Sunday, March 4, 2012

Buying a HDB with only a pay of $1000

Recently, there was an uproar on the comment made by Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam in parliament. It was said that it is possible to buy a HDB flat even if your household income is only $1000. Many people were pondering on how possible this is.

We should not be discussing on how the family can survive on remaing take home pay as it deviates from the "buying a flat with a pay of $1000" discussion. Instead, we will look at how the family can buy the HDB with their CPF alone.

1) How much CPF do they have?
For someone whose pay is $1000, he will be contributing to $180 [120 + 0.24 (1000-750)] . Employer contribution is $160. This a total of $340 CPF contribution. 

The above table did not mention about the breakdown percentage of he OA, SA and MA. Assuming that the rates are the same as someone whose pay is above $1500, an individual who is below 35 years old will contribute to $200.51  [$340 * 23/39]. This deviates from the $217 provided in the news article

Perhaps, for individuals whose pay is under $1500, the OA,SA,MA breakdown is different. However, I could not find any information on this.

2) Housing grant
First time applicants who earn $1000 in combined montly income qualify for the addiotnal CPF housing grrant up to $40,000, as well as the special CPF housing grant of $20,000 which can be used as the down payment of the flat. This will offset $60,000 from the selling price of the flat. For a flat that cost, $100,000, the remaining can be paid via his CPF.

See special CPF housing grant eligibility info:

With a loan from HDB for the remaining $40,000, Minister of State for Manpower and National Development Tan Chuan-Jin  demonstrated the repayment as follows:
Taking a 30-year loan: $161 per month
Taking a 25-year loan: $182 per month
Taking a 20-year loan: $214 per month
He pointed out that for an income earner with a $1,000 monthly salary, he has $217 contributed monthly to his CPF Ordinary Account, which means that his monthly cash outlay will be $0.
However, as mentioned above, the value of $217 differs from the value of $200 I calculated.

3) Other notes
CPF contribution rates decreases with increase in age. Also, the CPF contribution towards OA will drop. It seems that they did not take this into consideration when calculating the repayment amount and cash outlay.
For example, a 65-year-old whose pay is only $1000 will only contribute to $45 [30 + 0.06*(1000-750)]. His employer contribution is $44 [ 30.225 + 0.0541(1000-750)] 
If I assume the same OA contribution as a 65-year old who earns more than $1500, OA contribution is only $7.73 [89*1/11.5]. 

If he had taken the 30 year loan after he is 35, this individual definitely has to fork out additional cash to repay the HDB flat. Of course, his pay is likely to increase over the 30 years. But that increase is unlikely to have an significant impact to his CPF contributions.

There is definitely going to be some cash outlay at a certain point in time.

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