My CPF Ordinary Account (OA) will not be wiped off when taking a HDB Loan, so what?

Before we get into the article, I just want to put a disclaimer that this article is not sponsored. I was reading the news this morning and came across this article. I thought it would beneficial for us if we understood the new rulings better.

That being said, all opinions are our own.

You can now choose to NOT wipe your CPF off when purchasing HDB

Yes, you did not read that wrong. You can choose to leave up to S$20,000 in your CPF as Channel News Asia reported,

“Flat buyers can now choose to keep up to S$20,000 each in their Central Provident Fund (CPF) when taking a loan from the Housing and Development Board (HDB), the housing board said on Tuesday (Aug 28).”

Wiping Out Your Balance in your CPF Ordinary Account (OA)

Previously, it was necessary for you to use all of your balance in your CPF OA before being able to take an HDB loan to fund your flat.

With that, here are the interests you earn on your CPF OA and SA accounts, and the interest payable on HDB loan. The interest earned on your OA is insufficient to cover the interest payable on the HDB loan.

*On the first S$60,000 in your CPF accounts, maximum S$20,000 in your CPF OA.

2 Benefits of keeping S$20,000 in your CPF OA

This provides flat buyers like yourself more flexibility with your CPF funds like:

1. The S$20,000 can be used to pay your monthly mortgages instalments in times of need.
2. The S$20,000 can be kept to continue to earn 3.5%* for your retirement.

*Additional 1% is earned on your first S$20,000 in your CPF OA.

It is a CHOICE, should you or should you not?

Pretty sure all of us have the same few questions bugging us when we read the headlines,

• What’s the difference?
• Is this what you call good news?
• Why should we as home-owners bother with this?
• If I am able to use up all my CPF to pay for my HDB, wouldn’t that be better?

Let us look at the few points that address your questions. Also, if you have any questions and would like to hear from the community (the more experienced folks), feel free to ask us here!

Why should you keep S$20,000 in CPF OA?

Many of us would think that using ALL of our CPF OA savings to pay for our HDB loan is better. Because doing so will reduce the loan amount to finance the flat. But this, in turn, might have created unintended cashflow issues for you.

So why should you keep S$20,000 in your CPF OA? You can choose an amount of up to S$20,000, doesn’t have to be S$20,000 per se.

1. S$20,000 in your CPF OA can earn the extra 1% interest.

With a minimum amount of S$20,000 in your CPF OA, you earn a bonus of 1% on your S$20,000. Which is 0.9% higher than the HDB loan is currently held at 2.6% (as shown in the table above).

This bonus 1% goes into your CPF Special Account (SA) to help you save for your retirement, S$200 every year into your CPF SA to compound for 4% in interest.

2. S$20,000 can be used to pay your HDB loan repayment in any case of joblessness.

If your CPF OA is wiped out, meaning your account balance is S$0. A portion of your monthly contribution (from your salary) will go into your CPF OA which will be used to repay your HDB loan.

Scenario 1: If your monthly contribution is MORE than your monthly repayment, you will have excess savings remaining in your CPF OA.

Scenario 2: If it is LESS than your monthly repayment, then your CPF OA will remain at S$0.

If you fall into scenario 2 (which is most of us), and you lose your job for whatever reason, you have also lost the monthly contribution that comes from your salary which you use to service your HDB loan. This will result in unintended liquidity issue:

• You are required to service your HDB loan using CASH.
• As cash flow is expected to be tight, it would be a challenge to service your HDB loan with cash.
• It would be tough to build up your CPF OA for your retirement.

If your CPF OA has S$20,000, you are able to use the balance in your CPF OA to tide you through 1-2 years while looking for another job.

As what Felix Kim from the Seedly Community mentioned,

“When a loss of income happens in the next year or two, cash flow will be tight as there is a huge difference for many paying $1000 a month in cash vs CPF.

Thus, as risk management approach is to ensure there is some rainy CPF OA balance to cover the loan over some time. Could be a year, two or whichever period one is comfortable.”

Some Miscellaneous Questions Asked on Our Community

• Can I invest the S$20,000 that was left behind in my CPF OA?

No, you can’t. You can only invest your CPF under the CPF Investment Scheme (CPFIS) after setting aside S$20,000 in your CPF OA and/or S$40,000 in your CPF SA, depending on which CPF account you want to use your savings to invest with.

Some knowledge shared by Our Community

Kok Koon – “Anyway, 1% more on $20,000 is $200 to SA a year. That’s $5,000 in 25 years forgoing compounding effect.

Add 4% SA compound effect my wild guess is effect to SA is +$10k max.
What this info gave me though, is motivation to faster refund my OA housing grants with cash since it’s another way to add to SA abit.

The additional 1% that goes to in SA grows at 4% is a bonus. My motivation is also blended with building a warchest in CPF-OA at a very decent 2.5% while waiting (Philips MMF is 0.99%).”

Gabriel Loh – “I would use 3.5% to compare with 2.6% hdb loan even though the interest flows to SA. There is no difference eventually when the accounts converge to form RA at 55 and usually housing loans get to around that age.

What the government did is a good first step to offer to citizens who are not as savvy to help build their retirement funds but those in the know (especially in Seedly), knows that we can avoid letting CPF wipe out our OA by purchasing shares prior and transferring them in later on.

I took a hdb loan and this is pegged at 0.1% plus prevailing OA rate so the interest arbitrage issue has no impact on me as my OA will compound faster than my loan interest will ever get. The certainty in this is one of the reasons I took a HDB loan although I pay a slightly higher interest in the earlier years, a cost I willingly take.

Oh and I might as well clear one of the main misconception that many have when dealing with HDB housing grants. 

We must know that we are not required to return the government this grants that are given to us, even when we sell our flats. I believe the misinterpretation comes from the refunding of CPF OA plus accrued interests (if any) when we sell our flats. “

Overall, this is a good move and as echoed with the Seedly Community, it is a long overdue move. If you have any questions and would like to hear different perspectives from the experienced folks in our Community, Check out our blog for more unbiased opinions on your personal finance journey.

Share with us if you have any experience with these or even a better alternative by commenting below! Also, don’t forget to share it with your friends who might need this!

I’ll see you in the next one, and until then, may the Personal Finance force be with you!

All Gif Credits: Giphy