Credit Management Past Paper PDF 2024

FIN3719 HOUSEHOLD FINANCE Credit Management Lorna Tan Department of Finance 8-Oct-24 NUS Business School 1 FIN3719 HOUSEHOLD FINANCE TOPICS/SCHEDULE 2024 Week 1 (16 Aug) - Pe...

FIN3719 HOUSEHOLD FINANCE Credit Management Lorna Tan Department of Finance 8-Oct-24 NUS Business School 1 FIN3719 HOUSEHOLD FINANCE TOPICS/SCHEDULE 2024 Week 1 (16 Aug) - Personal Financial planning Week 2 (23 Aug) - Retirement planning & CPF (part 1) Week 3 (30 Aug) - Retirement planning & CPF (part 2) Week 4 (6 Sept) - Estate planning Week 5 (13 Sept) - Insurance planning Week 6 (20 Sept) - SA1: 2-240pm; SA2: 3-340pm) - Test 1 Week 7 (4 Oct) - Investment planning Week 8 (11 Oct) - Credit management Week 9 (18 Oct) - Consumer protection/Class Presentations Week 10 (25 Oct) – Class Presentations Week 11 (1 Nov) – NUS Well Being Day (no class) Week 12 (8 Nov) – Class Presentations Week 13 (15 Nov, SA1: 2-240pm; SA2: 3-340pm) - Test 2 Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE Agenda Credit Housing Avoiding the Debt Trap Lorna Tan Department of Finance 8-Oct-24 NUS Business School 3 FIN3719 HOUSEHOLD FINANCE Concept of Credit Debt Loan Leverage Borrowed money Lorna Tan Department of Finance 8-Oct-24 NUS Business School 4 FIN3719 HOUSEHOLD FINANCE Interest What has been borrowed, must be returned No free lunch Acquiring borrowed money comes with a price….. Interest Lorna Tan Department of Finance 8-Oct-24 NUS Business School 5 FIN3719 HOUSEHOLD FINANCE 5 Rules of Credit Understand your financial situation Only incur debt if it is necessary and it’s a “good” debt Repayment is a must and it carries a price Borrow the amount that is needed Consider ability to repay the debt Lorna Tan Department of Finance 8-Oct-24 NUS Business School 6 FIN3719 HOUSEHOLD FINANCE Secured Loan When an asset is provided as a collateral or security Examples: real estate, stocks, vehicles If the borrower fails to meet repayment obligations, lender has right to a) seize n sell the asset; b) ask for more security; or c) work out a repayment schedule Lorna Tan Department of Finance 8-Oct-24 NUS Business School 7 FIN3719 HOUSEHOLD FINANCE Unsecured Loan Lender does not hold any collateral from the borrower Examples: credit cards, credit lines, overdraft Lorna Tan Department of Finance 8-Oct-24 NUS Business School 8 FIN3719 HOUSEHOLD FINANCE Types of Credit Loans can be unsecured or secured with collateral Unsecured loans have higher interest rates Term loans have a fixed repayment period Revolving loans are repaid based on usage Your assets can be used to pay back a defaulted loan Lorna Tan Department of Finance 8-Oct-24 NUS Business School 10 FIN3719 HOUSEHOLD FINANCE Credit Cards Lorna Tan Department of Finance 8-Oct-24 NUS Business School 11 FIN3719 HOUSEHOLD FINANCE Credit Card - Basics Form of unsecured credit Interest-free credit of 20-25 days if bank receives full payment on or before the due date High interest charges of ~24% on rollover balance Late payment charge applies if bank does not receive minimum payment (3-5% of unpaid balance or $50) by due date Lorna Tan Department of Finance 8-Oct-24 NUS Business School 12 FIN3719 HOUSEHOLD FINANCE Credit Card Bills If unable to pay your bill in full, pay at least the minimum sum by the due date to avoid late payment charges Even if u just pay the minimum sum, the rest of your balance will still incur interest charges Interest will also be payable on any new purchases Pay off the balance as quickly as possible Put your credit card away until you have paid off the outstanding balance Lorna Tan Department of Finance 8-Oct-24 NUS Business School 13 FIN3719 HOUSEHOLD FINANCE Mired in Debt About 58,000 individuals with aggregated outstanding unsecured debts exceeded their annual income as at the end of Feb 2019 Down from 85,000 four years ago Outstanding debts also reduced to about $5.2 bn from $7.5 bn 10,000 of the 58,000 individuals had incurred debts exceeding 24 times their monthly income, a 70 per cent drop from 32,000 in the same boat in Feb 2015. Lorna Tan Department of Finance 8-Oct-24 NUS Business School 14 FIN3719 HOUSEHOLD FINANCE ‘It All Started Small’ Lorna Tan Department of Finance 8-Oct-24 NUS Business School 15 FIN3719 HOUSEHOLD