Should You Use Cash or CPF to Pay for Your Home?

I was having dinner with my secondary school friend, whom I have known since 2007 (think you can guess how old I am now).

And as we caught up and reminisced about our secondary school days.

Our conversation turned to major life events and he shared that he just took an HDB housing loan to purchase an HDB Resale Flat.

When I asked him whether he was going to use cash or CPF to pay for his housing loan.

He shared that he was going to use his Central Provident Fund (CPF) Ordinary Account funds to fund this big-ticket item.

I immediately stopped him right there to ask him if that is really the best idea?

Stumped, he asked me what did I think.

And… long story short, that’s why I’m writing this article.

Ready to find out which is the best option?

Here we go!

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TL;DR: Should I Use Cash or CPF to Pay for My Home Loan?

Here’s are two scenarios I came up with to better explain the pros and cons of using either cash or CPF to pay your home loan.

As you read through the article, I would like you to keep in mind that this is not a zero-sum game.

You can always choose to use a combination of CPF or cash to pay for your home based on your personal financial goals and needs.

These scenarios and the pros and cons that I am highlighting is for you to better understand the impact of using either option.

Note: if you’d like to do the calculations for yourself, I’ve included the relevant calculators which I used too.

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Using CPF OA to Repay HDB Home Loan

Before we begin here is a quick recap of what you can use your CPF OA funds for:

• Downpayment for your property (Up to 20% for private properties & EC, up to 10% for HDB flats)
• Stamp Duty
• Legal fees
• HDB Home Protection Scheme (HPS) premiums
• Repaying the monthly home loan instalments (can use for bank loan or HDB loan)

Do take this into consideration when thinking about the funds in your CPF OA.

Assumptions

For this scenario, let’s say we have a Singaporean married couple who is buying a 4-Room HDB Resale Flat for the first time.

Both of them do not own any other properties.

They will be using an HDB Housing Loan to fund their purchase.

Whether they choose to pay with cash or CPF, they have enough of either to pay for the downpayment as well as the monthly loan instalments.

I will be taking the average of the resale median prices for a 4-Room HDB Resale Flat (across all the various towns in Singapore for Q2 2020).

The purchase price of their resale flat is $466,154.

For simplicity’s sake, I will round this down to $460,000 instead.

Option 1: Using Only CPF-OA Funds to Pay For HDB Housing Loan

Assuming the couple only uses their CPF-OA funds to buy their flat…

Upfront Costs to Buy an HDB Resale Flat ($55,400) 

• HDB loan downpayment (10% of purchase price): $46,000
• Buyer’s Stamp Duty (BSD): $8,400
• Conveyancing fees (using HDB’s appointed lawyer): $1,000

HDB Housing Loan Amount ($414,000 over 20 years)

• Estimated HDB Housing Loan amount (90% of purchase price): $414,000
• Repayment Period (In Years): 20
• Interest rate of HDB Housing Loan: 2.6% p.a.
• Accrued interest rate for CPF funds taken out of OA: 2.5% p.a.
• Estimated monthly instalment: $2,214

Assuming They Sell After Minimum Occupation Period (MOP)

Let’s say the couple chooses to sell their flat at $460,000 after the Minimum Occupation Period (MOP) of 5 years as they would like a change of scenery.

Total Loan Amount After Five Years ($462,600)

Over the years, they would have also repaid part of the principal amount for the HDB loan through the monthly instalments via their CPF OA. (Calculator).

The would also have repaid the interest from the HDB loan.

*Figures are rounded up to the hundreds.

• Cumulative principal amount repaid: $84,300
• Cumulative HDB loan interest repaid: $48,600
• Total amount repaid: $132,900

Accrued Interest on HDB Loan Downpayment + BSD + Conveyancing Fees + Loan Amount Taken Out Over Five Years

Since the couple took out funds from their CPF OA to service the HDB home loan, they would have to return the principal amount and accrued interest from the:

• Upfront costs: $55,400
• Total loan amount over five years (split up over monthly instalments): $132,900

This means that they will have to return the principal amount and accrued interest of $14,000 back into their CPF OA.

Flat Sale Proceeds ($460,000)

Firstly, proceeds from the sale would go towards paying the outstanding balance of $329,700 on the HDB loan amount.

The rest of the proceeds will have to be returned to their CPF OA which amounts to $202,300 in total as they would have to repay the HDB loan downpayment, the BSD and conveyancing fees, HDB loan amount and accrued interest.

This will result in a negative cash sale where the couple will have to return $72,000 in cash to their CPF OA.

But on balance, CPF will not require you to put back more CPF OA funds beyond the HDB sale proceeds you receive when you sell your flat.

There’s a caveat, this will only happen if you can sell your property above or at your property’s market value

In the case that you sell your property at below market value and the amount you owe to your CPF account (inclusive of accrued interest) is more than your cash proceeds; you will have to return all of what you owe to your CPF account with cash.

