It is often suggested that the maximum housing loan one should take should comprise of a certain percentage of their income, say perhaps from 20% to 30%. That seems a bit too simplistic in my opinion thus I would be sharing my analysis on how much housing loan should one take up.
In my opinion, the most important criteria on the amount of housing loan one should take up is that it must be sustainable and affordable, taking into account of any future circumstances that may arise. So what do I mean by future circumstances that may arise ? Some circumstances may include a increase in the interest rate for those who are taking on variable rates housing loans from banks or retrenchment. With regards to retrenchment, most of us are dependent on our income from our work to pay the housing loan thus the amount of housing loan one should take up must also reflect this issue. It will be financially disastrous if we cannot afford to service the housing loan due to unemployment. Thus it will be important to set aside an amount of cash in the CPF account as a buffer.
To add on, I suggest that one should use their CPF to pay off their housing loan only and not use any additional cash. The reason is that the additional cash can be better utilized by placing them in investments such as an index fund or ETFs for the long run.
In short, the amount of housing loan one should take up should be capped at an amount which can be serviced by their CPF only with an additional amount of fund being left in the CPF to build up a buffer that can tide one through any changes in circumstances.
Let's consider a hypothetical example. A couple's combined monthly income currently stands at $6,000 and they wish to take up a housing loan from HDB to buy their 1st home.
Combined monthly income = $6,000Using the HDB calculator on the monthly instalment for housing loan here, $1,200 will be enough to service a loan of $300,000 for 30 years. Every year, there will be a contribution of $180 * 12 = $2,160 as a buffer to pay the monthly instalment of the housing loan.
Monthly contribution to CPF Ordinary Account = 34.5% * 0.6667 * $6,000
= $1,380
After setting aside $180 per month as a buffer in the CPF Ordinary Account,
Amount available for housing loan monthly = $1380 - $180
= $1,200
Posts
hi,
ReplyDeletei do agree with your views on buying hdb as first home. however, you got the calculation wrong.
keeping in mind that the cpf cnotribution cap is $4500, the contribution to cpf ordinary account should be: 34.5% * 0.66667 * $4500
regards,
d
Hi,
ReplyDeleteThanks for highlighting this. My apologies as I could have make myself clearer in the post. The $6,000 I am referring to is the combined income of the couple. As such, I am assuming that both are working and none of them is earning more than $4,500.
Kay
thank you, Kay!
ReplyDeleteyes i think you did mention it and it's all very clear now.
brgds,
d