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6 Reasons Why Cash is Better Than CPF To Pay For Your Housing Loan In Singapore!

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A lot of Singaporeans would conveniently tap into their CPF Ordinary Account (OA) to finance their home loans. The notion of using a huge amount of cash for mortgage repayment often translate into cash-flow fears amongst homeowners. Using cash may not seem a logical financial decision to some, especially when they already have funds available in their CPF account.

But is it really so?

Well, before you decide on how you are going to pay off your housing loan, it is best to compare the pros and cons of using cash versus CPF thoroughly instead of simply defaulting to using CPF. Just because we can, doesn’t mean we always should. Remember, choosing the right mode of home loan payment allows help you to save more.

There’s certainly no ‘best-fit’ answer that works for everyone. It could be a convenient option to use CPF funds for one person while the benefits of using cash might make it a better option for you.

Why is cash be a better option to pay for your housing loan in Singapore

A lot of homeowners may think it is safer and easier to use CPF for housing loan payments as it is safer to have more cash on hand as a form of security. Fair enough. But using your cash savings instead of CPF has its own benefits. Let’s discuss them one by one.

1. More CPF money for your retirement

Your CPF money is your tool to grow your retirement funds and is meant to supplement a typical decrease in income after retirement. When you pay down your home loan mortgages by cash, you build up your CPF savings for your retirement with the guaranteed, risk-free interest every year paid by the CPF board.

If you are using more CPF funds now, you are losing out on having a larger retirement fund in the future.

Also, using cash to pay down your housing loan mortgage helps you to prevent negative cash proceeds in the future when you may decide to sell your property.

2. No need to pay back the CPF used when your home is sold

One important thing to remember: whatever amount you have taken from your CPF OA to pay for your home purchase has to be paid back with accrued interest when the property is sold. This money will then be refunded to your CPF savings and returned to you upon retirement.

Since the ultimate goal of your CPF account is to ensure that you save for retirement, the funds you withdraw from CPF OA to buy property must be paid back else your retirement sum will be reduced.

That is why, when you sell the property, you will need to refund the amount used plus the interest accrued on this amount.

The restored funds will help you get a lifelong monthly income to cater for your living expenses after retirement.

Let’s suppose you took a bank loan to buy a condo for $400,000.

Initial downpayment (25%) in cash = $100,000,

Mortgage (75%) = $750,000, at 1.5% interest for 25 years,

So, the monthly instalments to be paid through cash savings is $1,199.81.

After 10 years, let’s say you sold the condo at a valuation price of $500,000.

Since you have used your cash savings, there is no need to refund the CPF money. You just need to pay the outstanding mortgage loan of $191,368.34 and receive the balance sales proceeds of $308,631.66 in cash.

With the cash proceeds, you can now purchase your next property easily. Had you been paying your monthly mortgage via CPF savings, you would have ended up with little or no cash proceeds after selling the flat many years later.

This shows it’s more difficult for your property sale to be profitable, especially if the interest rate has increased over the years, or worst if your property’s valuation starts to decline.

Generally, HDB flats tend not to appreciate over a long time, and the CPF accrued interest that you will have to pay back to your CPF OA account can be quite significant. So, while CPF savings can be used for HDB flats that we buy, we don’t suggest you to simply use up all of your CPF OA funds for your home loan repayment.

Note that if you choose not to sell your home, although it is not required to refund your accrued interest, it is a good move to make a voluntary refund to your CPF account as and when possible.

This will boost your CPF savings for retirement plus you will receive more cash proceeds whenever you decide to sell your property as you will need to refund lesser to your CPF account.

On the other hand, if you use your cash savings only for a home purchase payment, you don’t have to pay back anything to your CPF account.

3. Taking advantage of the returns of CPF

Note that by using cash to service your monthly loan repayments, homeowners can fully capitalize on the risk-free returns that CPF pays them.

If you are using your CPF instead of cash to buy a home, you are wasting money. CPF pays homeowners a risk-free interest of 2.5% per annum (or 3.5% on the first $20,000 in the CPF OA). Leaving your CPF savings in the CPF OA allows homeowners to accumulate this risk-free return, which may help them to hedge against inflation in the long run.

Thus, it might just make more sense financially to leave the money in your CPF account.

What’s more, homeowners can even voluntarily divert their CPF OA funds to their CPF SA (Special Account) to maximise their retirement funds with higher risk-free returns at a 4% interest rate.

Believe it or not, it’s hard to find any other 4% risk-free investment in the current market situation.

4. Hitting the CPF withdrawal limit becomes less of a concern

Another reason you may pass up on using your CPF funds for property purchase is that you can deplete your OA to the point of hitting the CPF withdrawal limit, i.e. 120% of the Valuation Limit as discussed above.

