Overview

The CPF Housing Scheme allows us to own properties using our CPF savings for its financing needs. It has become a norm for most of us to use CPF savings to purchase our home, instead of our available cash.

However, for business owners, freelance workers or odd job workers, who have little or no CPF contributions, using cash for loan repayments seems to be the only option.

The slang term “cash is king” simply reflects the belief that cash is more valuable. We are often reluctant to use it for housing financing and would prefer to hold available cash on hand for other purposes or contingency.

In addition, the savings in our CPF accounts does not allow free usage until our retirement age, many of us may also feel uncertain and insecure in leaving our money there. Therefore, whenever the opportunity allows for CPF usage, most people would make full use of it, especially for buying property.

Nonetheless, using CPF for housing will only be beneficial to people who are financially savvy to grow the wealth with the available cash, where every cent invested will bring more returns than the CPF interest can offer. Otherwise, it would be better to let our savings grow in the CPF accounts.

Things to Know about Using CPF Savings to Buy House

What is CPF Housing Scheme?

There are 3 different CPF Housing Schemes.

Public Housing Scheme

The Public Housing Scheme (PHS) allows us to use CPF Ordinary Account savings to buy new or resale Housing and Development Board (HDB) flats.

Private Properties Scheme

The Private Properties Scheme enables us to use CPF Ordinary Account savings to buy or build private residential properties in Singapore for own occupation or investment.

Home Protection Scheme

The Home Protection Scheme (HPS) is an insurance by CPF board that protects CPF members and their families from losing the HDB flat in the event of death, terminal illness or total permanent disability.

For details on the CPF Housing Schemes, please refer to the CPF Board website at https://www.cpf.gov.sg/Members/Schemes.

What can our CPF savings be used to pay for our house?

We can only use the savings in our CPF Ordinary Account (OA) to buy a new or resale HDB flat and to buy or build a private residential property for occupation or investment.

In general, we can use it for the down payment on a property and the monthly mortgage repayments for both HDB and private bank loans.

• pay all or part of the purchase price of the property,

• service monthly mortgage loan instalments,

• pay the stamp duty and legal fees,

• other related costs such as flat upgrading cost (HDB), survey fees and construction loan instalments (private property).

Down Payments

If we are using HDB loan, up to 90% of the property value can be financed by HDB, while the remaining 10% down payment can be paid by our CPF savings (less the agreed deposit money that have been paid in cash to the seller).

However, if we take up a private bank loan, up to 75% of the property value can be financed by the bank. Of the 25% down payment, minimum 5% must be paid in cash, while the remaining can be paid using our CPF savings.

How much CPF savings can we use for the property?

The housing limits on the amount of CPF OA savings we can use is depended on:

• The number of properties (e.g. HDB flat/ private property) that we own.

• Buying a new or resale HDB flat.

• Whether the flat’s remaining lease can cover the youngest buyer, who uses CPF savings for the flat, to at least 95 years old.

(If the remaining lease of the flat cannot cover the youngest buyer to at least 95 years old, CPF usage will be pro-rated based on how near to age 95 the property’s lease can last him/her.)

• If we are getting an HDB or private bank loan.

Basically, we need to take note of the Valuation Limit and Withdrawal Limit.

1. New HDB flat using HDB Loan.

There is no limit in the use of CPF OA savings when buying new HDB flat with an HDB loan.

2. Resale HDB Flat and DBSS using HDB Loan.

When buying a resale HDB flat or DBSS with an HDB loan, there is no limit on the use of CPF OA savings if we have already set aside the Basic Retirement Sum in our CPF accounts.

Otherwise, we can only use up to the Valuation Limit.

3. All Residential Properties using Private Bank Loan.

We can use the CPF OA savings to finance up to the Withdrawal Limit (which is 120% of the market value of the property), if we have already set aside the Basic Retirement Sum in our CPF accounts. If not, we can only use up to the Valuation Limit.

4. 2nd and Subsequent Property.

 After setting aside the Basic Retirement Sum, we can use the excess savings in our Ordinary Account (OA) for second and subsequent properties.

The total CPF Withdrawal Limit allowed for our second and subsequent properties is capped at 100% of the Valuation Limit of the property.

5. Remaining Lease. 

We are not able to use CPF savings if we are buying an HDB or private property with a remaining lease of 20 years or less.

For more details on the regulations of CPF Housing Schemes, please refer to the CPF Board website at www.cpf.gov.sg.