FINANCE Continued Source: Credit Bureau of Singapore Lorna Tan Department of Finance 8-Oct-24 NUS Business School 16 FIN3719 HOUSEHOLD FINANCE Credit Card debt Credit card interest can easily snowball Interest is charged on a daily basis for the outstanding amount Any interest not settled by the next payment due date will also attract interest in the next statement Interest will also be charged on any new purchases until full settlement is received → Use your credit card only when you can afford to pay for the purchases Lorna Tan Department of Finance 8-Oct-24 NUS Business School 17 FIN3719 HOUSEHOLD FINANCE Credit Card Usage Use credit cards as a cash management tool Use reward points to redeem essential expenses Choose cards that offer cash rebates Choose cards that match your spending habits Lorna Tan Department of Finance 8-Oct-24 NUS Business School 18 FIN3719 HOUSEHOLD FINANCE Credit Cards Usage - As a Form of Credit Settle payment due in full Keep account of card expenses Pay on time Avoid rollovers Lorna Tan Department of Finance 8-Oct-24 NUS Business School 19 FIN3719 HOUSEHOLD FINANCE Personal Loans Personal credit line Aka “revolving credit” and “overdrafts” High interest rate Only pay during the time you borrow Pawnshops Collateralised loan with ~20% interest Loan 60% to 80% of the value of collateral, mostly jewelery If fail to repay ➔ Collateral is sold, excess refund to borrower Lorna Tan Department of Finance 8-Oct-24 NUS Business School 20 FIN3719 HOUSEHOLD FINANCE Personal Credit Line Lorna Tan Department of Finance 8-Oct-24 NUS Business School 21 FIN3719 HOUSEHOLD FINANCE A Good Credit Score Don’t apply for too many credit facilities over a short period of time Pay lenders on time Establish a long credit history of prompt payments as this is the surest way to boost your credit ratings Lorna Tan Department of Finance 8-Oct-24 NUS Business School 22 FIN3719 HOUSEHOLD FINANCE Young adults – Personal debt Those in their 20s have been taking on increasing amounts of personal debt (excluding credit card debt) since 2Q2020 Average personal loans and overdraft balances for those < 30 rose by about 23% in 1Q2021 over 4Q2020 Average personal loan and overdraft balances for borrowers age 21 - 29 shot up to $49,689 in 1Q2021, about 42% higher than the average of $34,941 in 1Q2020. Unemployment and lower earnings could be driving young adults, with fewer resources, to personal loans and overdrafts as they try to borrow their way out of the Covid-19 pandemic Lorna Tan Department of Finance 8-Oct-24 NUS Business School 23 FIN3719 HOUSEHOLD FINANCE In the past…. An individual was allowed to borrow up to 48 times his monthly salary on an unsecured basis This meant he could chalk up to 4 years of debts on his credit cards by applying for new cards to pay instalments on existing card debts No limit to number of credit cards No consolidated limit on his unsecured debts Lorna Tan Department of Finance 8-Oct-24 NUS Business School 24 FIN3719 HOUSEHOLD FINANCE MAS Rules Industry-wide borrowing limit 1 June 2015 to 31 May 2017: 24 times of your monthly income 1 June 2017 to 31 May 2019: 18 times of monthly income From 1 June 2019: 12 times of monthly income Lorna Tan Department of Finance 8-Oct-24 NUS Business School 25 FIN3719 HOUSEHOLD FINANCE Credit Limit Mgt Measure – Avoid the Debt Trap Started in 2018, it sets a limit on how much outstanding debt you can have on unsecured loans across all FIs to help borrowers Aimed at borrowers with unsecured debt like personal loans or credit cards that exceeds six times their monthly income Banks cannot grant any increase in credit limits/any new unsecured credit facilities to such a person if these cause the total credit limit to exceed 12 times monthly income Affected borrowers can continue to use their existing unsecured credit facilities Buy a credit bureau report to check your outstanding balances and credit limits with all the banks Lorna Tan Department of Finance 8-Oct-24 NUS Business School 27 FIN3719 HOUSEHOLD FINANCE Credit Limit Mgt Measure – Avoid the Debt Trap Unsecured debts are those with no collateral, such as credit card debts, personal loans or an overdraft This limit applies to interest bearing balances on personal unsecured credit