Ah, one of the eternal debates in personal finance – should we buy or rent our home? Which is the optimal financial decision?

As mortgage payments and rent are the* most costly expenses* in our life, it’s really important to make the right choice.

Of course, due to the high rental cost in Singapore, if you qualify to purchase a BTO (Build-To-Order) HDB, you should definitely buy a BTO. The amount of subsidies you get compared to buying resale or a private condominium makes it a financial no-brainer.

However, what if you don’t qualify for a BTO? What if you must either buy a resale HDB or a condominium? Then the answer isn’t so clear cut.

Since I’ve recently gotten married, my lovely wife and I are now thinking hard about getting our very own home. Unfortunately, as we do not qualify for BTO, the question of rent vs. buy is an important question for us.

Looking around online, there are countless articles on this topic, but a lot of content is not Singapore-centric and the ones that are don’t dive into the financials as much as I’d like.

So I decided to sit down, roll up my sleeves and crunch some numbers. Hopefully others in a similar position will find this analysis useful for their own calculations.

**TL;DR:** Buying turns out to be the best financial decision! If you want to find out why, do read on!

### The non-financial factors

First, let’s get the non-financial factors out of the way.

Renting allows you to have the flexibility to move to new locations to be nearer to work or schools. You are able to adjust the unit size based on your current needs and aren’t stuck in one place.

On the other hand, by buying you have the ability to renovate the home and decorate the place the way you really want it. In a rental property you usually only have the ability to get loose furniture and therefore the fixed furniture won’t necessary match your tastes. You won’t really be able to fit the place out to save on space.

So these are factors that you should consider before the financials. If you want to be able to move around every few years, it’s best to rent (it’s also a much cheaper option since buying comes with high up-front overhead each time that doesn’t happen with renting.)

OK, with that out of the way, let’s get right into it.

## The conventional wisdom, buying is the obvious choice

We have all heard the conventional wisdom that “buying is always the best option in Singapore!” and I have heard that too!

It makes sense right? There are so many reasons why buying is intuitively *better* than renting:

- Paying mortgage means that a portion of our payments go to paying for the house – building up equity in the house. We will own a large asset at the end of it. However, renting does not provide this benefit – it’s like we’re putting money in a pile and burning it for warmth.
- It puts our CPF Ordinary Account to better use! If we don’t buy a house, our money is just sitting – locked up – in our Ordinary Account earning a miniscule 2.5% interest! If we use it to buy a home, at least we’d be using it to pay for an appreciating asset which will grow faster than 2.5%.
- Mortgage payments are lower than rent (for an equivalent unit) and thus the buyers can put the extra cash they have left over into investments.
- Once the mortgage has been paid off, a home owner no longer has to make payments to continue living in that house – eliminating a major fixed monthly expense that a renter must still pay.

The end result should be a no-contest – buying obviously comes out on top!. We’d be wasting time to even consider doing a comparison. Right?

Well, I won’t blame you if you feel that way. I have heard the same conventional wisdom and it made sense to me too.

However, is that really true?

## The downsides of buying

If we think about it, there are a lot of *downsides* to buying compared to renting too!

- Buying requires a huge amount of cash up front for downpayment, renovation, stamp duty and agent commission which could have been used to invest in the stock market to get compounding returns.
- There are monthly town council fee (HDB) or monthly management fee & sinking fund payment (Private Condo) to be paid.
- Annual costs like property tax, appliances breaking down and property insurance that has to be paid.
- Given that HDB is 99-year lease, the property value may be stagnant and even drop the longer you hold it. It’s completely possible that there’s no residue value in the unit once the lease runs out, rendering your equity worthless anyway – so what you paid into the property end up being very similar to rent (you get nothing out of it at the end.)
- However, if you want to sell and buy a new unit every few years to ensure that you always get a relatively new unit to maintain value, you’ll end up incurring transaction costs like agent commission and stamp duty as well as upfront costs like renovation all over again, reducing the financial benefits of buying – not to mention that a newer unit than your current one will also costs more, so you will likely end up losing money in that transaction.

Taken together, this has the potential to negate the financial benefits of buying compared to rent!

At the end of the day, it will come down to whether the benefits outweigh the drawbacks, which is what the following comparison will try to get to the bottom of.

