Should you Use CPF to Pay for your House?
Tommy: Dear, we can finally buy our own house and stay together!
Lucy: Yes! I see that there is an on-going application for the BTO in Toa Payoh area. Let’s apply now! How do we do it?
Tommy: Simple. Just go to HDB’s website, apply for the HDB Loan Eligibility (HLE) and pay S$10.
Hold up. If only buying a house was that easy!
If you are intending to use your CPF savings to pay for your house, you would probably have heard of CPF accrued interest. But, what exactly is it, and how does it affect you?
What is Accrued Interest?
Accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing. The interest is computed on the CPF principal amount withdrawn for housing on a monthly basis (at the current CPF Ordinary Account interest rate) and compounded yearly.
Only the funds in your Ordinary Account (OA) can be utilised to pay for your home. For those aged 35 and below, 23% of your salary goes towards your OA. For those aged 55 and below, your total monthly CPF contributions will be 37% of your monthly salary, of which 17% is contributed by your employer and 20% by yourself.
Do note that CPF housing grants that you receive will be subjected to accrued interest as well.
Breakdown of Fees Payable
Latest statistics from the Ministry of Manpower show that the median gross monthly income from work of full-time employed residents is $4,563 for the year of 2019.
Assuming that both Tommy and Lucy are drawing the same monthly income of $4,563 and are under the age of 35, they would have amassed a combined amount of $104,590 in their OA after working for 4 years. As their average monthly household income exceeds the eligible amount for the Enhanced CPF Housing Grant (EHG), they will not be receiving it.
A 4-room flat during the Feb 2020 Toa Payoh BTO exercise has an average price of $530,000 and an estimated waiting time of 4 years.
Here is a breakdown of the fees they have to pay before getting the keys to their dream home:
Assuming all of the above payments were made on Day 1 of the purchase, the amount of interest accrued during the 4-year waiting period surmounts to:
Upon collection of keys, Tommy and Lucy decided to wipe out their entire OA savings to reduce the loan amount.
This loan amount breaks down to a monthly payment of $1,665 for 25 years, at a concessionary interest rate of 2.6%. 10 years down the road, Tommy and Lucy decided to sell their HDB flat and move to a new condo. The average transacted price of a 4-room HDB flat at Toa Payoh Central is $780,000 (Wow! $250,000 profit based on recent prices. Imagine what the price will look like 10 years later!)
At this stage, they would have paid $199,750 of mortgage and still have an outstanding loan amount of $247,884.
Scenario A (Paying mortgage with CPF)
Scenario B (Paying mortgage with cash)
Comparing the 2 scenarios, Tommy and Lucy would have $220,000 more cash proceeds and returned $24,000 less accrued interest by paying their mortgage with cash as compared to CPF. That translates to $24,000 more liquid cash! We are already looking at an accrued interest of $61,000 over 10 years. Can you imagine how much more it would be 10 years later?
The amount of cash proceeds from the sale also allowed them to comfortably pay for the downpayment of their new condo, while still having a healthy amount left to save for rainy days!
Here comes the question. Should you use CPF savings to pay for your house?
From the above example, paying your mortgage with CPF may pale in comparison to cash. However, there isn’t a one-size-fit-all solution for everyone. If you have plans to upgrade your property in the future, and also the ability to pay for your mortgage in cash, it may be a better option for you to free up more cash from the proceeds of the sale. That said, if you have found your dream home and you intend to stay there for the rest of your life, this wouldn’t matter as the accrued interest would be part of your retirement fund!
Wonder how much of your sales proceeds have been taken away by the accrued interest of your CPF? Contact us for a free property health check now!
References:
