flat
The VL comes into the picture if John and Mary decide that they want to sell off this flat and purchase a resale flat.
- They negotiate with the seller to purchase this flat at $650k
- The independent valuation (VL) comes up to $600k
- They can only apply for loan based on $600k valuation. this means that the $50k is somewhat the “COV” or cash over valuation that they have to pay by cash
- John and Mary use their CPF to pay for the 10% down payment or $60k and loan $540k from HDB at 2.6% interest
- The VL here is $600k
In this case the total payment can come up to $732k, which is higher than the VL of $600k. This would mean that $132k comes into contention.
Every owner must individually set aside the half of the prevailing Minimum Sum in his OA and Special Account (SA) if he wants to withdraw more CPF to service the outstanding housing loan. Any owner who does not meet the above condition will not be allowed to do so.
So according to this, the current CPF minimal sum is $148k and if John and Mary EACH have $74k in their CPF OA and SA, then they can continue to use their CPF to pay for their flat.
This to me is entirely possible considering my SA possibly have $30k odd after working for 10 years. So by 20 you could possibly hit $60. On second thoughts, if John and Mary pushes their CPF to the limit to pay for the mortgage, they won’t build their CPF OA, so from the looks of it CPF SA might not be enough.
So perhaps they will have to pay cash for that $132k
Couple’s New or Resale HDB or Private Purchase using Bank Loan
In the case of that John and Mary decide to use bank loan to finance a $1,000,000 worth of Executive Condo (EC), both the VL and WL comes into the picture.
- The independent valuation (VL) comes up to $1,000,000
- John and Mary use their cash to pay for the 20% down payment or $200,000 and loan $800,000 from XYZ bank at 1.8% floating rate interest for 30 years.
- The VL here is $1,000,000
- The WL here is $1,200,000
- The couple pays a total of $1,033,852. This will exceed their $1,000,000 in VL by $33,852. The couple may not be able to pay this amount with their CPF. This depends on whether they have set aside half the minimum sum in their CPF OA. If they have, they can still tap upon their CPF OA
- $1,033,852 is still within their WL limit, which is $1,200,000
How would the Couple burst the WL Limit?
Banks are in the business to make loans.
They earn the spread between what they pay for deposits (their liabilities) and the loans they make. Since their cost on deposits are volatile based not just on what they offer to us but what is the market benchmark rates, if they set the loan interest wrongly, they are in for trouble.
For this reason, they tend to favor floating rates over fixed rates. They have more safety there.
If this couple is taking a loan on floating rate, their interest for the first few years could be 1.8%.
However, their interest over the 30 years may raise over time.
Even if the refinance the loan, the rates will be higher.
- If the annual interest rate is 3.2% instead of 1.8%, the total payment changes
- The total payment paid is $1,238,270. This exceeds the WL of $1,200,000.
- Unlike VL, once WL is reached, you have to pay the rest with cash
Why is the government being so anal about this VL and WL
The conspiracy theory is that the government needs our CPF money to make more money or that our CPF money is not there at all. I shall not go into conspiracy theories.
The CPF is suppose to not just provide “affordable” housing but also to ensure every Singaporean have enough for their old age.
Human beings are rather poor at planning how to deploy their money. They tend to make very poor decisions.
So the government have to “force” us to set aside this minimum sum.
If you use all your CPF for housing, how would you feed yourself when you are old?
Paying a larger down payment
The grand scheme of things seem to be that: Don’t expect to only tap your CPF for housing. You have to use cash.
If you provide more down payment at the start with cash, no problems. If not you pay for it later in life.
What if you Decide to Refinance Your Home Loan?
Someone post this question to me and my thoughts are, if you refinance, typically you would have to pay down a sum before re-finance can occur (correct me if I am wrong).
In this case, it is likely part of the objective of the government is achieved, which is getting you to pay in cash and trying to be prudent about it.
Boundary pushers and floating interest rates
From the illustrations, I hope the bombastic scenario of 4% interest rates don’t come into the picture. Imagine if you push the boundary of what you can purchase, a 1 mil condo with floating rate, which is covered by your CPF just right.
If the interest moves up to that, you need to pay more interest and may be in for a shock later in life.
Build up Wealth well and go in with eyes wide open
The ones being punish are the ones without a good plan. You can push the boundaries, but you better have a good contingency liquid cash holdings in case things go against you.
This won’t be a problem if you have use your cash to build up wealth.