## Approach to the comparison

In this post I’d like to make a detailed financial comparison between renting and buying a property. The way we are going to do this is to keep all the starting conditions for both options constant so we can make as direct a comparison as possible.

We will go through the analysis in the below order:

- The financial details of the buyer and renter
- The details of the property we will be buying and renting
- The detail financial setup and analysis of buying
- The detail financial setup and analysis of renting
- Bringing it all together
- Conclusion

I hope that makes sense to you, so let’s dive right in!

## Financial Details of the Buyers and Renters

Let’s introduce ourselves to our hypothetical couples that will be buying and renting: Buyers and Renters.

We’ll assume that both couples are 35 years old and are married so their income and CPF are for 2 people. Both the Buyers and Renters are financially identical, and here are the financial stats that they are both starting with before they make their purchasing or renting decision:

### Monthly Income, CPF Contributions and Expenses

Gross Family Income | S$12,000 (S$6,000 gross per person) |

CPF OA Contribution | S$2,760 |

CPF SA Contribution | S$720 |

Take Home Income (After CPF) | S$9,600 |

Income Tax Expense (per Month) | S$297 |

Expenses (Exclude Rent & Mortgage) | S$3,000 |

Remaining Before Rent or Mortgage | S$6,135 |

Both Buyers and Renters are doing reasonably well for themselves, they are both married to a spouse that also works so both families has 2 streams of income. Both are earning exactly at the CPF contribution cap of S$6,000 per person (S$12,000 per couple) so are maxing out their CPF contributions.

Before paying rent or mortgage, both Buyers and Renters has a total of S$6,135 in disposable income that can be used for rent, mortgage, savings or investment.

Now let’s take a look at what they currently have in their savings and CPF before they make their buying or renting decision.

### Cash and CPF Balances

CPF OA Balance | S$120,000 (S$60,000 each) |

Cash Savings Balance | S$38,100 |

In order to make a property purchase, Buyers would like to use as little of cash outside of CPF as possible and maximise the use of the CPF OA balance to make the purchase and borrow the rest.

The current requirement for using CPF OA money allow us to use anything above S$20,000 for housing purchase. Thus the Buyers can use S$80,000 out of the S$120,000 in their OA (leaving S$20,000 in each spouse’s OA account.)

So we will assume that the Renters will also start with the same balances in their CPF and savings.

We will ignore the CPF SA as that will be the same across both Buyers and Renters.

## Home Sweet Home: Details of the Property, Mortgage & Rent

With the financial standings of the couples out of the way, let’s take a look at the property that they will be considering.

Given that the Buyers has up to S$80,000 in CPF OA monies that can be used for property purchase and housing loans require 20% down payment with a minimum requirement of at least 5% in cash, this means CPF OA monies can make up up to 15% of the property price.

This will allow the Buyers to afford up to S$530,000 in property, so we’ll assume they will buy a hypothetical 4-Room Flat that is worth S$500,000.

Property Type | Resale HDB |

Number of Rooms | 4-Room Flat |

Asking Price | S$500,000 |

### Mortgage Details

Given the above, let’s figure out what the mortgage would look like. Here are our assumptions:

Loan Tenure | 35 Years |

Loan Value | S$400,000 |

Mortgage Interest Rate | 2.5% |

Monthly Mortgage Payment | S$1,430 |

To make this analysis simpler, we’ll assume that the interest rate remains fixed so the mortgage payment will not change throughout the life of the mortgage.

Now this is not realistic since interest rates changes with the economic cycle. Sometimes it will go up and sometimes it would go down. However, instead of guessing how much and when the interest will go up and down, I’m keeping it constant and instead also keeping rent constant such that the effects of both should roughly cancel each other out.

### Rental Details

Since we are keeping the mortgage interest and mortgage payment fixed, we’re going to keep the rental fixed as well. Rent tends to also go up and down based on the rental market but usually home owners try to make sure the rent can roughly cover the mortgage, so instead of trying to predict where the rent is going, I’m just going to ignore it by assuming that it will be pegged to the mortgage payment. As we’re keeping the mortgage payment fixed, I’m going to keep the rent fixed.

Based on the current rental market, the rent for a 4-Room HDB Flat should cost around S$2,200 per month.

