Congratulations! Your home has hit the 5-year Minimum Occupancy Period (MOP) and now you’re able to sell your home to reap the profits from your purchase.
It’s an exciting time, and you’re already picturing the lump sum of cash that will enter your bank account once the whole process is over.
But now you’re wondering to yourself…
“How much do I actually get IN CASH after the sale?”
That’s a great question, and we’re here to answer it.
Join me and let’s do the math (one step at a time) to figure out your home sale.
The main factors we need to look at are the following:
- Sale price of your home
- Outstanding loan
- Refund of CPF OA used + Accrued interest
- Property agent fee
- Legal fee
- HDB resale fee
So, here’s how to calculate!
Let’s say, you purchased a 4-room BTO at $400,000, 5 years ago.
With this in mind, you placed a 10% downpayment of $40,000 using your CPF and took a HDB loan of $360,000 at 2.6% per annum (p.a.) for 25 years.
As a result, that means your monthly mortgage repayment amounts to $1633.21 per month, and you decided to service the entire monthly mortgage using your CPF OA as well.
Still following along? Great. Let’s continue. (Now with formulas!)
After 5 years, your property has appreciated by 25% and grown to $500,000. A $100,000 profit — great success!
While technically correct, let’s see exactly how much you can take home in cash.
After 5 years of paying your loan, your $360,000 loan is now at $305,393.93.
As shown above, you may be wondering why after paying close to $98k, your loan principal only reduced by $54.6k. Well, that’s because only a portion of the monthly payment reduced the principal. The rest was paid to interest.
The next step is to calculate your CPF OA refund. Take note that this will be paid back to your CPF OA, not given in cash.
After using $40,000 for your downpayment and servicing your entire monthly mortgage with your CPF OA, you now owe yourself $149,585.07.
To calculate this, we use a financial calculator to find the future value of your CPF with Accrued Interest owing. You can download an app to try this for yourself or use Microsoft Excel to input the Future Value (FV) formula to find the same results.
Great. Next, you were smart to engage agent to sell your home. To reward them for their hard work at finding you a buyer who agreed to your ideal sale price, you pay a low market rate of 1% service fee + 7% GST. This amounts to $5,350.
Let’s combine the last 2 assumptions: Assuming you engage HDB’s legal services, using their helpful Legal Fees Enquiry Facility, it’ll cost you $290, with an additional resale fee of $80.
Let’s punch in the equation, shall we? (we’re almost there).
Sale price – Outstanding loan – Refund of CPF OA used with acc. interest – Property agent fee – HDB legal fee – HDB resale fee = Cash in bank
$500,000 – $305,393.93 – $149,585.07 – $5,350 – $290 – $80 = $39,301.01
To sum up, a $100,000 profit translates to…
$39,300 cash in your bank account.
“But what if I want MORE?!”
We want to help you with that.
There are 3 ways to help you earn and keep more profits in cash:
- 1) Sell your home for a higher price
- 2) Reduce your mortgage interest rate (refinancing)
- 3) Don’t use all your CPF
1) Sell your home for a higher price
This may be the most obvious solution, but it’s perhaps the hardest to achieve. The best ways to achieve a higher selling price boils down to a few factors:
Better staging of your property
There are just some things you cannot physically change. Your home’s location and its size. However, staging could help you overcome pesky “flaws” in your property.
Staging your property is the art of beautifying your home for pictures. The first thing most people see when looking at a property listing are the pictures.
Before nearby schools.
Even before the closest amenities.
The look of the home is the reason why an interested buyer may continue to care and consider buying your home.
You don’t need to be a world-class photographer or an award-winning designer.
Just an eye for highlighting natural light and space could already win you 90% of the battle for attention.
In simple economics, demand drives prices. The more people want it, the more valuable it becomes.
This is the same for your home.
Attracting more individual buyers, having the opportunity to get them to outbid one another, and closing at a higher price just to swat away other parties would certainly help you increase the sale price of your home.
However, for many of the property listing sites, you need to be a property agent yourself before you can list your home.
Another option you may have is to run advertisements and get interested buyers to contact you directly. But it comes with heavy costs that eat into your potential profits, without even considering the time you’ll have to set aside to entertain every inquiry and arrange viewings whether they’re genuine or just window shopping.
Finally, bringing out the inner Jordan Belfort. Remember that guy in Wolf of Wall Street?
You want to sell high, and they want to buy low.
If you want to sell your home at a higher price, you’ll have to convince your buyer that it’s worth the price.
Remember, if you’re selling your home above valuation, your buyer will have to pay a Cash Over Valuation (COV) in cash.
That’s a big commitment for them and requires expert negotiation for you to pull off.
Ordinarily, we don’t expect many homeowners to be able to do so, and that’s why it’s proven that having a seasoned property agent with years of experience could add an extra 5-15% on average in the sale price.
Here are just some examples.
2) Reduce your mortgage interest rate
Your next biggest culprit in reducing your cash profits is the interest rate you’re paying.
If you were to get a mortgage rate of 1.8% p.a instead of 2.6% p.a with a bank loan, you’ll be:
- Saving $142.14/mth or $8528.61 over 5 years,
- Reducing your loan balance by $5,057.83 as more is paid to principal than interest,
- Using less CPF OA and accrued interest by $9,074.52,
- And increasing your overall cash proceeds by $14,132.35.
Altogether, that’s an extra 36% of cash profits from one little trick.
Now, we understand that as of writing, interest rates have flown through the roof. But when interest rates fall in the future, be sure to refinance your mortgage to get a better deal and to earn a higher profit overall.
And last and most controversially,
3) Don’t use all your CPF
I feel like I’m going to be burned at the stake here, but the numbers don’t lie.
While your CPF OA is returned to you and you can immediately use it again for your next purchase, the double whammy of not earning interest from the government and instead paying yourself that interest is a painful pill to swallow.
From our calculations above, if you would have used cash for both the downpayment and the monthly mortgage, you would have paid $138k instead of $149k.
That’s an extra $11k that you would earn directly through your CPF interest rate from the government.
And all that $138k is returned to you in cash to use however you please.
Now, we’re not advocating for you to just use cash. In fact, that’s close to impossible for most Singaporeans.
We’re just here to present the facts and it’s up to you to decide. Perhaps a combination of both?
Let’s put it all together
If you followed our tips and…
- Sold your home for 5% more earning you an extra $25,000.
- Reduced your interest rate from 2.6% to 1.8% earning you an extra $14,000.
- And used cash instead of CPF earning you an extra $11,000.
You’ll be walking home with $50,000 in additional profits — more than doubling what we started with.
How does an extra $89k sound to you?
It’s a brand-new car, or buying your next house a few floors higher, or even paying the university tuition of your future child.
Well it sure sounds good to me.
This article was originally published on Ohmyhome.