I Am 45, How Should I Plan My Mortgage? (6 Tips)

Without doubt, it will be more engaging a topic on CPF schemes for someone in their 40s than 30s.  Suddenly the prospect of being able to withdraw CPF money in another 10 years becomes quite appealing as retirement planning takes centre stage.  So is the heightened need to plan for unexpected risks in life and legacy matters.  

You might be surprised to discover that having a mortgage on a private property might actually help you in this planing. We have the following 6 tips to share when it comes to mortgage planning:

1. Plan for 55 (CPF Life Retirement Scheme)

First, a mini “crash course” on CPF Life. We’ll get to the crux quickly.  The best thing about CPF Life retirement scheme is as per what the name suggests – it’s a payout for life, for as long as you live. And everyone needs to get onboard quite simply because it beats all the private annuity plans in the market in terms of costs and payout! As explained by CPF on its website – it has no marketing or distribution costs and it’s a national scheme with the biggest base of enrolment in the country.

So how do you benefit most from CPF Life? Aim to qualify under the highest tier known as Enhanced Retirement Sum (ERS) where the projected payout from age 65 onwards is $2,300 a month.

For a retiree couple that works out to be $4,600 a month – a very decent budget to retire on and remember it’s for life.  To achieve that you’ll need to set aside $298,200 (for those turning 55 in 2023) in your newly-created Retirement Account (RA) at age 55 to join the highest tier. Or you can do that anytime from 55 to 65 years old but it requires a higher prevailing minimum sum later (minimum sums are raised every year at the rate of about 3%).  The money transferred to RA is locked away and you can’t touch it, unlike Ordinary Account (OA) and Special Account (SA) which you can withdraw after 55, subject to certain conditions.  RA funds gets paid 4% compounded interest just like SA and grows every year (To be precise, first $30,000 in RA earns 6%, next $30,000 earns 5%, and the balance at 4%). At 65, the whole sum in RA along with all the interest earned gets deducted in one lumpsum premium to start your annuity payout.  You will choose the type of payout (level plan or escalating plan)closer to turning 65.

At 55, the amount that’s automatically transferred to RA is not for the highest tier, but the default tier called the Full Retirement Sum (FRS) which is set at $198,800 (for those turning 55 in 2023).  There’s also the lowest tier of Basic Retirement Sum (BRS) where just $99,400 is required.  You can see that the minimum sums required for the three tiers are simply multiples of $99,400.  What’s the difference in the projected monthly payouts from age 65 for the three tiers? Quite significant, especially if you live a long life – it’s $2,300 (ERS), $1,500 (FRS), $800 (BRS).

So, if you like to retire on the government’s coffer for good after 65, and drawing a “salary” of almost $5,000 as a couple, what must you do at age 55?  Make sure you top up both you and your spouse’s RA to $298,200 each (or whatever is the ERS minimum sum by that year).  Incidentally, you can opt to get even higher payouts above $2,300 per month if you just continue to top-up to the new minimum sum as it gets raised each year (note the interest earned on RA are not counted towards the minimum sum as they are used in the projection for the returns).

So how do you top up? At 55, funds in your SA will automatically be swept to RA but only up to the default FRS minimum sum.  Any shortfall will have to come from your OA.  To get up to the highest ERS tier, you’ll need to initiate the top-up from SA/OA or using cash which is the most wise.  This is because if you are still working, using cash will allow your funds in SA/OA to continue to grow and compound at 2.5%/4% respectively. 

So where can you get the cash to top up at age 55?  Plan early.  Do a projection to see if there will be a shortfall to top-up to the highest tier (remember the minimum sum gets raised about 3% a year) by the time both you and your spouse reach 55.  As most would have a substantially-paid down mortgage in your 40s, time yourself to cash out in a lump sum when interest rate comes down. This means taking on a mortgage withdrawal term loan (MWL) against the property while you are still drawing a good salary (note MWL is only applicable for private properties).  However, you’ll have to make sure you keep this lump sum in principal-protected or very low-risk investments like fixed deposits, or bonds issued by Singapore government, stat boards or blue-chip companies.