facilities. Excludes secured loans such as property and car loans; As well as unsecured loans for business, medical and education spending Borrowers with an annual income of at least $120k or those with net personal assets exceeding $2 million are exempted from industry-wide borrowing limit. Lorna Tan Department of Finance 8-Oct-24 NUS Business School 28 FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE Debt Management Debt Consolidation Plan (DCP) Debt Management Plan (DMP) Debt Repayment Scheme (DRS) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 31 FIN3719 HOUSEHOLD FINANCE DCP Introduced by FIs in Jan 2017 to help borrowers reduce their debt over time Consolidate a borrower’s existing unsecured credit balances across various institutions under a single entity And offer effective interest rates that are lower than credit card and credit line rates Customers on DCPs will have lower monthly repayments (as compared to the total individual payments a customer incurs) And the benefit of making repayments to a single bank Lorna Tan Department of Finance 8-Oct-24 NUS Business School 32 FIN3719 HOUSEHOLD FINANCE DCP Eg: Debt consolidation customers of Citibank Singapore can choose a loan tenure of up to 7 years Receive a credit card with a limit of one month’s income Complimentary insurance coverage of up to $160,000 for accidental death, total permanent disablement and involuntary employment disruption. Apply at www.citibank.com.sg/dcp Lorna Tan Department of Finance 8-Oct-24 NUS Business School 33 FIN3719 HOUSEHOLD FINANCE DMP Offered by Credit Counselling Singapore (CCS) since 2004 A charity and agency that assists people with unsecured debt problems Unlike DCP, debts are not consolidated under one institution DMP – a monthly instalment plan – gradually repay debts to all creditors over a period of time Conducts a one-hourly debt advisory session with eligible applicants to help them work out how much they need to spend per month before working out a payment proposal that creditors can approve Lorna Tan Department of Finance 8-Oct-24 NUS Business School 34 FIN3719 HOUSEHOLD FINANCE DRS An alternative to bankruptcy Triggered only by a bankruptcy appln being made in court against debtor and the debts do not exceed $150k Court may refer debtor to the Insolvency Office for the Official Assignee to assess debtor’s eligibility n suitability for DRS Strict eligibility criteria: debtor must be gainfully employed with debts under $150k Usually take 5 yrs to complete repayments Link: https://singaporelegaladvice.com/law-articles/debt- repayment-scheme-guide-drs-singapore/ Lorna Tan Department of Finance 8-Oct-24 NUS Business School 35 FIN3719 HOUSEHOLD FINANCE Minimum: $15,000 & above Maximum: up to $150,000 Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance 8-Oct-24 NUS Business School 37 FIN3719 HOUSEHOLD FINANCE Housing Public-Sector Properties Private Properties HDB flats (include Design, Non-landed properties Build and Sell Scheme ie ✓Apartment DBSS) ✓Condominiums ✓New Landed properties ✓Resale ✓Detached houses Executive condominiums (EC) (bungalows) Hybrid of public and private ✓Semi-detached houses ✓Terrace houses Lorna Tan Department of Finance 8-Oct-24 NUS Business School 38 FIN3719 HOUSEHOLD FINANCE HDB New HDB Flat HDB Resale Flat Price A new flat is sold at a The price is negotiated between subsidised price. you and the seller. Mostly located in non-mature Flats in all locations may be put up Locations estates. for sale. Launches are held periodically, Mode of Purchase and applicants apply directly to Flats can be purchased from the HDB for a flat. open market any time. Eligibility Subject to new flat eligibility Subject to resale flat eligibility conditions (income ceiling) conditions (no income ceiling) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 39 FIN3719 HOUSEHOLD FINANCE Income Ceiling HDB Income ceiling (average gross household income) $14,000 (for families), up from $12,000 $7,000 (for singles), up from $6,000 Note: HDB flats are named by total number of rooms. Eg 5-rm HDB flat has 3 bedrooms with living and dining area. EC Income ceiling $16,000, up from $14,000 Note: Condominiums are named by number of bedrooms. Eg “3-bedroom” condo has 3 bedrooms