4 Reasons You Should Not Use Your CPF To Pay For Your House

[Updated 2019] Get to know 4 Reasons why not to buy a house using your CPF in Singapore.
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Most Singaporeans would generally use the monies from their CPF Ordinary Account (OA) to make the downpayment of their home, be it an HDB flat or private property.

Whilst there's nothing wrong with that, here are 4 main reasons why using your CPF to fund your home isn't the best idea. 

  1. Using CPF To Buy A Home Means Lower Savings In The Future

  2. Hitting Withdrawal Limit For Using CPF To Buy Condo

  3. Automatic Housing Loan Repayment Via CPF Can Lead To Missed Savings

  4. Using CPF To Buy Condo Can Result In Wasted Money

In case you didn't know, the funds in your CPF Ordinary Account (OA) can be used to pay for residential properties and fund the education of your children, as well as to subscribe to government-approved insurance and investment schemes.

In particular, Singapeans can use the money saved in the OA to fully or partly finance the downpayment for their residential property. When buying HDB flats, buyers need to pay a 10% downpayment based on the home’s purchase price, while up to 90% (loan-to-value) can be borrowed from HDB.

Since mid-May 2019, new rules have been implemented for HDB housing loans. If a property can cover the youngest buyer until less than 95 years of age, the loan-to-value (LTV) limit of 90% will be pro-rated according to the extent that the remaining lease can cover the youngest buyer to age 95.

If the property can cover the youngest buyer until he or she is 95 years old or older, the LTV limit of 90% will apply.

Regardless of which category you fall under, if you’re using a HDB housing loan, your loan tenure will be the shortest of the following:

  • 25 years
  • 65 years minus the average age of the buyers
  • The remaining lease at the point of purchase minus 20 years

But When buying private housing or taking out a mortgage loan from a commercial financial institution (not HDB), the loan-to-value (LTV) only amounts to 80% of the home’s selling price. As such, the remaining 20% should be paid with a combination of savings in your Ordinary Account and cash. You also have the option of paying the remaining 20% in cold, hard cash.

Apart from the initial downpayment, Singaporeans have the option of having their monthly housing loan repayments deducted from their OA. This option is available for mortgages obtained from HDB or a commercial bank.

Moreover, the Ordinary Account can be tapped to pay other related fees incurred when buying a residential property, such as stamp duty on Option to Purchase (OTP), stamp duty on mortgage, Additional Buyer’s Stamp Duty (ABSD), conveyancing legal fees, caveat registration fees, Title search fees and the Home Protection Scheme (HPS) insurance.

Given that monies in your CPF accounts have limited usage, and many people consider their CPF savings as money you can’t utilise while they’re still in the prime of their life, most Singapore citizens use it as much as possible whenever they could, especially using CPF to buy a condo or HDB flat.

However, there are several strong arguments why it shouldn’t be used to fund your home purchase. That it’s better for you to rely on cash instead. Here are four key reasons why it isn’t advisable to use CPF to buy a condo or an HDB flat.

1. Using CPF To Buy A Home Means Lower Savings In The Future

One key reason you may pass up on using your CPF to buy an HDB flat or condo is that you lose out on having a larger retirement fund in the future. Instead of partly paying for a house, you can maximise your retirement funds by voluntarily diverting money from your Ordinary Account to your Special Account (SA).

While the latter can only be used for old age and investment in retirement-related financial products, it benefits from a higher interest rate of up to 5.0% compared to up to 3.5% for OA. Please keep in mind that of the 3.5%, 1.0% only applies to a maximum of $20,000 in the OA.

But given that you will be shifting nearly all money in OA to SA, you will need to fund your property purchase mainly in cash when paying the down payment and servicing the monthly mortgage installments.

While this appears hard, it’s not an impossible feat, especially if you’re buying a build-to-order (BTO) flat. For instance, under the Housing Board’s BTO sales exercise in November 2018, a three-room flat in the mature town of Tampines near an MRT station costs from S$220,000, inclusive of grants.