We think the best way to ensure you never touch these funds set aside for CPF Life scheme is to put it back to CPF OA immediately – for those who had previously withdrawn for housing.  You don’t have to wait for the sale of the property.  You can make a housing refund with cash for any amount and at any point in time via PayNow.  Put it back early to stop interest accruing and let Temasek/GIC pay you instead 2.50% risk-free return compounded.  By 65, if you end up with more surplus cash than planned, simply top-up to ERS with cash, and keep your CPF OA balance. Who knows you might be able to withdraw just the interest paid for some living expenses.

Some might ask – at 45 is it wise to take out MWL and increase your debt for the next 10 years, after you had worked so hard paying down your mortgage in the last 10 years?  Perfectly understandable.  However, for those who withdrew CPF for housing where you need to put back with accrued interest from your sales proceeds later, this might be a no-brainer whenever prevailing interest drops below 2.50%.  You are simply borrowing from the bank today to pay back another “lender” – your sales proceeds or future OA balance, which charges you 2.50%.  You are not exactly “debt-free” to start with.  You do that while you still can with a high salary in your 40s.

For the rest of us, we address this concern in the next tip on the uses of MWL.

As most would have a substantially-paid down mortgage in your 40s, time yourself to cash out in a lump sum when interest rate comes down. This means taking on a mortgage withdrawal term loan (MWL) against the property while you are still drawing a good salary (note MWL is only applicable for private properties)

2. Make clever use of MWL (Mortgage Equity Withdrawal Loan)

We’ve discussed MWL in an earlier article in this blog, which explained the concept of MWL and how it works.

MWL is simply cashing out on the equity portion of the property valuation which has gone up over the years at the same time when you are reducing outstanding loan balance.  In short, banks can now lend more to you on top of existing housing loan, and disburse the funds directly into your bank account.  And in Singapore most banks will charge the same interest rate on MWL as your housing loan.  MWL is applicable only for private properties, and there are limits on how much loan you can take out.  For single-mortgage applicant, the limit is usually set at 75% of valuation less outstanding loan less CPF used for the property (plus accrued interest).

There are some clever ways to make use of MWL which fit in nicely with priorities that require lumps um cash in your 40s.  We’ll elaborate on two of these.

At 45, you’ll most likely have parents who were already passed 65 years old and started getting their CPF Life payouts (they can join CPF Life anytime from age 65 but not after 80).  You can do a monthly “cashflow swop” to achieve savings.  For example, instead of giving $700 to one parent as living expenses, let CPF Life pay out that $700 (or even more) by simply topping up their RA in one lumpsum using MWL.  In other words, you are simply transferring from paying your parent to paying the bank with minimal or no change in your monthly cashflow.  Yet, there are real benefits in doing so.  First, your real cost is much lower than $700. Though you are servicing a slightly higher monthly repayment now, a large part of that goes to principal-reduction which comes back to you on the sale of your property.  Second, your mortgage gets paid down eventually or when you sell the property. But the higher CPF Life payout to your parent continues for life!  Use CPF Life Estimator online to determine what’s the optimal amount you need to top-up in a lumpsum in order to increase the payout to the amount you desire.

Instead of buying a second or third investment properties, another use of MWL is to consider buying a Universal Life (UL) plan and spare yourself the liability of ABSD taxes!  With savvy marketing, UL plans are no longer privy to private banking customers.  You may want to add some liquid assets to your estate rather than immovable properties.  UL plans typically provides a high coverage for example US$1 to 2m payout with a front-loaded lump sum premium like USD250,000. Banks like to sell such plans with special financing for client.  But you should simply finance it with MWL which is not only the least-cost option on secured lending, there’s also amortisation or principal reduction over time.  When you finish paying down the mortgage, you’ll feel great as it’s equivalent to “owning two properties”, but without all the taxes.  One caveat: UL plan values will be subject to market volatility which depends on the performance of the participating funds.  Remember you are in it for the long haul.

As you can see from the two examples above, taking on a bigger debt via MWL in your 40s may not necessary be a bad thing.  It depends on your use and if you have a very clear objective in mind.  In general, I would say this – taking out MWL for pure consumption purposes or risky investments be it stocks or business ventures may backfire.  But doing so for legacy planning, cashflow management to bring about savings, or retirement planning (especially when it’s the national annuity scheme) are all good and clever uses of MWL.