plus living and dining area No income ceiling for HDB resale, EC resale and private properties Lorna Tan Department of Finance 8-Oct-24 NUS Business School 40 FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance 8-Oct-24 NUS Business School 41 FIN3719 HOUSEHOLD FINANCE Pricing New BTO Resale HDB Condo (depends on location/size/age/leasehold) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 46 FIN3719 HOUSEHOLD FINANCE Fees Application: $10, resale application fee: $40-$80 Collection of keys Booking the flat Stamp duty (mortgage) and legal fees Option Fee (part of down-payment) (Survey fee and registration fee) o New HDB: $500 to $2,000 (size dependent) Home Protection Scheme o DBSS/ EC: 5% of purchase price Fire insurance o Resale: max $5,000 Balance of the purchase price Sign agreement of lease Valuation fee: if CPF are used for Stamp duty (house) and legal fees (conveyance financing or taking bank loan and caveat) Agent fee (resale): 2% for sellers, 1% for Downpayment buyers Other miscellaneous costs Lorna Tan Department of Finance 8-Oct-24 NUS Business School 47 FIN3719 HOUSEHOLD FINANCE Staggered Downpayment Scheme (SDS) Revised payment schedule for eligible couples Take effect from next BTO sales launch in Jun 2024 Couples must be current full-time students/recent grads/Nsmen At least one party must be aged 30 or below and the couple must be married or applying for a flat under the Fiance-Fiancee Scheme Can pay for d/p for their uncompleted HDB flat in 2 instalments a) initial d/p when signing the Agreement for Lease (takes place within 9 mths of booking a flat b) remainder at key collection Lorna Tan Department of Finance 8-Oct-24 NUS Business School 48 FIN3719 HOUSEHOLD FINANCE Staggered Downpayment Scheme (SDS) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 49 FIN3719 HOUSEHOLD FINANCE Buyer’s Stamp Duty (revised on 15 Feb 2023) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 51 FIN3719 HOUSEHOLD FINANCE Buyer’s Stamp Duty (residential) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 52 FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance 8-Oct-24 NUS Business School 53 FIN3719 HOUSEHOLD FINANCE Example Mr. and Mrs. Tan, both Singapore citizens, have an existing HDB and they would like to purchase a private property of $4m. How much stamp duty do they need to pay? Total = BSD + ABSD = ? Can they avoid ABSD by decoupling? Since April 2016, changes in HDB flat ownership are allowed only on grounds of marriage, divorce, death of an owner, financial hardship, renunciation of citizenship and medical reasons. Decoupling is an option for private property if it makes financial sense. Individuals have to be able to support the mortgage loan by himself/herself. Lorna Tan Department of Finance 8-Oct-24 NUS Business School 56 FIN3719 HOUSEHOLD FINANCE Q. Is applying for BTO as applicant and occupier (husband and wife) a good way to avoid ABSD? It is a way to avoid ABSD but whether it is a "good way" depends on the circumstances. Lack of legal rights - being an occupier means you do not own any rights to the property, even though you are recognised as family members in the HDB flat. This means that in the event of any legal dispute (e.g. divorce), things could get messy if you are trying to lay claims to the property. It doesn’t matter even if you have contributed to repaying the mortgage, since the legal ownership structure shows that you are merely an occupier rather than a co-owner. To contest this, you will need to fight your case in court (which will also incur hefty legal fees) with no guarantee that you will win. Other cons - Cannot use an occupier’s income assessment for your loan application on the house ie occupier’s CPF cannot be used the occupier will also need to fulfil the MOP (Minimum Occupation Period) So this method only works if you have complete trust in the other party, and the one who’s the sole (legal) purchaser has sufficient income and CPF to meet the criteria for the downpayment and loan. Of course, the silver lining in this arrangement is that upon completion of MOP, the occupier can then go on to purchase a private property without incurring ABSD. Lorna Tan Department of Finance 8-Oct-24 NUS Business School 57 FIN3719 HOUSEHOLD