Although it may seem like a norm to tap on our CPF savings for home purchases, does it mean this is the right way to go?

Is it better to use CPF savings to pay for our home?

This is a question that many buyers grapple with when deciding whether to use cash or CPF savings to finance the new home. Or how much CPF savings to be used for the payment of the property or to service the monthly mortgage loan? Let us discuss this issue by using a simplified scenario.

Scenario

Assuming that a buyer bought an HDB resale flat at $500k and $5k (maximum allowed) deposits has been paid to the seller as agreed. The buyer has taken the maximum 90% HDB loan of $450k for a tenure of 25 years. The buyer has to decide how to finance the remaining $45k down payment and the monthly loan repayments.

The Table above illustrates the 3 different options of financing the flat.

• Option 1 – All Cash.

A total amount of $662,453 cash, inclusive of $5,000 deposits payable to seller, will be used for the down payment and repayments of the mortgage loan from HDB over 25 years.

• Option 2 – Mainly CPF.

A $5,000 Deposits (mandatory cash) will be paid in cash, while the remaining down payment and HDB loan repayments will be using CPF Savings. A total amount of $657,453 CPF savings will be used for the flat over 25 years.

• Option 3 – 50% Cash and 50% CPF.

A total of $331,226.50 cash and $331,226.50 CPF savings will be used for the down payment and HDB loan repayments over 25 years.

Assuming the flat is sold 25 years later at a price of $700,000 after the HDB loan has been fully paid.

The growth in the CPF account and the amount to be refunded to CPF OA account are shown in the table above. The amount of CPF not used to pay for the flat (cash is used instead) is considered to have been saved in the CPF Ordinary Account. For simplicity, this computation of CPF savings is based on the prevailing CPF interest rate of 2.5% for Ordinary Account and does not include the extra or additional interest applicable.

For Option 1, the amount of CPF savings which is not used for the flat is saved in the Ordinary Account and has grown to $931,560 after 25 years.

In Option 2, The principal amount ($662,453) used from CPF and its accompanying accrued interest ($274,107) amounting to a total of $$931,560, must be refunded to CPF after selling the property. This is the amount of CPF savings that would have been grown in the OA over 25 years if it has not been used for the flat.

As the sales price is lower than the total CPF refundable amount, therefore, only the entire sale proceeds of $700,000 will be refunded to the CPF savings. There is no need to top up the shortfall.

As for Option 3, there was an interest of $134,919 earned in from the amount of CPF unused, resulting in the account growing to $461,145. However, as for the principal amount ($331,227) used from the CPF savings, a total amount of $470,415, including the accrued interest ($139,188), will be refunded to the CPF savings.

Let’s look at the pros and cons of the three options with the total assets generated after the sales of the flat 25 years later.

Option 1 – All Cash

Pros

• After selling the property, the entire sale proceeds of $700,000 in cash will go to the owner.

• The amount of CPF not used for the flat has continued to grow at an interest rate of 2.5% p.a., accumulating to $931,560 in the Ordinary Account.

• The total asset after selling the flat 25 years later has grown to $1.6m, inclusive of $700,000 cash and $931,560 CPF savings.

Cons

• Opportunity cost on the cash ($662k) for other investments over the 25 years. However, it does not commensurate the risks of investment and use of CPF savings, unless the investments can yield more than 2.5% of CPF interest rate.

Option 2 – $5k Cash, Mainly CPF

Pros

• By using CPF savings, the amount of cash ($657k) available could be used for other investments. Similarly, it is not be appropriate, unless the investments can yield more than 2.5% of CPF interest rate.

• More cash on hand – flexibility of usage. However, it will also depend on individual, whether will this extra cash be wisely saved or invested, or will it be just spent unnecessarily.

Cons

• The entire sale proceeds of $700k will be refunded to the CPF savings. There is no gain in cash to use after selling the flat.

• Lost the opportunity of growing the CPF amount at an interest rate of 2.5% p.a., which could have grown to $931,560.

• The total asset generated, which is only the sales proceeds of $700k, will be refunded to CPF account. Leaving nothing on hands.

Option 3 – 50% Cash / 50% CPF

As for Option 3, which is a partial usage of CPF for the payment and loan repayment of the property, the buyer will get somewhere in between the full cash and full CPF.

As can see from this illustration, the buyer will lose the growth on certain portion of the CPF used and will need to refund the CPF principal amount used with the accrued interest when the property is sold.

