If you are buying a HDB flat and like to use your CPF to fund your purchase. You might like to take this option which requires risk taking.

Instead of using up all the CPF money to pay for the CPF, invest the CPF money in REIT or dividend stock and loan the money from HDB. HDB loans - Current rate is 2.6% (which may be revised from time to time)

Example - If you have $170,000 in CPF. Instead of using all CPF money to pay for your flat. Allocated $50,000 to invest in REIT. Which mean you will take extra $50,000 loan from CPF at 2.6%.

a. The monthly payment of $50,000 HDB loan at 2.6% for 25 years is about $227.

b. Invest the 50K CPF in REIT at around 8.5%. The yearly dividend will be $50,000 * 0.085 = $4,250. Monthly will be 4250/12 months = $354.

c. Which mean you will have extra $354(b) - $227(a)(monthly loan payment) = $127 monthly.

d. For 25 years - You will have extra $127 * 12 months * 25 years = $38,100. Assuming the $50,000 REIT appreciate by 3.5% annually. In 25 years the $50,000 will become $108347. After 25 years, the loan will be paid and you will earn = $38,100(monthly saving for 25 years) + $108,347(You still own the REIT) = $146,447.

Risks involved

• HDB housing loan interest shoot up more than the dividend payout.
• Risk from investing in REIT.

What is the minimum dividend return to be able to payout the monthly HDB loan payment?

$50,000 * Y% = 227 * 12 months

Y = 0.05448 (About 5.45%)

Chose stocks that pay dividend that is able to service the monthly loan payment. i.e stock that pay dividend of more than 5.45%. This calculation is based on 2.6% housing loan.

Go to financialplanningtools.wordpress.com for a list of REITs (complied on 18 Apr 08 ) that return more than 5.5%.

Marcus Toh
Domino Consultant
http://financialplanningtools.wordpress.com