CPF For Home Loans Is A Bad Decision
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CPFOA savings are largely used for home loans, but it is best to incur high, risk-free interest rates by moving the money to the Special Account (SA).
Paying home loans using CPF seems like an attractive deal but may not be one of the best financial decisions.
Most Singaporeans prefer using their CPF to pay monthly housing installments since it feels like CPF is the money they can’t touch.
But, the interest in a CPF Original Account (OA) incurs 3.5% interest, while if the money is moved to the Special Account (SA), then it incurs up to a 5% interest rate.
Hence, it is wiser to not use the CPF money for monthly installments but instead move it to the SA for a high, risk-free interest rate.
Also, there is a withdrawal limit from the CPF OA for private property or residential property purchases.
There are high risks of reaching this limit if the monthly housing payments are automated from the CPF OA account.
What can you pay for using CPF?
Singaporeans can use their CPF to pay for education for their children, buy residential properties or invest in government-insurance schemes.
A survey shows that approximately 800,000 homeowners in Singapore use their CPF savings to pay off housing loans.
There are many advantages of using CPF to make monthly housing payments, and the first is having enough cash at home for other purposes.
Another advantage is when purchasing a home through an HDB loan.
An HDB loan requires a 10% down payment during the purchase, which can be paid in full using the CPF OA savings.
However, a bank loan requires a 20% down payment where 5% is to be paid in cash and 15% either in cash or CPF savings.
Also, those reaching retirement age can make housing loan payments using their CPF retirement account savings.
Such payouts will enable careful segregation of retirement income for personal savings or mortgage repayments.
Homeowners can use a housing usage calculator to calculate how much OS savings they can use to purchase a house.
The next factor to consider is the interest rate when taking housing loans.
HDB loans are fixed at 0.10% above the current CPF OA interest rate, which comes up to about 2.60%.
In contrast, bank loans follow a floating interest rate that is based on the Singapore Overnight Rate Average (SORA) Interest Rate benchmark.
Reasons to not use CPF to pay for home
There are many disadvantages to using CPF to pay for home purchases or loans.
One of the disadvantages of using CPF is that if homeowners wish to resell the house, then they need to return the amount (including interest) to their CPF savings.
Any outstanding housing loans need to be repaid upon selling the house.
Another important reason is losing out on retirement funds when you use CPF to pay for housing loans.
The CPF savings form the foundation for retirement plans for most Singaporeans.
But, when the CPF saving is used every month, you lose your future savings that may come out of the 3.5% interest rate when kept in the CPF OA account.
Remember that there is also a CPF withdrawal limit if you buy a property through an HDB loan.
There are high chances of reaching the limit if automatic monthly payments are enabled in your account.
Hence, you must check your OA account regularly to avoid facing the risk of not having money for the next mortgage repayment.
Homeowners should provide full contact details, download CPF mobile, and enable email notifications to get updates on their CPFOA accounts.
Also, if you are taking a bank loan, then you must know that bank loans don’t have a fixed interest rate over the entire tenure of the mortgage.
Banks may offer attractive interest rates for the first few years, but interest rates are bound to increase sharply after the fourth year.
The situation is exacerbated if you don’t check your OA account regularly and keep track of how much money is exiting your account for monthly mortgage installments.
Homeowners end up paying more than what they ought to if these rates and the CPF account are not regularly monitored.
Corporate service buyers can benefit from asking simple questions about the complexities of using CPF OA to make informed decisions.
Should Your CPF Ordinary Account (CPFOA) Be Used For Housing?
Using CPFOA to fund housing loans may not be your best financial decision.
Bear in mind that one of the major reasons for a CPFOA is to support your retirement plans.
This is why CPFOA savings incur anywhere between 2.5% to 3.5% per annum interest rate without additional transactions for retirement costs.
Hence, using this money for a property purchase will lead to major savings being lost on loan repayments.
Also, the CPF Board has employer obligations rules set for employers to contribute to their employee’s CPF accounts, hence more money to incur higher interest.
CPF contributions are also payable on one-time reimbursements of relocation expenses if the employee moves to the country for employment with a locally based company.
Should I wipe out my CPF for HDB?
No, you shouldn’t, and also, you can’t!
In fact, the old rules demanded a total wipe out of the CPOA accounts for HDB loans, but that’s not the case anymore.
The new rules allow homebuyers to keep a minimum of $20,000 in their CPOA for getting HDB loans.
Here’s why wiping out your CPF for HDB is a bad idea:
- You will not have cushion money to cover mortgage repayments in case of emergencies.
- When you move your OA savings to SA, you incur a higher interest rate of about 5% per annum.
- You can also invest the CPFOA money in other investment products such as blue chips, Exchange Traded Funds, gold, government derivatives, and more.
Is it better to use CPF or cash for housing?
If there’s extra cash in hand, it is always better to use cash for housing instead of CPF.
While using CPF savings can leave extra cash in hand for other purposes, CPF OA savings can give you up to 3.5% interest rates per annum.
Also, when you use CPF money to buy a house, you will have to pay all outstanding loans and the housing grant back to your CPF account during a resale.
How the CPF rule change affects you
The new CPF rule allows homebuyers to keep a minimum of $20,000 in their CPF accounts when taking an HDB loan.
The new rule enables homebuyers to save some of their CPF money for emergency monthly repayments, move money to SA or invest elsewhere.
Pros And Cons of Using CPF Or Cash
Pros of using CPF
- More cash in hand for other expenses
- More investment opportunities with more money in the CPF account
- It can be used to make other fee payments such as stamp duty on mortgages and others
Cons of using CPF
- Using CPF can affect retirement plans with lesser savings
- Have to return CPF money with accrued interest upon resale of the property
Pros of using cash
- CPF OA savings will incur interest of 3.5% yearly and, if moved to SA, can earn up to 5% interest
- Money in CPF OA can be used for other investment opportunities
Cons of using cash
- Shortage of hard cash for other emergency purposes
What can the different CPF accounts be used for?
The CPF accounts can be used for other purposes other than buying a home.
The CPFOA savings can be used for insurance schemes such as the Dependants’ Protection Scheme, which gives financial protection to you and your family in case of permanent disability, terminal illness, or even death.
Loved ones can send cash top-ups to the SA accounts of loved ones to get a tax relief of up to $8000.
CPF Withdrawal Limit
Currently, the withdrawal limit is capped at 120% of the Valuation limit.
The Valuation limit is the purchase price or the valuation amount, whichever is lower.
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