Monthly Rent (Including Aircon Servicing) | S$2,200 |

## Financial Analysis for Buying

Now we’re really getting into the meat. Let’s break down the expenses related to purchasing a property.

### Upfront Cost

Here’s the upfront cost for the Buyers:

**CPF**

Downpayment (CPF OA) | S$75,000 |

**Cash**

Downpayment (Cash) | S$25,000 |

Buyer Stamp Duty (First Time) | S$9,600 |

Legal Fee | S$3,000 |

Valuation Fee | S$500 |

**Total Cash Out of Pocket: S$38,100**

Note that I did not include the cost of renovation. I assume that both Buyers and Renters are going to be buying or renting a place that is in a condition that they are happy to live in so that we can compare apples to apples.

The will also spend the same on loose furniture, which will net off and therefore we can safely leave that cost out of the calculations.

### Annual & Monthly Expenses

Aside from the upfront costs of purchasing a property, these are the monthly costs associated with buying.

I’ve also divided the annual cost by 12 to spread it out across the months to make this easier to follow.

Mortgage | S$1,430 |

Town Council Fee | S$80 |

Property Tax (S$744 per year) | S$62 |

Maintenance & Insurance (S$600 a year) | S$50 |

**Total Monthly Costs: S$1,622**

So now that we have the upfront and monthly cost, let’s take a look at what the Buyers have to start with in terms of their investment setup.

### The Buyers’ Investment Setup

Since S$75,000 from the CPF OA has been used for the down payment, the Buyers are only left with S$45,000 in their CPF OA.

We will assume that the Buyers will use their CPF OA income to pay for the mortgage so we will deduct the mortgage from their CPF OA contribution.

This is what their CPF OA situation looks like:

Remaining CPF OA | S$45,000 |

Remaining CPF OA Contribution (Monthly) | S$1,330 |

As for the cash. They spent all of their cash on hand on the down payment, but will have quite a bit of their income left over to invest. Given that they have S$6,303 after their other expenses, the town council fee, property tax and maintenance is a really tiny portion of their monthly expenses.

Remaining Cash | S$0 |

Remaining Investable Cash Flow (Monthly) | S$6,111 |

The buyers will be investing both their CPF OA (in STI ETF) as well as their remaining cash (in Bogleheads 3-Fund Portfolio). Here are the return assumptions:

Real Return for CPF OA Investments | 5% |

Real Return for 3-Fund Portfolio | 7% |

CPF OA Investments will follow the investment rules of the CPF Investment Scheme: Only 35% of the CPF OA funds that are above S$20,000 (per person) will be invested in STI ETF.

The 5% real returns for the STI ETF is based on my returns analysis of the STI ETF with the assumption that inflation will be around 2%.

We will run the simulation over 35 years (the life of the mortgage) that should already give us a good idea of whether the Buyers are ahead or the Renters are. So let’s take a look at the net worth of the Buyers!

### Buyers’ Net Worth Over Time

The net worth of the buyers will make up of 3 components:

- CPF OA Balance
- Investment Portfolio Value
- Net Property Value

This should be quite self-explanatory. We will assume that the property has 0% real appreciation throughout the 35 years, which means that at the end of the mortgage, the property will be worth exactly S$500,000 which is the purchase price.

So what does the net worth look like? Here’s the result:

Wow! Based on the above assumptions, at the end of 35 years the Buyers end up with a net worth near S$12,500,000!

The majority of the networth is made up of their investments, not the property and not the CPF OA. This is due to the massive difference in real return that the Buyers are getting out of the 3-Fund portfolio.

Another neat thing to note, you can see that the property value is only a tiny fraction of the Buyer’s net worth. Even if the property value goes to 0 at the end of their lease, it wouldn’t even matter much, it’s so insignificant compared to the rest of their wealth!

That’s really cool.

Although, this is an amazing result on its own, it only matters if it’s better than the Renters’ result. So let’s take a look at that right now shall we?

## Financial Analysis for Renting

The benefit that the Renters get here is that there are no significant upfront cost compared to the Buyers so we’ll assume that this portion is effectively S$0.

As for the monthly expenses, there isn’t much aside from the rent, which is S$2,200 per month! Clean and simple!