Assuming you borrowed S$198,000 to avail of the 90% loan-to-value of an HDB Concessionary Loan and you intend to repay that in 25 years at an interest rate of 2.6%, the monthly instalment is just S$900. Assuming that this amount is equally shared by a husband and wife, each will only need to repay around S$450 per month.

It may take tremendous willpower to repay your housing loan purely with cold cash instead of CPF, as you need to prudently manage your finances and only spend on what’s essential. But your discipline will eventually pay off.

If you took this route and shifted monies in your Ordinary Account to Special Account, it’s possible to get a hefty retirement fund of at least S$1 million when you reach 65 years old or even 45 years old. This potential huge windfall is thanks to the compound annual growth rate (CAGR), especially if you consistently maximised the mandatory and voluntary contributions of S$37,740 per annum.

However, the trade-off for this sizeable nest egg is you can’t utilise your OA savings for purchasing a property and paying for the monthly mortgage instalments.

2. Hitting Withdrawal Limit For Using CPF To Buy Condo

Another reason why you shouldn’t use your CPF savings to buy a private condo is that you can deplete your Ordinary Account to the point of hitting the CPF withdrawal limit.

If you bought a BTO flat, the withdrawal cap doesn’t apply to you. You can use your Ordinary Account to pay for your property purchase and monthly housing loan instalments until money in the OA runs out. By then you need to pay in cash.

But if you bought a resale HDB flat or private property like a condo, there is a ceiling on the maximum amount you can take from the Ordinary Account to fund your home purchase. This withdrawal limit also takes into account not just the principal amount of the mortgage but the interest you pay as well.

Nonetheless, you can be exempt from the limit when you meet the Basic Retirement Sum, which is currently at S$90,500. However, please note that if you only set aside the Basic Retirement Sum, you will only be entitled to the lowest monthly lifelong payout of S$660 to S$720 when you retire. If you want to compute your withdrawal limit, please visit this link.

Since mid-May 2019, new rules have been put in place for both private and public housing. If the property can cover the youngest buyer to less than 95 years of age, the Valuation Limit will be pro-rated based on the extent that the remaining lease can cover the youngest buyer using CPF to age 95. This Valuation Limit basically determines what your CPF housing withdrawal limit will be.

If the property is able to cover the youngest buyer until he or she is 95 years or older, the use of CPF funds will be subject to the Valuation Limit, or the applicable withdrawal limits if they are higher.

Regardless of which category you fall under, the use of CPF funds will be allowed only if the property’s remaining lease at the point of purchase is more than 20 years.

One possible risk for automatically repaying the monthly housing loan instalment via CPF Ordinary Account is that the home buyer may neglect to check how much money remains in their OA.

And in this situation, one thing you don’t want to happen is to get a mail from the Central Provident Fund informing you that you cannot longer use your Ordinary Account for hitting the cap. To make matters worse, you then learn that you barely have enough leftover cash on hand to service your next monthly mortgage instalment. This could lead to late payments, which in turn will result in penalties, or worse your home might get foreclosed if you default on repaying your housing loan.

3. Automatic Housing Loan Repayment Via CPF Can Lead To Missed Savings

Another potential danger of neglecting to keep track of your housing loan repayments is that you could miss on chances to lower your monthly mortgage instalments if you took a loan from a commercial bank instead of HDB.

This is because there are no housing loans in Singapore, wherein the interest rate doesn’t change over the entire tenure of the mortgage. Typically, housing loans offered by banks here only have a fixed coupon for the first three years or five years.

Thereafter, it shifts to floating rate based on some financial benchmarks like the Swap Offer Rate (SOR), Fixed Deposit Rates (FHR), Mortgage Rate Plus (MRP) and Singapore Interbank Offered Rate (SIBOR). For laymen, this means the interest rate of your housing loan can increase or fall over time depending on the local and global economic situation.

More importantly, please keep in mind that the interest rates of housing loans in Singapore usually increase sharply starting from the fourth year. Sometimes, a financial institutions or a mortgage broker will suggest a housing loan package with a low coupon initially that increases eventually. These lenders are doing so on the assumption that you are financially literate enough to refinance when the interest rates start increasing significantly.