However, you can approach CPF to waive the amount you owe to your CPF OA. But, do note that approval for this is on a case-by-case basis.

Do note that this scenario applies to bank loans as well. You will have to adjust the interest rate to calculate how much-accrued interest you need to return over the years.

You can also log in to my CPF Online Services to view his accrued interest (under “My Statement”).​

Option 2: Using Only Cash to Pay For HDB Housing Loan

The second scenario is where we assume that the couple only uses cash to buy their flat…

Upfront Costs to Buy an HDB Resale Flat ($55,400)

• HDB loan downpayment (10% of purchase price): $46,000
• Buyer’s Stamp Duty (BSD): $8,400
• Conveyancing fees (using HDB’s appointed lawyer): $1,000

HDB Housing Loan Amount ($414,000 over 20 years)

• Estimated HDB Housing Loan amount (90% of purchase price): $414,000
• Repayment Period (In Years): 20
• Interest rate of HDB Housing Loan: 2.6% p.a.
• Accrued interest rate for CPF funds taken out of OA: 2.5% p.a.
• Estimated monthly instalment: $2,214

Assuming They Sell After Minimum Occupation Period (MOP)

Let’s say the couple chooses to sell their flat at $460,000 after the Minimum Occupation Period (MOP) of 5 years as they would like a change of scenery.

Total Loan Amount After Five Years ($462,600)

Over the years, they would have also repaid part of the principal amount for the HDB loan through the monthly instalments via their CPF OA. (Calculator).

The would also have repaid the interest from the HDB loan.

• Cumulative principal amount repaid: $84,300
• Cumulative HDB loan interest repaid: $48,600
• Total amount repaid: $132,900

*Figures are rounded up to the hundreds.

Flat Sale Proceeds ($460,000)

Firstly, proceeds from the sale would go towards paying the outstanding balance of $329,700 on the HDB loan amount.

Even though they had to fork out $37,300 from having to pay the interest from the HDB loan and the BSD and lawyer fees, all is not lost.

This will result in a positive cash sale where the couple will receive $130,300 in cash from the sales proceeds.

To make it a bit clearer, here is a visual representation of these two scenarios:

Now that you’ve gone through the scenarios, here are the Pros and Cons of using your CPF or Cash to buy your home.

Pros of Using CPF to Buy Home

1. Higher Liquidity With More Cash in Hand

With your OA savings fully financing your monthly home loan payments, you are free to use your money for investments or other expenses like home renovations.

Investing With Your Cash

One of the perks of using your CPF OA to buy your home is that you can use your cash to invest.

Since you will be paying the same amount of interest on the HDB loan regardless if you use cash or CPF, you will need to invest and attain returns of more than 2.5% p.a. (or 3.5% p.a. for first $20k) as you are basically ‘borrowing’ from your own CPF account at this interest rate.

Your investment returns will also offset the HDB loan interest rate of 2.6% p.a.

You get more liquidity and cash on hand by doing this.

However, do note that you will have to return the principal you took out from your CPF plus the accrued interest when you sell your flat. 

If the principal amount plus accrued interest and the outstanding balance for your home loan exceed the sale proceeds, you will experience a negative cash sale.

So do keep track of the accrued interest and the principal amount you took out from your OA.

Another thing I would like to point out is that the money you will have return to your CPF OA is still your money and part of your net worth. But, do take note that your money will be locked into your CPF.

Personally, as I am a bit more risk-averse, I would not take this approach. Unlike returns from CPF which are guaranteed (subject to policy changes), returns from investing are generally non-guaranteed.

However, if you are disciplined with your investing and don’t mind the risk, this approach can work for you.

It will not be hard to find investments that can beat the returns that the CPF OA can give you.

P.S. check out our guide to investing in Singapore if you are interested!

Cons of Using CPF to Buy Home

1. Run the Risk of Negative Cash Sales

When you sell your HDB flat, you are required to return some ‘refunds’ from the sales proceeds.

This can be avoided if you pay for the flat with only cash.

Otherwise, you are required to make two refunds:

First, your existing home loan’s outstanding balance needs to be paid back. This could be your HDB home loan or bank loan. This is the first refund that needs to be made and takes priority over everything else.

Secondly, you will need to return all the CPF funds you took out from your CPF OA, which includes things like the downpayment, lawyer’s fees, stamp duties and the accrued interest on the amount you have taken out of your CPF OA over the years.

2. Remember Accrued Interest

Another important thing to consider is CPF’s requirement that you repay any CPF funds used or received to finance a property when you sell your current property.

The amount you have to return consists of the principal amount you took out from your CPF OA as well as the accrued interest.

In other words, you will have to return the interest on the principal amount based on the current CPF-OA interest rate of 2.5% per annum (p.a.)!

