CPF Accrued Interest – Should I use more cash or CPF to buy property?
Updated: Oct 13, 2022
What is CPF?
Central Provident Fund (CPF) is established as a comprehensive social security saving plan for all Singaporean.
This ensures all Singaporean has a sense of security for their retirement years, able to pay their medical bill or even to buy a home.
To achieve financial freedom or a passive income during your retirement years will only be possible if you are savvy enough to know how to utilize the CPF scheme well.
Let’s understand how CPF benefit us:
1. Employers pay more into our salary
When I started my first job as an employee, I am as annoyed as all other employees who need to pay 20% of my wages to CPF.
Imagine I only earn $1800 back then and my take home is only $1440. How to survive?
What I failed to understand is that my overall salary is actually $1800 + 17% contribution from my Employer which is $2106.
Let’s face it! How many people are disciplined enough to keep 37% (employee and employer contribution) of their salary for retirement, medical needs or even for housing?
2. Interest rate is better than Bank's fixed deposit
As compared to banks' fixed deposit rates, our CPF interest rate is way more attractive. This is part of the Government’s initiative to enhance our retirement savings.
All working Singapore Citizens and Permanent Residents will enjoy these CPF investment schemes that generate interest of 2.5% per annum on Ordinary Account (OA) and 4% per annum on Special Account (SA), MediSave Account (MA) and Retirement Account (RA).
For CPF members who are 55 years old and below, an additional 1% per annum interest will be paid on the first $60,000 member’s combined balances with a capped of $20,000 from the OA.
CPF members who are 55 years old and above will enjoy higher interest rates generated from CPF. There will be an additional of 2% per annum interest on the first $30,000 and 1% per annum on the next $30,000 of their combined balances with a capped of $20,000 from the OA.
Since there is a cap of $20,000, CPF allows members to transfer our funds from the OA account to the SA account. This will allow us to enjoy a higher interest rate of 4%.
3. CPF Housing Grants
This CPF housing grant scheme has assisted lower and middle-income families with the first purchase of their home.
This has benefited many young married couples who have just embarked on their career path and have limited savings. With the grants, the purchase of their matrimonial house is more affordable. However, everything has a flip side coin.
We are more than happy when the Singapore government pay us more interest into our CPF account.
But the issue is, when you take money from the account to buy property, you will need to refund the interest back to your own account when you sell the flat.
So what did you lose?
1) The interest that the government supposedly payable to you
2) The cash proceeds will be much lesser
3) Possible negative sales when you sell your property
Real Case Study:
My sister has recently purchased a 3-room BTO at Towner Crest that cost $500,000. For the initial payment, she has paid 20% as a down payment fully by CPF.
Assuming she will only collect her key after 4years as per the contract with HDB. For simplicity in the calculation, I will only use a 2.5% interest rate for OA account. Taking note that the interest is computed on the CPF amount withdrawn on a monthly basis and compounded yearly.
So, by the time she collects the key, she has incurred $10,381 accrued interest owe to her own CPF before she even started staying there.
After she collects her key, she will need to start servicing her monthly instalment for 25 years loan tenure. She will be using parts of her CPF, $900 per month / $10,800 per year to assist her with the monthly instalment.
As such, by the end of year 1, the amount refundable will be $107,689 + $2692( accrued interest from the year -1) + $10,800 (payment made using CPF for monthly instalment)
Therefore, by the time she reaches the Minimum Occupation period (MOP) of 5 years, she has used a total of $178,609 CPF fund and incurred an accrued interest of $29,074.
She may feel that it is ok to pay $29,074 as a cost of living there. So, decided not to sell her flat!
Let's review the snowball effect of Accrued Interest
Assume she decides to keep it for 25years till the end of the loan tenure.
At the end of 25 years, She would have fully paid off the property loan but she has incurred a compounded accrued interest of $212,767.
In order to have cash proceed from the unit, she will need to sell $582,767 and above ($568,553 plus $14,214 which is equivalent to $582,767).
This is a classic example of how the interest rate would have compounded over the years.
What happened after she has fully paid off the bank loan? She will still continue to incur the accrued interest compounded every year.
This interest would have been paid by the government to our CPF.
Should We Use CPF to buy a house?
This really depends on how you view CPF, your future home and your financial standing. It is probably easier to keep $100,000 in CPF and voluntary top up the $10,800 to the CPF to generate up to 2.5% - 5% of interest which will yield us $212,767 interest instead of incurring this amount which is payable in the future upon sale of the flat.
So, Why do people still use CPF?
We still need to give credit to CPF as this system ensures we can still afford a house.
However, are we making full use of CPF?
The main objective of CPF is to build our retirement. We would use CPF to fully pay our down payment and monthly instalments on our homes to ease the burden on our finances.
In summary - Is this decision going to aid in our financial objective in the future?
Many couples would have the same mindset that since after 25 years, they will be debt-free and therefore there is no need for them to do anything or worry again about all the loans.
However, the property that she is going to stay with the CPF used will continue to pile up the accrued interest.
Should she sell at or below $582,767, it will be considered a negative sale even though you think that you are good to be able to sell above your purchase price.
The longer you decide to hold the flat, the lesser you will get as cash proceed as you will need to refund back to your CPF Ordinary Account after the sale of your flat.
Not doing anything to the HDB means you allow the value of your property to be in sleeping mode or what we call as a dormant fund.
As such, I would strongly encourage you to consider balancing the amount of cash and CPF you used for the property. Whenever your finance picked up over the years, you should consider using more cash for the instalment payment instead of CPF. You may consider doing a voluntary housing refund.
On top of that, you may want to awaken your dormant fund from the HDB by not holding the HDB for too long.
Do you need more clarification?
If you are not clear about your current situation or what are your options available or you need more information before taking action, feel free to contact me.
I do provide a Free consultation for couples who wish to make changes to their property portfolio but are not sure how to go about it
Click Whatapp to get in contact with me for a 1 time free 30min Property Wealth Planning (PWP) consultation.
A PWP consultation includes the following:
· A detailed financial affordability assessment
· A clear and customised investment road map for your real estate investment journey.
About the Author
Maine Soh holds a Bachelor’s Degree in Real Estate from NUS and has more than 13 years of experience working as a Real Estate consultant. While focusing on sales, she has attained consistent Top Achiever awards.
She has been known for being well-versed in all marketing strategies and tools. She will constantly make a diligent effort to be updated with all the new trends and digital marketing platforms to enhance sales.
She has assisted many of her clients throughout the whole process successfully by making informed decisions and preventing them from making avoidable mistakes.