With just 10 more years to go before hitting 55 years old, when you’ll either be withdrawing your CPF excess OA balance or find yourself needing more cash to top up to the highest tier of CPF Life, those in their 40s will need to look at mortgage planning more seriously.

That’s also about mid-life (with average lifespan getting longer at 80) where you can still use some leverage to grow your retirement nest egg, especially if you’re already falling behind on your retirement goals. Serious financial planning will take more centre stage in your 40s to 50s.

Most people underestimate the income needed for a comfortable retirement in Singapore. Rule of 72 in finance dictates that prices of goods and services will double every 24 years when inflation is around 3%. That means by the time you retire, whatever is the monthly income you need say $10,000 right now, you’ll need to double that to $20,000 a month for the same lifestyle today!

When you work with us on your mortgage, we don’t just help you to compare rates, the real value-add is we show you top-class mortgage planning to power your retirement that no other brokers or repricing bank can offer. See our special gift at the end.

In this article, I like to offer 6 useful tips for more basic mortgage planning for those in your 40s:

1. Plan for 55 (CPF Life Retirement Scheme)

First, a mini “crash course” on CPF Life. 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 $3,170 a month (ave between both sexes) for those turning 55 in 2025. It could be even higher for those who opt for the Standard or Escalating payout plan, but we use the Basic payout plan here where you get the highest bequest as only 10-20% of your Retirement Account (RA) balance will go towards the annuity premium.

For a retiree couple that works out to be $6,300 a month – a decent budget which serves as your base level comfort.  To achieve that you’ll need to set aside 4x the sum for Basic Retirement Sum (BRS) or $106,500 x 4 = $426,000 each in your RA for those turning 55 in 2025. 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) which you can withdraw after 55, subject to certain conditions.  Funds in RA and SA (Special Account, which will be phased out after 2024) earn 4% compounded interest very 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 plan (level, escalating or progressively lower) 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 2x of BRS or 2 x $106,500 = $213,000 for those turning 55 in 2025.  Basic Retirement Sum (BRS) may require just $99,400 minimum sum to be set aside, but the payout is significantly less. Let me give you the projected monthly payouts from age 65 on the Basic Plan (progressively lower) for the three minimum sum schemes for those turning 55 in 2025 (taking mid-point between male and female): $3,170 (ERS), $1,635 (FRS), $860 (BRS).

So, if you like to retire on the government’s coffer for good after 65, and drawing a “salary” of almost $6,300 as a couple, what must you do at age 55?  Make sure you top up both you and your spouse’s RA to minimally $426,200 each (or whatever is the ERS minimum sum when you turn 55).  Incidentally, you can opt to get even higher payouts if you just continue to top up to the new minimum sum as it gets raised each year. This is so as the interest earned on RA every year from age 55 to 65 does not count towards the minimum sum ceiling.

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 top-up from OA or use cash which is the most wise.  This is because if you are still working, using cash will allow your funds in OA to continue to grow and compound at 2.5% for risk-free return.

So where can you get the cash to top up at age 55?  Plan early.  First, do a projection to gauge what’s the shortfall to top up to the highest tier (remember minimum sum gets raised about 3% a year) by the time both you and your spouse reach 55.

One of the best way to raise this shortfall is pay back the amounts withdrawn for housing in your CPF OA early using any spare cash or extra bonuses. You don’t have to wait for the eventual sale of the property.  You can do a refund back to OA with cash for any amount and at any point in time via PayNow.  Put it back early to stop interest accruing, which you have to pay yourself later from the sales proceeds, and instead, let Temasek/GIC pay you that 2.50% risk-free return compounded.  With compound interest, by 65 you’ll end up with more surplus cash in your OA and a smaller top-up in cash needed for ERS.

How else can you raise the cash for any further shortfall estimated? Consider a taking a home equity loan (for private properties only) since by late 40s or early 50s, most would have paid down quite a substantial portion of the outstanding mortgage leaving room for additional loan. Once approved, you could even take the lump sum disbursed to put back fully all CPF OA monies withdrawn for housing including accrued interest. However, does it make sense to do that as you’re paying interest on these funds?

That depends on how you look at it. After paying down the loan for example from $1 million down to $500,000, it may appear silly to increase the loan back to say $800,000 and use the extra $300,000 to fully reinstate your CPF OA which is money you can’t touch until 55. But I see more benefits of doing that:

• You stop the 2.50% interest accruing early and let Temasek/GIC start paying you, so the real “cost of funds” is really your current mortgage rate less 2.50%. Based on today’s average interest at 2.75%, that’s only 0.25%.
• That’s a small price to pay considering you have one major retirement goal accomplished decades ahead of time, freeing you to focus on other financials goals or achieving higher retirement income beyond CPF Life payouts.
• This supposed “cost of funds” could even be wiped out if you work with the right mortgage broker who could help you achieve an even lower long-run mortgage interest of below 2.50% by taking early action before each Fed’s move.
• All mortgages get paid off eventually be it $800,000 or $500,000, especially if this is home equity loan on an investment property. Don’t sweat the small stuff in life but focus on the big goals like retirement and get them over and done with early.