FINANCE Prime Location Public Housing Model Stricter buying n selling conditions 6% clawback clause upon resale of unit 10-year minimum occupation period (MOP) Income restrictions on resale buyers at cap of $14,000 combined monthly household income Owners prohibited from renting out the whole unit even after MOP Eg BTO flats in Rochor (2021) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 58 FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance 8-Oct-24 NUS Business School 59 FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance 8-Oct-24 NUS Business School 60 FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance 8-Oct-24 NUS Business School 61 FIN3719 HOUSEHOLD FINANCE Lorna Tan Department of Finance 8-Oct-24 NUS Business School 62 FIN3719 HOUSEHOLD FINANCE Cooling measures Rationale: To moderate demand in HDB resale mkt Ensure they remain affordable by slowing the momentum of price increases in HDB resale mkt by deferring demand from pte property owners Apply stricter criteria to assess borrowers’ ability to repay and qualify for a loan Encourage prudent borrowing Lorna Tan Department of Finance 8-Oct-24 NUS Business School 63 FIN3719 HOUSEHOLD FINANCE Cooling measures LTV for HDB housing loans cut from 85% to 75% which reduces the maximum amount home buyers can borrow from HDB Currently, new mortgages cannot cause borrowers’ total mthly loan repayments to exceed 55% of monthly income A wait-out period of 15 months (temporary measure) for pte residential property owners to buy a non-subsidised HDB resale flat after selling their property Those aged 55 & above moving to a 4-room or smaller flat will not be affected Lorna Tan Department of Finance 8-Oct-24 NUS Business School 64 FIN3719 HOUSEHOLD FINANCE Housing (mortgage) loan A mortgage is a loan from a bank or lender to help you (mortgagor) finance the purchase of a home Mortgagor has an obligation to repay the amount borrowed based on an agreed-upon interest rate The home is used as “collateral” If the mortgagor reneges on the loan the mortgagee is entitled to foreclose on the property, ie take possession of assets and realise any amount owing on the loan Lorna Tan Department of Finance 8-Oct-24 NUS Business School 65 FIN3719 HOUSEHOLD FINANCE Total Debt Servicing Ratio (TDSR) Objective of the TDSR framework: So that property buyers will not borrow more than they can afford Calculates the percentage of your income that can go into servicing your loan TDSR limit is 55%, ie all your debt obligations (student loans, credit card debts, car loans, personal loans, and so on), cannot exceed 55% of your income (up from 60% previously) This applies to property loans granted by all FIs Lorna Tan Department of Finance 8-Oct-24 NUS Business School 66 FIN3719 HOUSEHOLD FINANCE Loan-To-Value Ratio (LTV) Max amount that you can borrow to finance your home as a percentage of property’s mkt value; To protect homebuyers from over-borrowing; Eg: an LTV ratio of 75% means that you can borrow up to 75% of your property value or price, whichever is lower For HDB loans, the maximum LTV is 75% (it was 90% before 16 December 2021); The remaining amount can be paid by cash, through your CPF OA, or a mixture of both Banks also have a maximum loan of 75% LTV; Of the remaining 25%, 20% can be paid via a combination of cash or your CPF OA - but a min of 5% must be paid in cash For your 1st property: you are allowed to borrow 75% of LTV limit for loan tenure of 30 years or less; 55% LTV for loan tenure of more than 30 years, or if loan extends past the age of 65 Lorna Tan Department of Finance 8-Oct-24 NUS Business School 67 FIN3719 HOUSEHOLD FINANCE Loan-To-Value (LTV) Ratio Formula: Loan amount/Asset price = LTV ratio Example 1 You are buying a house worth $400,000 LTV ratio of 75% is $300,000 The remaining $100,000 can be paid off via cash, through your CPF OA or a mixture of both Lorna Tan Department of Finance 8-Oct-24 NUS Business School 68 FIN3719 HOUSEHOLD FINANCE Outstanding Home Loans If you already have 1 outstanding home loan, the LTV on your 2nd loan is capped at 45% for loan tenure of 30 years or less; 25% LTV for loan tenure of more than 30 years, or if loan extends past the age of 65 If you have 2 outstanding home loans and are looking to get a 3rd, the LTV ratio is capped at 35% for loan tenure of 30 years or less; 15% LTV for loan tenure of more than 30 years, or if loan extends past the age of 65 Lorna Tan Department of Finance 8-Oct-24 NUS Business School 69 FIN3719 HOUSEHOLD FINANCE Uses of OA savings for buying a home Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE Considerations that determine how much to use from your CPF i. What is my budget? ii. What is the difference between HDB and bank loan? iii. What are the housing grants available? iv. What other costs do I need to be aware of? Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE How much can I afford? Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE Buy within your means Mortgage Total Debt Servicing Ratio Servicing Ratio ≤ 30% of your gross ≤ 55% of your gross monthly income monthly income Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE 3 tips to buying your home with CPF 1. Try the First Home Calculator 2. Choose to keep $20,000 in OA (HDB loan) 3. Consider using Part Cash, Part CPF Lorna Tan Department of Finance NUS Business School FIN3719 3 tips to buying your HOUSEHOLD FINANCE home with CPF 1. Try the First Home Calculator 2. Choose to keep $20,000 in OA (HDB loan) 3. Consider using Part Cash, Part CPF Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE First Home Calculator Estimate a housing loan and property price based on your income and your ability to service the loan. Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE What type of property do you want? Lorna Tan Department of Finance NUS Business School Copyright © 2020 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE HDB Flat / New HDB Flat Private Property Completed flat with New flats (BTO), new remaining lease, or freehold 99 years lease (private property) Subsidised Price Market Price Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 3 tips to buying your HOUSEHOLD FINANCE home with CPF 1. Try the First Home Calculator 2. Choose to keep $20,000 each in OA (HDB loan) – allowed since Aug 2018; Under the old rules, the flat buyers had to fully utilise OA savings to pay for flat before taking up a HDB loan 3. Consider using Part Cash, Part CPF Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 3 tips to buying your HOUSEHOLD FINANCE first home with CPF 1. Try the First Home Calculator 2. Choose to keep $20,000 in OA (HDB loan) 3. Consider using Part Cash, Part CPF 1. Change in CPF contribution and allocation rates as you age 2. Creation of Retirement Account at age 55 Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE Make prudent choices when financing your property Leaving some savings in the OA can also act as a safety net (buffering the payment of your monthly mortgage instalments in case of temporary unemployment). You can choose to set aside up to $20,000 in your OA when taking HDB loans. Try to minimise the use of your savings on mortgage interest: Using OA savings for mortgage means losing Choose a lower-interest mortgage loan out on the OA interest of 2.5% p.a. You could consider using some cash instead if Make capital repayments when possible Lorna Tan Department of Finance NUS Business School you Copyright © 2021 can. Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE Check the amount of CPF you can use Log on to my cpf online services > My Statement > My Property Lorna Tan Department of Finance NUS Business School Copyright © 2020 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE Home Protection Scheme Protection against losing your flat Support you and your loved ones with the housing loan repayments in the event of death, terminal illness, or total permanent disability Affordable premiums Premiums are one of the lowest in the market Ease of premium payment Auto deduction from OA The total share of cover for all the co- owners must add up to at least 100% of Lornathe Tan outstanding Department loan of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE What happens if I buy another property? Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE Use of CPF for multiple properties Buyer has at least one property that can last him till age 95: Need to set aside Basic Retirement Sum in OA, SA/RA before using excess OA savings towards the 2nd/subsequent property Buyer has no property that can last him till age 95: Need to set aside Full Retirement Sum in OA, SA/RA before using excess OA savings towards the 2nd/subsequent property Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE What happens when I sell my property? Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE How much CPF can I use from the sales proceeds? Refund to CPF Account Principal Amount Accrued Interest (withdrawn for the purchase) + (otherwise earned on your CPF account) You can use your Ordinary Below 55 years old Account savings for your next property purchase Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE How much CPF can I use from the sales proceeds? Refund to CPF Account Principal Amount Accrued Interest (withdrawn for the purchase) + (otherwise earned on your CPF account) * Refund will be used to top up your RA up to You can then use 55 years old your FRS (if applicable) and any balance your OA savings for housing refund will be paid to you in cash, your next property and older unless you request to retain the balance purchase. housing refund in your OA. Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE What happens if I have a negative sale? $400,000 (sold at market value) - $50,000 Cash Proceeds Sellers do not need to top up the shortfall in cash $100,000 $350,000 provided the property is Outstanding HDB loan CPF Refunds sold above or at market value Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE Check your required refund online How can members check the amount to be refunded to their CPF account upon the sale of their property? They can: Login to our CPF website with their SingPass Select "My Statement" Look under Section C and select 'Property' Select "My Public or Private Housing Withdrawal Details" They can also check the amount of housing refunds required via mycpf mobile app, under ’My Housing’ Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE Voluntary Housing Refund You can refund any amount capped at the full Principal Amount (withdrawn for the purchase) Housing refunds principal amount you have withdrawn for the property with the accrued interest, without disposing your property. + Accrued Interest The refund will start earning prevailing interest rates (otherwise earned on your in the CPF account from the following month. CPF account) Ordinary Account Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE How can I unlock the value of my flat for my retirement? Lorna Tan Department of Finance NUS Business School  FIN3719 HOUSEHOLD FINANCE Rent out your flat or spare rooms to earn Renting out regular rental income Right-size to a smaller flat to Silver Housing Bonus get a cash (Aged 55 or above) bonus when you top up RA* Sell the tail- end of your flat’s lease to Lease Buyback Scheme HDB and (Aged 65 or above) receive LBS bonus * Sale proceeds used to top up your RA are used to join CPF LIFE to give you lifelong monthly payouts. Lorna Tan Department of Finance NUS Business School Copyright © 2021 Central Provident Fund Board. All rights reserved. Reproduction without prior written consent by Central Provident Fund Board is strictly prohibited. FIN3719 HOUSEHOLD FINANCE Bank Loans (Interest rates) Different types of mortgage packages Fixed rate loans (usually for 3 yrs) Fixed deposit rate-pegged loans Floating rate loans eg loans pegged to SIBOR* or SOR** Board rate - determined by individual bank *SIBOR – Spore Interbank-Offer Rate ** SOR - Swap Offer Rate Lorna Tan Department of Finance 8-Oct-24 NUS Business School 105 FIN3719 HOUSEHOLD FINANCE Home Loans Role of Mortgage consultant Who pays the consultancy fees? Lorna Tan Department of Finance 8-Oct-24 NUS Business School 106 FIN3719 HOUSEHOLD FINANCE Bank Loans (example) Fixed / floating loan Loan 1 Loan 2 Loan 3 Year 1 FHR8 + 1.45% 3-mth SIBOR + 0.75% 1.60% Year 2 FHR8 + 1.45% 3-mth SIBOR + 0.75% 1.60% Year 3 FHR8 + 1.45% 3-mth SIBOR + 0.80% 1.60% Year 4 and thereafter FHR8 + 1.45% 3-mth SIBOR + 1.35% 3-mth SIBOR + 1.4% “Fixed Deposit Home Rate” or “FHR8” means the Bank’s prevailing interest rate per annum for a 8-month Singapore dollar time deposit within $1,000 to $9,999 or other sum as the bank may specify. Eg, FHR8 is 0.20% pa SIBOR: Singapore Inter-Bank Offer Rate Lorna Tan Department of Finance 8-Oct-24 NUS Business School 107 FIN3719 HOUSEHOLD FINANCE 2-in-1 Home Loan (DBS) Have part of your loan amount under a fixed rate package for a peace of mind, and also benefit from the interest of a floating rate package for the remaining loan amount Lorna Tan Department of Finance 8-Oct-24 NUS Business School 108 FIN3719 HOUSEHOLD FINANCE Here’s how it works: Case 1 - John chooses to have 50% under a 2-year fixed rate package and the remaining 50% under the floating rate package. 