Think of it as a reverse interest; the longer the money is out of the account, the more the accrued interest you’ll have to return into your CPF OA when you sell your property.

This may result in a negative cash sale, a scenario where you might have to refund cash to your CPF OA when selling your house.

But on balance, you still can use the funds in your CPF OA for future property purchases as well as for your retirement.

3. Using CPF To Buy Payoff Your Home Loan Will Affect Your Retirement

Singaporeans have a love-hate relationship with their Central Provident Fund (CPF).

But, you have to admit that the guaranteed (subject to policy changes) interest rate of 2.5% p.a. (3.5% p.a. for first $20k) for your CPF OA and 4 – 5% p.a. for your CPF special account (SA) is nothing to sneeze at.

So much so that there is even a 1M65 movement, which teaches you how to get $1 Million at 65 using your CPF.

By taking out money from your CPF to repay your mortgage, you incur opportunity cost, as the money could be in your CPF accounts earning that sweet sweet compound interest.

Pros of Using Cash to Buy Home

1. Avoid the Risk of Negative Cash Sales

Basically, this is the mirror opposite of the con of using your CPF to repay your HDB home loan.

By paying in cash, you do not have to pay anything back to your CPF OA for your loan. However, any other CPF funds that you take out have to be paid back with accrued interest.

2. CPF ‘Emergency Fund’

You can use the funds in your CPF OA as an ‘emergency fund‘ of sorts to pay off your home loan in case you lose your source of income.

This is probably linked to the 2018 policy change to HDB home loans and the use of CPF OA funds.

Previously, HDB required that all buyers exhaust their CPF OA funds before they could take up an HDB home loan. Although, the buyers who took bank loans could still choose to keep some funds in their CPF OA.

HDB stated that:

“The funds can be used for their monthly mortgage instalments in times of need and will improve retirement adequacy if left unutilised.”

Not to mention that the first $20,000 in your CPF OA enjoys an extra 1% p.a. per cent interest on top of the 2.5% p.a. base interest rate for your CPF OA; bringing the total interest rate to 3.5% p.a.

3. Using Cash Will Help Your Retirement

Basically, this is the opposite of the con of using your CPF to repay your HDB home loan.

Used wisely, CPF can be a great component of your retirement portfolio. By using cash instead of CPF, and continuing to contribute to your CPF regularly, your CPF funds will grow and compound.

You can fully capitalise on the largely risk-free returns that CPF pays us.

For example, let’s use the above-mentioned couple’s scenario

As everyone’s CPF contribution amounts are different, we will be only looking at the amount they would have gained by putting the amount needed for the downpayment, stamp duty, lawyer’s fees and monthly instalments in their CPF accounts.

The initial amount they had in their CPF for the downpayment, BSD and lawyer’s fees amounted to $55,400. The monthly instalments of $2,214 a month which amounts to $132,900 over five years.

This means the total principal amount they put into their CPF accounts is $188,300.

Assuming the CPF OA interest rate of 2.5% p.a.; at the end of five years, they will have gained a tidy $202,330 in your CPF OA account or about $14,000 earned from the interest.

This will partially offset the cost of taking up an HDB home loan with its current interest rate of 2.6% p.a., with a net interest margin of -0.1% p.a.

In addition, there is also the option for them to transfer the savings from their CPF OA to their SA.

Assuming the CPF SA interest rate of 4% p.a., they will have $211,303 in your CPF SA account or $23,000 earned from the interest.

This will partially offset the cost of taking up an HDB home loan with its current interest rate of 2.6% p.a., with a net interest margin of +1.4% p.a.

Sums calculated using this compound interest calculator.

But more importantly, you will need to know that any transfer from your CPF OA to SA is IRREVERSIBLE.

The funds in the CPF OA are SA are also locked in.

When you reach 55, a Retirement Account (RA) will be created for you.

The savings from your Special Account (SA) and/or Ordinary Account (OA) up to your Full Retirement Sum (FRS) will be transferred to your RA to form your retirement sum. The retirement sum will provide you with a monthly payout from the payout eligibility age, which is 65 for members born on or after 1954.

But when you turn 55, you can withdraw:

• $5,000 or your Ordinary and Special Account savings above the Full Retirement Sum (currently $181,000), whichever is higher.
• And, any Retirement Account savings (excluding top-up monies, government grants, and interest earned) above the Basic Retirement Sum (currently $90,500) if you pledge your property.

For more on CPF and the lock-in, check out our guide to CPF!

Cons of Using Cash to Buy Home

1. Lower Liquidity With Less Cash in Hand

The only major con of using cash to repay your home loan is the loss of liquidity with less cash on hand.

The money used to repay your home loan has an opportunity cost. This means that instead of being used for other purposes like home renovations or investments; the money is funnelled to your home loan.

What Are Your Thoughts on Using CPF or Cash For Your Home?

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