Put it (CPF monies withdrawn for housing) back early to stop interest accruing, which you have to pay yourself later from the sales proceeds, and instead, let Temasek/GIC pay you that 2.50% risk-free return compounded

2. Make clever use of Home Equity Loan (For Private Properties)

We’ve explained the concept of home equity loan and how it works in an earlier article in this blog.

Home equity loan, or what MAS refers to as Mortgage Equity Withdrawal Loan (MWL), is simply cashing out on the equity portion of the property valuation which has gone up whilst you are paying the outstanding loan balance over the years.  In short, banks can now lend more to you and disburse the extra funds, secured on the same property, directly into your bank account.  In Singapore, most banks will charge the same interest on home equity loan 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 (with accrued interest) used for the property.

Other than using home equity loan to return all your CPF OA monies as explained earlier, there are some other ways to make clever use of it which will meet some financial priorities in your 40s where lumps sum cash is required.  We’ll elaborate on two of these in this article:

First, 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 to 80).  You can do a monthly “cashflow swap” to achieve some 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 his or her RA in one lump sum using a home equity loan.  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 order to increase your parent’s monthly payout to the desired amount.

Second, instead of buying a second or third investment property, another use of home equity loan is to consider buying a Universal Life (UL) plan and spare yourself the need to pay ABSD taxes which can cost as much as the UL premiums!  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 a US$1 million payout with a front-loaded lump sum premium of US$250,000. Banks like to sell such plans with premium financing as that means interest income for the bank.  Consider financing it with a home equity loan instead, which is not only the least-cost option due to availability of fixed rates and market competition, it’s the neatest solution as the full sum assured of the UL will be paid to your beneficiary. When you finish paying off the mortgage, you’ll feel great as it’s equivalent to “owning two properties” but without all the taxes.  One caveat: UL values will be subject to market volatility and there are other counter-party risks to evaluate. Speak to a qualified financial advisor.

As you can clearly see from the two examples above, taking on a bigger debt 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 that leveraging for pure consumption purpose is a no no. And doing so for some risky investments be it stocks or business ventures may sometimes backfire.  But taking a home equity loan for legacy planning, cashflow management to bring about more savings, or as part of retirement planning (especially when it’s the national annuity scheme) are all good, legitimate and clever use of debt.

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 half the 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 forward 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 the time they come of age.

There’s another big advantage for decoupling – it allows you the ease to get home equity loan as a single-mortgage applicant since both of you now only has one mortgage to your name.  For those with more than one mortgage, the financing limit allowed on home equity loan gets cut drastically from 75% down to 45% of the property valuation to start with, before even deducting the outstanding loan and CPF amount used on the property.

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.  Over time, you would likely also have paid down these mortgages leaving quite a handful of small loans which are not only cumbersome to manage, it’s cost more to refinance them.

It’s time to do some loan consolidation as you age to keep administration simple, and at the same time reap some cost efficiency and savings.

The simple idea is again to leverage with home equity loan 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 simply left pocket to right pocket, and consolidating all the debt into one big loan.

You may have thought of paying down all the debts gradually over time. 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 by that 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.

6. Stay wary of lock-in periods

This last tip applies across all age group of borrowers.

The biggest leverage a mortgagee bank can wield is the “commitment period” or lock-in period.  As such, on the flip side, the best position for a mortgagor to adopt with all things being equal, is to go for the shortest lock, or better yet, one with no lock where possible.

This is especially important during cycle-turning years which we’d witnessed quite a number in our 10 short years of operations: 2014 | 2016 | 2019 | 2020 | 2022 to current. Fixed rates have come down quite substantially since the start of 2023, but the path ahead may still be uncertain with Trump presidency.

Leveraging for pure consumption purpose is a no no. And doing so for some risky investments be it stocks or business ventures may sometimes backfire.  But taking a home equity loan for legacy planning, cashflow management to bring about more savings, or as part of retirement planning (especially when it’s the national annuity scheme) are all good, legitimate and clever use of debt.

Beyond these 6 tips for those in your 40s, perhaps the epitome in mortgage planing culminates in our exclusive gift for you when you work with us on your mortgage: We’ll show you to become Mortgage-Free in 6 Years!

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So, 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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* Subject to ownership of a Singapore private property, meeting of certain loan & seed capital requirements, interest rate not going into anomalies like the Great Inflation of 1965-1982 and other typical investment risks

Disclaimer: MortgageWise Pte Ltd is not in the business of providing financial advice nor are we licensed or regulated by MAS under the Financial Advisory Act (FAA) in Singapore. All information presented are opinions and any representations given, whether by way of example, illustration or otherwise, are purely portfolio allocation advice and not recommendations or inducements to buy, sell or hold any particular investment product or class of investment product.  All opinions are generic in nature and are not tailored to the particular circumstances of any reader.  Seek advice from a qualified financial advisor before making any investment decision.

Though every effort has been made to ensure the accuracy of the information and figures presented, we make no representations or warranties with respect to the accuracy or completeness of the contents in this blog and specifically disclaim any implied warranties or fitness for a particular purpose.  We shall not be held responsible for any financial loss or any other damages suffered whatsoever, directly or indirectly, if you choose to follow any of the advice or recommendations given in this blog.