3. Divide & conquer

With ABSD entrenched as part of the costs for property investment in Singapore, we see more & more couples pursuing property decoupling over the years.  If you have bought your first property under joint-tenancy with your spouse earlier, this means you will need to buy or sell the half share (50%) to the other owner which attracts BSD (buyer’s stamp duty 3-4%) and sometimes SSD (seller’s stamp duty 4-12%), in order to free up one spouse for purchase of a second investment property.

The legal fees involved, in the range of $5,550-6,000, may be exorbitant as you will need two different law firms to act in the part-purchase and part-sale.  There might also be legal implications in event of a divorce.  However, that could be the only way for couples to acquire more properties in Singapore. It’s part of estate planning to leave behind assets for two or more children, or if they believe the next generation may get priced out of private properties by their adult age.

There’s another big advantage for decoupling – it allows you the ease to get MWL as a single-mortgage applicant.  For those with more than one mortgage, the limit on MWL is drastically cut from 75% to 45% of property valuation less outstanding loan less CPF used for the property (plus accrued interest).

4. Consolidate & keep life simple

By 45, some might own more than a few properties including commercial properties bought in personal name or overseas properties.  And over time, you would’ve paid down each of these mortgages quite significantly.  It’s time to do some loan consolidation as you age to keep administration simple.  Plus, there’s cost-efficiency and savings with less mortgages to manage.

The simple idea is once again to leverage with MWL on a residential private property which has the lowest interest rate, and use those funds to fully redeem your commercial or overseas property loans.  It’s left pocket to right pocket, simply consolidating onto one big loan. Relying on your own funds may not be sufficient to redeem entire loans. Even if it does, you probably have better use of your funds for investment and would rather maintain your total borrowing capacity.  It is not advisable to redeem only partially. That could put you in a worst-off position as most banks do not refinance below a certain minimum loan size and you might get stuck on a high thereafter rate, and lose bargaining power for repricing with your bank.

5. Work with a trusted broker

After being a homeowner and mortgagor for some time by your 40s, and experiencing at least a few peaks and troughs in the interest rate cycle, you might start to appreciate the crux in mortgage planning – big interest savings are derived not from mere 0.05% to 0.10% difference when comparing home loan packages. Rather, it’s about making the right call at the right point in the cycle between going fixed or floating.  Much like how you make big profits in stocks or real estate market when you enter and exit at the right time.

It may sound self-serving, but we’ve seen too many people calling us late to review their mortgages.  When cycles turn up or down, very often you need to make the switch pre-emptively 4-6 months before it happens.  Working and partnering with a trusted broker remain the best way for you to “stay ahead of the curve”. You’ll need someone to watch your back and give you that nudge in the midst of all your work schedules, before it’s too late for you to take action.

6. Stay wary of lock-in periods

This last tip applies across all age groups of borrowers.

The biggest leverage a mortgagee bank can wield is the “commitment period” or lock-in period.  As such, with all things being equal, the best position for a mortgagor to adopt on the flip side is to cut this down. Go for a package with the shortest lock or better yet with no lock where it make sense.

This is especially important in cycle-turning years like 2023-2024. With fixed rates at record highs in recent decades, the risk has mounted significantly of getting stuck with a high fixed rate when the cycle peaks and comes down. The “higher for longer” rhetoric has yet to be proven. And “longer” is also a relative term. What’s for sure is that we are still living in a highly uncertain world.

Taking out MWL for pure consumption purposes or risky investments be it stocks or business ventures may backfire.  But doing so for legacy planning, cashflow management to bring about savings, or retirement planning (especially when it’s the national annuity scheme) are all good and clever uses of MWL.

Need more advice?  We don’t just throw you a set of rates, or get different bankers to sell to you.  Not only do we help clients navigate through Singapore mortgage rates quick and fuss-free, we show you how best to position and profit from the interest rate cycle, be it for residential or commercial property loan. Work with us today and you’ll also be helping to support our social cause!

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