Here’s a homeowner’s dream come true – paying zero cash on your monthly mortgage. Imagine signing the papers, owning your very own property, and yet each month, never having to spend any additional money to pay off the loan.
It sounds impossible. And (spoiler alert), it is rare. But there are ways to go about it – though they are far from the fairy tale situation described above. In this article, we will go over two of the main methods of paying zero cash for your monthly mortgage and explore the pros and cons of each.
But before we dive into the first method, it will be helpful to keep the following saying in mind – there’s no such thing as a free lunch.
Method #1: Using CPF to Fully Cover the Mortgage
This is the main method that most Singaporeans can make use of. Let’s summarise the current rules surrounding the use of your CPF funds for housing-related payments. In brief:
- You can only use the funds from your CPF Ordinary Account (OA). Your Special Account (SA), Retirement Account (RA), and Medisave are strictly off-limits
- Your CPF OA funds can be used for downpayments, housing loan repayments, stamp duties and legal fees, Home Protection Scheme premiums (for HDBs), as well as construction loans and vacant land purchases (private properties only)
- The property must have over 20 years of lease remaining
- The remaining lease on the property plus the age of the youngest owner will determine the percentage of the property price that can be financed using CPF
- CPF OA funds cannot cover the cash downpayment portion (5% of the purchase price for private bank loans)
- It also cannot cover renovation costs, agents’ commissions, and purchase price over market valuation (for resale properties)
- You must refund your CPF OA monies (including accrued interest) should there be a sale
Here’s an example of how someone could potentially fully cover their monthly home loan payments using their CPF funds. We are assuming:
- A home-loan tenure of 30 years with an annual interest rate of 2%.
- The borrower is under 35 years, meaning 23% of their monthly income (subject to the $6,000 Ordinary Wage Ceiling) is allocated to their CPF OA
- The borrower does not have any existing property currently financed using CPF funds
- It’s a private property with 99 years left on the lease
Home Loan Amount
Monthly Gross Income
Monthly Contribution to CPF OA
This is the most favourable scenario. Because of the borrower’s age and remaining lease on the property, they are eligible to finance the whole thing using their CPF OA (you can check your withdrawal limits here). And because of their income, their automatic monthly contribution to their CPF OA exceeds their monthly home loan repayment. Thus, each month, they can simply pay the home loan out from their CPF OA, and effectively still be adding – rather than subtracting – from it.
Of course, this is a fairly low mortgage amount, especially compared to the borrower’s income – making this a rarer situation. However, this scenario is to specifically highlight how someone could service their monthly mortgage without touching their cash or original CPF OA balances. It does not take into account the far more common scenario of people who already have big lump sums in their CPF OA and can fully service their mortgage without dipping into their non-CPF cash reserves (but will have to use their existing CPF OA balances).
So, this is one way for paying zero cash for your mortgage. But is it all positives?
The Upsides and Downsides of Financing Everything with Your CPF
Now, obviously, this option is not available to everyone. It takes being of a certain age, having good earning power, and selecting a property within a specific price range. However, even if it is available to you, this does not mean that it’s a unanimous positive.
- Good for cash flow
- Frees up cash for potentially higher-return investments
- Opportunity cost of using CPF
- Could lead to lax financial discipline
First, let’s acknowledge the good.
- You can compensate for any short-term financial shortfalls. If, for whatever reason, you are dealing with short-term financial strains, effectively not having to service that monthly home loan payment can be a tremendous help.
- You can invest those additional savings in higher-return assets. Even if you’re not facing any strain, you may be able to put those additional savings into higher-return assets, such as equities. The return on those could significantly exceed the 2.5% paid on your CPF OA. Of course, you bear additional risk for doing so.
Then, there are the downsides.
- Opportunity costs. Your CPF OA currently pays out a mandatory 2.5% a year – which exceeds the cost of home loans in this present low-interest rate environment. This means that by using your CPF monies to service your home loans, you are incurring opportunity costs.