So let’s just get to the investment setup.

### The Renters’ Investment Setup

The Renters has managed to keep all of their existing CPF OA balance of S$120,000 for CPF Investment Scheme.

Since they also do not have a mortgage to pay, they get to keep all of their monthly CPF OA contribution in their OA and invest it.

This is what the Renters’ CPF OA situation looks like:

Starting CPF OA | S$120,000 |

CPF OA Contribution (Monthly) | S$2,760 |

For the cash portion, they also did not need to pay the down payment and thus can use that money to start investing. However, as the rental cost is higher than the mortgage payment (and they cannot use their CPF funds to pay for rent) they have much less cash outside of the CPF to invest with.

Remaining Cash | S$38,100 |

Remaining Investable Cash Flow (Monthly) | S$4,103 |

So the benefits for Renters is that they start with much higher capital for investments but their cash flow into their 3-Fund portfolio outside of their CPF is much lower than the Buyers.

Assuming that the rate of returns of investments that they get for CPF OA and 3-Fund portfolio is exactly the same as the Buyers, let’s take a look at what their net worth looks like after 35 years!

### Renters Net Worth Over Time

For the Renters, their net worth are only made up of 2 components since they do not have a property:

- CPF OA Balance
- Investment Portfolio Value

That’s pretty straight forward, so let’s just take a look at the result of the simulation:

Well, well, well. This is a surprising result.

At the end of 35 years of renting, the Renters ended up with a net worth close to S$10,000,000. Although this is still impressive, this is around **20% less** than the Buyer’s net worth – even when we assume that the property itself will end up worthless!

How is the result so different?

Well let’s bring the results together to see where the Renters went wrong!

## Bringing the results together

How did the Renters do so much worse than the Buyers?! Based on all the pros and cons, I would have assumed that the results would be much closer and I even entertained the thought that Renters would come out on top since they get to have such a head start in their investment portfolio.

After looking at the data, there is one main reason why the Buyers had the upper hand, and it had nothing to do with the value of the real estate itself. The main advantage was:

The Buyers get to use the lower-returns CPF OA funds to pay for the mortgage leaving more cash outside of CPF to put towards the higher-return 3-Fund Portfolio.

That’s it. Although the Renters got a bit of a head start, the amount of cash that the Buyers had to fork out was certainly not enough to make the head start significant enough.

The majority of the upfront cost for the Buyers really came out of their CPF which offered lower return potential whereas all of the rent that the Renters paid came out of the funds they could have used to invest in higher return investment vehicle.

Let’s take a look at how long it took for the Buyers to overtake the Renters in terms of net worth:

If we look at the net worth including the property value, the Buyers actually caught up with the Renters within 15 months, less than 2 years. This is because the rent that the Renters pay basically disappears but the mortgage the Buyers pay go to build equity in the property and thus increasing its net value.

But since the property isn’t really liquid, let’s take a look at the liquid net worth and how long it takes for the Buyers to catch up to the Renters:

Now it looks a bit better for the Renters, the Buyers only start performing better than the Renters in terms of liquid assets (CPF OA + Investments) after **127 months**, a little over 10 years.

But that doesn’t change the fact that after 10 years, the Buyers begin outpacing the Renters on liquid assets as well.

## Conclusion

So as it turns out, the conventional wisdom is right afterall. Well, now we know!

I believe that this was done by design and is the reason why the CPF was structured this way. It encourages helps the population to buy and own property and in a way makes it a bad financial decision to leave the money inside instead of using it to buy a property.

This even means that the Buyers could potentially upgrade their unit every 10 years and still come out on top financially since at Year 10, they have equivalent liquid asset to the Renters while they also have equity in the house which can be sold and used as down payment for a larger property.

Well I hope that this was as interesting for you as it was for me to put together!

This was very HDB focused, but if you’d like to see a similar analysis for Private Property (I feel that the outcome will be similar, but I can’t be sure) do let me know in the comment section below or send me a tweet @firepathlion.

If you enjoyed this post and think that you have friends that would enjoy it too, I’d really appreciate it if you helped to share this post with them!

Until next time!

FPL

Hi fpl,

As a renter what is the next best choice to invest my CPF OA besides STI ETF? All the unit trusts seem to have high fees.