When the monthly housing loan instalment is automatically deducted from the CPF OA, homeowners may neglect to check how much money is left in their OA. Chances are you will hit the CPF withdrawal limit and no longer be able to use CPF OA to pay the next monthly housing loan instalment.

Things can get worse if you don’t have enough cash on hand. Late payments can result in penalties, or worse, you can end up defaulting on your home loan. Using cash to service monthly repayments instead avoids this possibility.

Let’s take a look at the different withdrawal limits for different property types for first-time homebuyers:

Type of PropertyType of Housing LoanApplicable Housing Limit
New HDB FlatHDB LoanNo limit imposed, can use CPF funds fully
Resale HDB FlatHDB LoanLower of the valuation or property price at the time of purchaseAfter setting aside Basic Requirement Sum (BRS), can use CPF funds fully
HDB Flat or Private PropertyBank LoanLower of the valuation or property price at the time of purchaseAfter setting aside Basic Requirement Sum (BRS), can use a further 20% for the property

The chance for refinancing your home loan to save money

Another potential drawback of using CPF payments is that you could miss on chances to lower the monthly mortgage repayments of your housing loan. Typically, even the best housing loans from banks in Singapore only have a fixed rate for the first three to five years and usually increase dramatically starting from the fourth year as they shift to floating rates.

Banks generally expect you to refinance your home loan after this period, however, when you are fully complacent on the automatic CPF deduction, you may forget to take a further look at home loan refinancing when interest rates eventually increase.

As a result, you end up paying more than you should as the higher interest costs slash your earnings when you resell your home after some years.

So, is it better to use CPF or cash for housing loan payments? This is no right or wrong approach to paying off your home loan. It rolls down to which method works best for you – what retirement plans do you prefer, how you want to strategize your upgrading plan and what can you afford.

Here’s a quick look at the main points made in this article showing a comparison table of using cash vs CPF.

 Using CashUsing CPF
Have a limited monthly salary?NoYes
Don’t have enough cash to fully pay downpayment?NoYes
Want to set aside cash for emergency/rainy days?NoYes
Planning to invest or start a business in the future?NoYes
Looking to maximise your retirement sum?YesNo
Want to take advantage of risk-free CPF returns?YesNo
Don’t want to hit the withdrawal limit for using CPF?YesNo
Want to lower monthly mortgage repayments by refinancing on time?YesNo

But why would some people still prefer using CPF to make their home loan payments?

Let’s discuss some common reasons why some of us might choose to tap their CPF savings for home payments:

A lack of alternative outlets to spend the money in CPF OA on

Despite CPF being your own money, you cannot withdraw the CPF OA funds until the retirement age of 65. There are only limited alternative outlets, such as property purchase, insurance, investment, and education to spend your CPF savings on.

If you are opting not to use CPF for home purchase, which is probably the biggest financial commitment you will ever make, you are pretty much not doing anything with your CPF OA funds.

Note that investing too seems worthwhile only if you are earning a larger return than the offered CPF OA rate (2.5% or 4%).

Inability to afford a home on cash alone without using CPF money

Being able to use CPF OA funds for a home purchase is indeed helpful for a lot of people, especially young couples who are just starting their career or some single/divorced parents who might be cash strapped to fully pay the property downpayment, or prefer more flexibility in how they use the money on hand.

In such cases, people consider using their CPF OA savings to buy the property and then pay for the monthly house repayments.

If you can afford a home purchase on cash alone, then it will certainly be a good idea to leave your CPF savings in your account to have enough retirement savings.

Want to set aside cash for rainy days

By using your CPF OA savings for home loan payments, you can set aside cash that is currently available for emergencies, unexpected expenses or even other investment opportunities. For example, if you suddenly lose your job, this set aside cash can help you service your housing loan till the time you find another job.

For working couples, it is a good idea to build up cash savings as their career progress and salary increases. They can plan to set aside a substantial amount for emergencies and use the rest to make lump-sum capital payments to repay the loan early.  

Also, as of August 2018, you can set aside up to $20,000 in your CPF OA when taking an HDB loan as a safety buffer to deal with unexpected financial problems in life such as loss of income due to unemployment, bad health or inability to work.

You can use this reserved amount (not necessarily the full $20,000) to cover your housing payments during times of financial difficulties.

Anybody in the above-discussed circumstances would suggest using CPF as a better option to pay off a housing loan.

Final Thoughts

There is no ‘best-fit’ that works for everyone. Rather than thinking in terms of strictly one option or the other, it’s better to use both options to finance your home purchase and home loan repayments.

Rather than thinking in terms of strictly one option or the other, we need to strike a healthy balance between cash and CPF usage for property purchase and growing our CPF savings to maintain a certain lifestyle after retirement.

If you are still confused about what’s best for you, we suggest consulting a professional mortgage broker who can educate and advise you properly on the best approach for paying your housing loan after understanding your situation.

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