However, the buyer gets to maintain the flexibility of the portion of cash on hand over the 25 years for other purposes, like investments, savings, renovation or as contingencies. There will be a balance of $229,585 from the sales proceeds after the CPF refund.

The total assets after selling the flat is $1.16m, inclusive of the $931,560 in CPF savings and $229,585 in cash.

Advantages for using CPF OA Savings

Therefore, the key advantages of using CPF for our home financing are:

1. More cash on hand. We will have more cash in hand that could be used for other investments. This is provided that the yields from the investments are more than 2.5%, or else it does not commensurate the risks of investment and the opportunity cost of 2.5% interest from CPF OA savings.

2. Flexibility of usage. Unlike CPF savings, the cash in hand will also enable more flexibility in its usage. It can be used to pay for the renovation and furnishing costs required after buying the properly, or it can be saved for contingencies.

However, will the cash in hand be saved or invested wisely, or will it be spent unnecessarily. It requires a lot of discipline from the individual.

Disadvantages for using CPF OA Savings

On the other hand, the disadvantages of using CPF savings for housing are as follows:

1. Refund to CPF. The sale proceeds including the principal amount used from CPF savings and its accompanying accrued Interest must be refunded to our CPF account after selling the property.

2. Lost in Interest Opportunity. Lost the opportunity of growing the CPF amount at an interest rate of 2.5% p.a. Need to pay back additional accrued interest of 2.5% p.a. and the principal amount used.

3. Reduced the Growth in CPF Savings for Future Retirement. By using CPF to buy a home, we will miss the amount of interest gained in the account, thus resulting in reduced growth and lower savings for future needs.

4. Risk of Over Commitment. With the access to CPF savings to finance loan repayment, we may be getting too comfortable in using it and may result in over commitment in our home purchase and miss out in our savings.

5. Risk of Hitting the Withdrawal Limit. If not monitored closely, the automatic deduction of the loan repayment using CPF Ordinary Account may subsequently result in us being caught in not having enough cash to service the loan at a later stage in life once the CPF Withdrawal Limits (120% of the Valuation of the property price) is reached.

So, should we still use our CPF Savings for Property Purchase?

No, if we can afford not to touch our CPF

It is important to note that CPF is meant for our retirement needs. Hence, the more we use for our property, the less we may have for our retirement. We should also attempt to allow our CPF savings to enjoy the high interest rates provided and let it grow. Notwithstanding, it can also be used for investments to further enhance its value under the CPF Investment Scheme (CPFIS).

Yes, when we do not have enough Cash

Conversely, there will be situations when our cash flow is insufficient for the down payment or repayment of mortgage loan, but we want to buy a home for some reasons, such as:

• When we spotted our idea home when we least expected and yet we may not want to miss the opportunity.

• Unexpected or impending arrival of new family member that requires us to upgrade to a bigger unit.

• When we get hitched in a love at first sight and a whirlwind romance, we have the desire to provide a cosy home immediately after a lightning marriage.

Whatever the situations, buying a home involves high capital and timing may not always be on our side for us to save enough cash for the purchase. Inevitably, we may not realise our dream of owning a home without utilising our CPF savings.

Other Considerations for using CPF for Housing

We should also consider some other issues before deciding if CPF savings or how much of it to be used for our home financing, such as:

• Is there other needs to use our OA savings, like children’s education and insurance premiums?

• The reduction in our CPF contribution rates as we age, will we have enough to service the loan?

• The mandatory Home Protection Scheme or a mortgage insurance that we must subscribe when we use CPF to pay the monthly mortgage instalments.

Conclusion

Most of us have the aspiration of owning a dream home, however, it should not be at the expense of our retirement needs. Many of us have the mindset of maximising the usage of our CPF savings for property purchases, while some are keen in reaping the high interest rate offered by CPF Board to grow our wealth for the future.

Ultimately, the purpose of CPF savings is to provide the us with the necessary retirement financing for our healthcare, housing and basic standard of living. Therefore, whether to use CPF savings to fund the purchase of our property will depends very much on everyone’s conditions and needs.

If we need to buy a roof for ourselves but have not enough cash, using CPF savings will be a viable option to fulfil our needs. Conversely, if we have enough cash and there is no real need to utilise the CPF savings for our housing, then it may be better to leave it in CPF and let it grow for future retirement needs.

In conclusion, we should be prudent not to use all our CPF savings to pay for our property without considering for our retirement. We need to strike a balance between using CPF savings for our property and growing our CPF savings to provide a certain lifestyle we desired in the later part of our life.

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