- Could lead to lax financial discipline. Yes, you might take that additional savings and invest it wisely. But it could also lead to you seeing all that extra money in your bank account each month and deciding to spend it on more luxury goods. Or, even in the case of investing, using to chase high-risk opportunities (which could also lead to high losses). Now, we’re not saying this is you. But it’s definitely something to consider.
Method #2: Buying a “Cash Flow Positive” Property
The previous method was an option available to a select group of homeowners. This one is focused on those interested in buying property and renting them out instead – investors. And for investors, the “holy grail” is finding what is know as a “cash flow positive property”.
A cash flow positive property is one that generates more cash than it costs to upkeep. In a nutshell, the rental income provided by such a property would exceed the sum of the loan repayments, taxes, and maintenance costs.
This is simple in concept, but hard in execution. Mainly, it involves doing a lot of research to narrow down your list of properties. Here, PropertyGuru’s extensive database can help. You can:
- Look at the list of properties currently available for sale
- Use our Mortgage Calculator to gauge the monthly home loan repayments; and
- Cross-reference the above with the list of rentals to gauge potential incoming monthly cash flows and see if it exceeds the estimated home loan repayment amount
The Pros and Cons of Buying a “Cash Flow Positive” Property
Again, easier said than done. But it is indeed possible. The question is, if you’re an investor and you find a cash flow positive property, does that make it an “automatic buy”?
- Lower risk
- Stronger staying power as an investment
- May not be permanently “cash flow positive”
- Highly dependent on rentability
- May have lower capital appreciation
Even though on the surface, it might seem a no-brainer for an investor to immediately buy a cash flow positive property, there are still downsides. Again, before we delve into those, the upsides:
- Lower risk. If you’re making money from day one, your risk is obviously lower. This is a big plus, especially when talking about investing that requires taking on debt (which increases your risk).
- Stronger staying power. Being able to stay “in the game” for the long term is a critical yet often overlooked success factor in investing. Being cash flow positive allows you to better weather any storm that may occur, for example, losing your primary source of income.
These are indeed powerful benefits. But the thing with cash flow positive properties is:
- It may not be permanent. Just because a property is cash flow positive upon purchase does not guarantee it will stay that way. Not only can your home loan costs fluctuate, but so can the rental you may be able to command (this is actually why MAS has a TDSR/MSR framework in place – to provide a buffer) . Further…
- Rentability may be an issue. Rental yields are not the only important factor in property investing. For example, rentability issues may result in periods of vacancies – during which your cash flow will decidedly not be positive.
- Capital appreciation may be lower. Cash flow is just one aspect of the returns from property investing. Capital appreciation is the other. Again, focusing on just whether a property is cash flow positive may cause you to neglect its capital appreciation potential – which could cost you down the line.
Another thing to keep in mind is that in Singapore, the max LTV for a second residential property is only 45% – meaning the monthly home loan amount is also much lower. This makes it easier for a property to technically be cash flow positive, but still out of reach for most because at least 55% downpayment is needed. Of course, different rules apply in the case of commercial property.
Should You Always Try to Pay Zero Cash? (And What to Focus on Instead)
As we said, there is no such thing as a free lunch. Whether it’s financing a property solely using your CPF or buying a cash flow positive property, there is always a cost to pay elsewhere or an additional risk to bear.
This doesn’t necessarily make both of these a bad idea. But it does mean that you shouldn’t make paying zero cash for your home loan your sole focus – especially when home loan rates are the lowest they’ve ever been. Instead, focus on the fundamentals – affordability, putting in a savings buffer, having clear goals for what you want, understanding your personal risk appetite, and always doing your proper research beforehand.
If you need help applying these fundamentals to your unique situation, consider speaking to one of our professional Home Finance Advisors. Just fill out this short form and one of them will get in touch within a few hours. And as always, for the best guides on everything you want to know about home financing, just go here.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.