2-Year Fixed Floating Rate with 2-Year Lock-In Blended Rate (Exclusively for 2-in-1 Home Loan) Interest Rate 4.25% 3.89% 4.07% Yr 1 (3M SORA + 0.75%) 4.25% 3.89% 4.07% Yr 2 (3M SORA + 0.75%) 4.14% 3.89% Thereafter (3M SORA (3M SORA + 0.75%) 4.02% +1%) Lorna Tan Department of Finance 8-Oct-24 NUS Business School 109 FIN3719 HOUSEHOLD FINANCE Prepayment and Refinance Prepayment Homeowners often repay all or part of their mortgage balance prior to the scheduled maturity date. The amount of the payment made in excess of the monthly mortgage payment is called a prepayment. Prepayment penalty and lock-in period When would you like to make prepayment? Refinance Getting a new mortgage to replace the original one The new loan will pay-off the original loan and recalculate monthly payment based on remaining principal base on new terms (interest rate, tenure etc) When would you like to refinance? Is it feasible? Lorna Tan Department of Finance 8-Oct-24 NUS Business School 112 FIN3719 HOUSEHOLD FINANCE Is a HDB flat an investment or Home for life? Can sell flat after Minimum Occupation Period (MOP) Calculated from the date of key collection and excludes any period where the owners do not occupy the unit, eg overseas for work Reported that property prices have risen despite Covid pandemic Reasons: upgrading to bigger flat or pte property; move closer to parents or school of choice etc Lorna Tan Department of Finance 8-Oct-24 NUS Business School 113 FIN3719 HOUSEHOLD FINANCE 8 Tips to avoid Debt Trap 1. Curb overspending Are you maintaining a lifestyle not sustainable with your income Due to adverse events eg retrenchment, medical crisis etc 2. Sticking to a budget Spending responsibly and in a disciplined way Understand difference between wants and needs 3. Picking a suitable credit card Assess your spending habits and pick the one that offers the most benefits for your everyday use Lorna Tan Department of Finance 8-Oct-24 NUS Business School 114 FIN3719 HOUSEHOLD FINANCE Tips to avoid Debt Trap 4. Maintain a good credit history Building up a good credit history helps to ensure a higher chance of qualifying for loans or obtaining credit 5. Avoid relying on future income Avoid relying on future salary increases and bonuses to pay for your current lifestyle 6. Understanding financing options For instance, personal loans typically offer significantly lower interest rates than borrowing through credit cards Lorna Tan Department of Finance 8-Oct-24 NUS Business School 115 FIN3719 HOUSEHOLD FINANCE Tips to avoid Debt Trap 7. Pay off debts with highest interest rate first If you are juggling multiple debts, prioritise paying off the debt with the highest interest rate so that it does not snowball 8. Paying off debts Banks offer repayment assistance schemes that can help you restructure your debt, particularly if you have a large one Lorna Tan Department of Finance 8-Oct-24 NUS Business School 116 FIN3719 HOUSEHOLD FINANCE TOPICS/SCHEDULE 2024 Week 1 (16 Aug) - Personal Financial planning Week 2 (23 Aug) - Retirement planning & CPF (part 1) Week 3 (30 Aug) - Retirement planning & CPF (part 2) Week 4 (6 Sept) - Estate planning Week 5 (13 Sept) - Insurance planning Week 6 (20 Sept) - SA1: 2-240pm; SA2: 3-340pm) - Test 1 Week 7 (4 Oct) - Investment planning Week 8 (11 Oct) - Credit management Week 9 (18 Oct) - Consumer protection/Class Presentations Week 10 (25 Oct) – Class Presentations Week 11 (1 Nov) – NUS Well Being Day (no class) Week 12 (8 Nov) – Class Presentations Week 13 (15 Nov, SA1: 2-240pm; SA2: 3-340pm) - Test 2 Lorna Tan Department of Finance NUS Business School FIN3719 HOUSEHOLD FINANCE Thank you Lorna Tan Department of Finance 8-Oct-24 NUS Business School 118