However, when you neglect to monitor your monthly loan instalments and the prevailing interest rates in the market due to being fully complacent on the automatic CPF deduction, you may forget to refinance when interest rates are on the uptrend.

For instance, if you’re on a SIBOR-based mortgage package, you should have refinanced earlier this year as the benchmark has increased sharply in 2018 and the Singapore Interbank Offered Rate is expected to reach a 10-year record high.

From 2009, SIBOR fell to historic lows and hovered at that level for many years. This led to low interest rates for housing loans and many homebuyers took up mortgages with floating coupons. But now that the benchmark is rising, monthly loan repayments for SIBOR-based mortgages are also increasing, thus you should refinance to secure a lower interest rate.

But if you don’t frequently check how much is getting deducted from your CPF Ordinary Account, then it’s possible that you could have been paying more than you ought to. This is a bad move for property investors, as the higher interest cost will slash your earnings when you resell your home after holding it for a number of years.

4. Using CPF To Buy Condo Can Result In Wasted Money

If you tap your CPF to buy a home, instead of using cash, you are wasting money. This is because, money stashed in your CPF accounts, are earning high interest rates with zero risk. The CPF interest rates are even greater that the interests accrued by fixed deposit accounts offered by Singapore banks, which only comes with interest rates ranging from around 1.4% to 1.9% per annum as of 1 November 2018.

Paying your monthly instalments in cash prevents money wastage, unless you have a business or venture that earns a larger Return on Investment (ROI). So unless you have a more lucrative use for your on hand cash, it’s better to utilize it to pay for your home instead of utilising your saving in your CPF Ordinary Account.

Most of the time, we opt to tap our CPF savings rather than cash because we use the latter to finance inessential stuff, like overseas trips and holidays, eating out at fancy restaurants, jewellery or the latest gadgets and gizmos.

For the financially literate, these things are not needed, and it’s better to be live frugally than have a luxurious lifestyle then go bankrupt later on. If you use your hard-earned money for such things, you’re missing out on the OA’s interest rate of up to 3.5% or the higher 5.0% rate for the Special Account.

But if you are tapping your CPF savings because your cash on hand is used for business ventures or investments with stellar returns surpassing the CPF interest rate of 3.5% or 5.0%, then continue to do so.

So should you use your CPF to buy a private property?

The aim of the government when they established the CPF is to provide a sufficient nest egg for Singaporeans when they retire, as well as ensuring that they have enough savings for important stuff like education, housing and healthcare.

The CPF OA is intended to be used to partly fund your home purchase, so there’s really nothing wrong in using CPF to buy a condo or an HDB flat.

However, having your monthly housing loan instalment deducted automatically from your CPF savings can make you lazy and complacent, leading to losses and missed opportunities to earn.

Basically, those who struggle to understand financial matters like budgeting, refinancing and investing are better off paying for their home in cash. If you pay in cash, you will be better involved and you will pay more attention to the details. Consequently, it is unlikely that you will hit the CPF withdrawal limit. In addition, there is a lower chance of being in the dark or not knowing that interest rates are on the uptrend or downtrend.

On the other hand, financial savvy types who fully comprehend the ramifications of using their CPF to buy a condo or HDB flat can tap their Ordinary Account should do so without worry. Consequences include sacrificing the risk-free CPF interest rates, and the fact that you need to return the accrued interest to your CPF account when you dispose the property.

If you’re one of those financial literate people, please feel free on using CPF to buy a condo or an HDB flat. But if you decide to utilise most of your CPF monies to fund your property purchase, please still make sure you have ample cash savings and have put in place adequate investment plans for your future.

Aside from this article, you may also want to browse our resale HDB flats or private condos for sale or rent. If you want to know about future property hotspots in Singapore that will benefit from ambitious government plans, check our AreaInsider.

If you need someone to assist you for a property deal, kindly engage a licensed property agent or query them instead via AskGuru.

 

To get more guides like this, check out PropertyGuru.

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