Thanks

cc

At the moment, besides STI ETF, an investment option for CPF OA with the lowest fee with a passive investment strategy that will give you broad exposure to the global stock market might be Endowus. Take a look into them and their investment strategy. The total expense ratio comes up to be about 0.9%, not low compared to STI ETF, but you get better exposure and better growth potential, yet it’s definitely lower than other Unit Trusts available where fees are at least 1.5-1.75% (which is ridiculous.)

Very interesting. I’ve been searching up and down for something better diversified for my cpf oa (not hdb). I will look into Endowus. 0.9% fee is 0.6% better than sti etf. Worth it for a more diversified + likely >2% higher return from an IWDA equivalent fund for cpf.

You mean 0.9% is 0.6% worse than STI ETF as that charges a 0.3% expense ratio, however you’re correct that it would still be worth it if the global exposure produces a return that is higher than that difference (which is likely will.)

This is also why I personally only hold around 20% of my portfolio in STI ETF (even then I’m thinking to rebalance down to just 10% as my portfolio size grows as I only need this portion of my portfolio to provide currency stability for a year or so of local spending.)

As for you analysis in the article, what return should CPF OA investment have to make renting a better decision than buying hdb?

*Addendum:* I forgot to also adjust the returns that the Buyer get from investing their CPF funds. After adjustment, the renter will need to have MORE return on CPF OA than the returns on non-CPF funds in order to outperform the buyer – which I think is extremely unlikely. If you can achieve high returns within CPF, you’ll get higher returns outside as you have more investment options available to you. Plus as rental prices will go up over time, the renter must continue to make rent payments while the buyer can stop paying the mortgage after 35 years and not have to worry about having a roof over their head.

This is due to higher rental cost and extremely low interest rate for mortgages in Singapore. It really tips the scale in the buyer’s favour, buyers are essentially paying nothing for the loans they are taking from the bank at the moment. The majority of the mortgage payments are going to pay for the equity within the house itself rather than paying the bank.

Would the result change dramatically if you change the individual’s income level? The assumption was 12K gross across 2PAX. What happens when you change it to say, 20K in a 15-5 split, or even a 20-0 split?

Hey d! Thanks for reading! I don’t believe that the results would change dramatically if the mortgage payment is covered by the CPF OA funds of the couple. However, one thing that would change the results would be if the renters were able to invest their CPF OA funds into higher-yielding investment vehicles that generate higher than 5% real return. Some RoboAdvisors that provide access to the globally diversified portfolios are starting to become available for CPFIS investments, so that could turn the tide in the Renters’ favour.

Hi FIRE- Path Lion, I am in the midst of decision, and would like to seek your advice:

– 2 PR, combined income SGD 10k, OA only SGD 25k per pax

– Currently renting a master bedroom beside MRT station (SGD 1k per month)

– Plan to buy a resale HDB to stay 7-10 yrs

Option 1: Buy (Target 370k resale HDB)

– High upfront (25% dp+5%absd), mainly with cash due to low OA, and this cash can be invested in place with higher return

– Given my budget, it is hard to find good HDB near MRT, even for 3BR

– Given the resale HDB price trend, I wonder if I can cover my loan interest paid + inflation+oppo. cost for dp when I sell the HDB

– Of course the good point is that I can use my monthly OA to part for installment, free up my cash (supposed for rent) for investment, and I own the whole house myself

Option 2: Continue to rent (SGD 1k per month)

– More flexibility, better location

– DP can be used to invest with %

– Oppo cost for rent (assuming can generate interest > OA)

– Need to deal with owner (so far ok for me)

To clarify, I will still buy HDB down the road, either when I got my child, or the OA is fat enough to use. However if the price of HDB remains low, I guess it is good to delay first?

Old people always says that ” You need to pay monthly regardless you buy or rent, so why don’t you buy”. However when I realized that the most of my monthly installment for 1st 5 yrs will be paid to interest, I don’t get much capital back when I sell the HDB, so it makes no different

If we can certain that the HDB price will increase faster than typical investment (like what happened in China main city few yrs back), buying is the best option. Yet given the stagnant HDB price, I wonder which is a more prudent option to hit FIRE soonest. Thank you.