Mr and Mrs Lee, a couple who are both 35 years of age, approach you for financial advice. Eight years ago, they bought a small apartment in Changi for $480,000. They paid for it using cash, a lump sum withdrawal totaling $100,000 from their Central Provident Fund Ordinary Accounts [CPF OA] and a loan of $250,000. The loan was a fixed rate mortgage for 30 years with a coupon rate of 3% per annum on a monthly rest basis. The Lees used a total of $1,000 of their monthly CPF OA contributions towards debt repayment. (For simplicity, assume that the interest rate on CPF OA contributions over the last eight years was 2.5% p.a., monthly compounding.)

The Lees are considering upgrading to a larger unit in ET, a completed condominium project nearby. The condominium seller is asking for $920,000 while a recent valuation report valued it at $900,000.

Given the cooling measures put in place, the Lees intend to sell their current apartment before entering into a new Sale & Purchase Agreement for the ET unit. However, the couple disagree on the best way to finance the purchase and seek your advice.

Mr Lee thinks the family motto should be CPF for Life. After selling their apartment and refunding their CPF OAs, he thinks the monies should be left there for old age. Hence, Mr Lee would prefer to take the maximum loan possible and to pay the downpayment and all transaction costs out of cash. In fact, he would like to service the new loan with cash rather than with CPF OA contributions.

Mrs Lee believes Cash is King. She thinks that the couples CPF OA balances their existing combined balances and the money from the sale of the apartment that is refunded should be used to the maximum limit allowed for the initial outlay, Further, she would like to reduce the principal amount of the new loan by using up all their CPF OA balances. Finally, she would like to use all their monthly contributions to the CPF OA for debt service as well.

Some relevant information are provided below.

Currently, Mr Lee has a balance of $70,000 in his CPF OA while his wife has a balance of $40,000.

Mr Lee earns $7,000 a month while Mrs Lee earns $6,000 a month.

They have a total of $120,000 in cash.

In selling their apartment, the Lees estimate that they can get $640,000 for it. Further, legal costs will be 0.2% of the sale price while agency fees will be another 1 % of the sale price.

The downpayment on the condominium is 20% of its purchase price. 5% must be in cash while the remaining 15% can be either cash or CPF OA savings. Buyer stamp duty is payable at the normal tiered rates. Legal fees are estimated to be 1.5% of the purchase price.

Under prevailing rules, the maximum loan that can be taken by the Lees (who have no other outstanding housing loan) will be the lower of the following two amounts:

Under the LTV [Loan-to-Value] rule, the maximum loan cannot exceed 80% of the purchase price or market value, whichever is lower;

Under the Total Debt Servicing Ratio [TDSR] rule, the loan amount must be such that no more than 60% of the Lees salary can be used to service the debt. To determine the loan amount, you may assume that the loan is a fixed rate mortgage for 30 years with interest at 3.5% p.a., monthly rest.

Note that stamp duty is payable on the loan at 0.4% of the principal amount subject to a maximum of $500.

Based on the case notes, answer the following questions. Clearly state any assumptions you may make.

What is the unpaid mortgage balance on the existing loan for the apartment?

(3 marks)

How much must the Lees refund to their CPF OA if the apartment is sold now? What will be their combined balances in their CPF OAs after the refund?

(6 marks)

Determine the net cash proceeds from the sale of the apartment after discharging the loan and making the CPF OA refund. How much do the Lees have in cash?

(5 marks)

Compute the maximum amount that the Lees can borrow based on the LTV rule and the TDSR rule. Which rule results in the lower amount?

(6 marks)

Work out the total outlay required for the purchase of the condominium at the asking price, assuming that a loan will definitely be taken. Include all the relevant transaction costs payable.

(4 marks)

Regardless of whether Option A or B is chosen, the first 5% downpayment for the condo must be paid in cash. Under Option A where the Lees borrow the amount computed in (d), can they afford to service the debt using cash? What is their cash balance?

(5 marks)

With Option B, what is the loan amount? Can the Lees service the debt fully using their CPF OA contributions?

(6 marks)

What is your final advice to the Lees?

(5 marks)