Should You Use CPF to Pay Off Your Home Loan?
For every $100 in salary you earn each month, up to $20 “mysteriously” disappears en route to your bank account. The pain of that vanishing money is very real, but it is actually for your benefit. That $20 is diverted to your CPF accounts—with your employer also having to throw in an additional $17 on top. This is the government’s way of helping its citizens save for their retirement.
All in, up till the age of 55, you get $37 in your CPF accounts for every $100 you earn. Out of this amount, $21 to $23 goes to your CPF Ordinary Account (OA), with the remainder being split between your CPF Special Account (SA) and MediSave Account.
As time goes by, it can be easy to forget about this “invisible money”. In fact, that’s the whole point—having people forget about it (while still contributing to it) so that it’s there for them when they need it.
But there’s more to it than that. Although the idea behind CPF is for retirement, you can use the funds there—before the standard withdrawal age of 55—for select purposes. Specifically, you can use the money in your OA to pay for housing, educational expenses, and even to fund investments.
Since this is PropertyGuru, we are going to discuss the first use—using the funds in your OA to pay for your home loan. And while many Singaporeans don’t hesitate to tap their OA, but we advise you to think differently. There are multiple considerations in play here, and that’s what we will be going over in this article.
First, a quick recap on the “rules” for using your CPF monies for housing-related costs.
The Rules for Using Your CPF OA for Housing Costs
Broadly speaking, you can use the monies in your CPF OA for:
- Downpayment costs
- Monthly loan repayments
- Home Protection Scheme premiums
- Stamp duties and legal fees
The maximum amount you will be able to withdraw mainly depends on three factors: loan type, property type, and your CPF balances.
If you take an HDB loan for a new HDB flat, there are no limits. If you take an HDB loan for a resale HDB flat, there are also no limits, but only provided you have more than the Basic Retirement Sum (BRS) in your CPF accounts in future. If you don’t have that amount, then the maximum limit will be the lower of the purchase price or market value—officially called the Valuation Limit.
Now, if you take a bank loan instead, your maximum withdrawal amount is 120% of the Valuation Limit, which is referred to as the Withdrawal Limit.
And there’s one more factor—the remaining years on the lease. It must be able to cover the youngest buyer (since you can jointly purchase a property) up till 95 years old. For example, if you are 35 years old, there must be at least 60 years remaining on the lease. If not, the maximum amount will be prorated accordingly.
Yes, it can get a little complex. If you’re still unsure, simply use CPF’s official Housing Usage Calculator to find out exactly how much you are allowed to withdraw.
Now that you know how you can use your CPF to pay your home loan, let’s move on to whether you should. The most important thing to consider here is opportunity costs.
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The opportunity cost of using CPF for housing
The concept of opportunity costs is fundamental to economics. This “cost” is essentially the gain you give up by choosing a different option. In our case, the opportunity cost of using your CPF OA to service your home loan is the return you would have been able to get by keeping it in your CPF OA, which as of July 2020 is a guaranteed 2.5% per annum.
This means that if your mortgage rate is less than 2.5% and you withdraw money from your CPF OA to service the instalments, you are in fact losing money—without even realising it. For example, if your mortgage interest is 1.5% per annum, you would be essentially giving up a guaranteed 2.5% a year return to pay off a 1.5% cost. It doesn’t make economic sense.
Here’s Paul Wee, Managing Director at PropertyGuru, explaining this concept:
And with floating rate mortgages being priced at around 1.4% to 1.8% as of June 2020, it currently does not make sense to use your CPF OA account to service your home loan. Of course, this may change in the future. But as the pandemic is expected to keep interest rates depressed for an extended period, don’t expect this to flip in the short term.
Now, you might be thinking that the difference of 0.7% to 1.1% per year—the current estimated opportunity cost—is no big deal. But the true cost is even higher than that.
Thanks to your CPF SA, the true opportunity costs may be even higher
Another thing to account for is that you are allowed to transfer money from your CPF OA to your SA, which currently carries a minimum guaranteed interest rate of 4% per annum. The more you tap your CPF OA, the less you have left to transfer to your SA.
Now, the opportunity cost has potentially increased to 2.2% to 2.6% a year—a significant difference. To put things in perspective, $100,000 at those rates would turn into $172,295 to $189,970 after 25 years (the standard mortgage tenure). That’s no paltry sum, especially when you consider that you would likely pay far more than $100,000 over the course of your mortgage.
But that’s not all. When you use your CPF OA money to pay your home loan, your “actual” costs may in fact be doubled.
The need to repay accrued CPF interest doubles your actual costs
If you use your CPA OA monies to fund your property, you will have to pay back the amount to your CPF account if you sell the property. This makes sense—if you didn’t have to, then there would be a loophole allowing you to indirectly withdraw from your CPF OA for whatever purpose.
But here’s the catch. Not only do you have to repay the “principal”—the amount you withdrew—you must also repay the accrued interest as well. As a simple example, let’s say you withdrew $50,000 from your CPF OA for a downpayment, and then sold your property 15 years later. Assuming the CPF OA interest rates stayed constant at 2.5% per year, after 15 years you would have to repay a total of $72,414.
And remember, this is not an opportunity cost, but a very real out-of-pocket sum that you must bear—not including the opportunity costs discussed above! So, in effect, your “actual” costs are doubled.
Now, of course, if you sell the property, repay your CPF OA, and then immediately buy a new property (again using the CPF OA), it might not matter as much. But if you want to sell it for any other purpose, it is an expensive cost to bear.
Paying cash is better, but real life is nuanced
The numbers clearly demonstrate that it may not always be a good idea to repay your home loan from your CPF OA. The theory is sound, but reality is never as simple. There are numerous reasons why someone might have no choice but to tap into their CPF OA for their housing costs, and we understand.
All we can advise is that, if possible, to minimise the amount you withdraw. Not only will this pay off in lower costs, but you will be thankful for it come retirement. Furthermore, your CPF OA can also act as a payment buffer for your home loan in case anything unexpected—such as sudden job losses—happen.
Here at PropertyGuru, our goal is to make our readers the most educated and informed home buyers out there. From detailed analyses (such as this one) to simple tips and tricks, our home financing guides have you covered. You can even get advice tailored to your specific situation by speaking to one of our Home Finance Advisors.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.