CPF for home purchase – factors to consider

Buying a home is a huge commitment which requires careful planning of our finances. For most people, housing is considered expensive in Singapore and we are fortunate to be able to use our Central Provident Fund (CPF) monies to fund our property purchases.

However, the use of CPF money for our home purchase comes with opportunity costs. To help you decide on whether to utilise your retirement savings to buy a house, here are some factors for you to consider.

4 Considerations when using CPF for housing

Opportunity Costs
Our CPF savings have several uses, one of which is to help build up our retirement nest egg. As such, the greater the amount of CPF monies you use for housing, the smaller the amount of funds you would have left for your retirement. The CPF savings used to purchase your flat could have been used to build your nest egg since money stashed in your Ordinary Account (OA) and Special Account (SA) enjoy risk-free interest of 2.5% and 4.0% respectively.

Do you have enough CPF for your home purchase?
There are many ways you can use your CPF OA savings to pay for your home purchase. You can use them to pay for the downpayment and legal fees, as well as to service your monthly mortgage loan repayments.

However, our CPF monies are not unlimited. If you choose to automate the deduction of your home loan repayments from your CPF accounts, there is a possible risk of depleting your OA savings.

In addition, those who are still paying their mortgage beyond age 55 need to be aware that their CPF contribution rate falls after they reach 55.

Source: CPF

The decrease in contribution rate can affect the amount you have in your CPF account for servicing your mortgage.

Applicable Housing Limit
There is a cap on how much CPF savings you can use to finance your home purchase. The table below summarises the different scenarios where the different limits apply.

For example, your resale HDB may cost you $500,000, but if the HDB values the flat at $480,000 at the time of your purchase, then your applicable housing limit will be $480,000. This is applicable if you are using a HDB loan.

If you intend to use a bank loan to pay for your mortgage, you can use your CPF to finance up to 120% of the valuation of your property. Using the valuation of $480,000, you can use up to $576,000.00 if you set aside your Basic Retirement Sum (BRS) in your CPF accounts.

If you are unsure, you can use the CPF Housing Usage calculator to help you.

• Will you reach these limits?

The answer will likely be a yes if you intend to use your CPF savings for the various payments linked to your property purchase, including the downpayment and servicing monthly loan repayments. If you decide to take up the HDB loan which has a higher interest rate than bank loans, your repayments would likely be higher as well.

Returning the CPF monies you withdrew

If you have the intention of selling your house in the future, other than paying off your outstanding home loan, do note that you are required to return the CPF monies that you withdrew to pay your property. The amount that you must refund comprises the principal amount plus the accrued interest on the amount you have taken out from your OA over the years, as well as the housing grant that you have taken.

If you are 55 and above, the refund will be used to top up your CPF Retirement Account up to your Full Retirement Sum (if applicable). Any balance housing refund will be paid to you in cash, unless you request to retain the balance housing refund in your OA.

In the event of a negative sale (sales proceeds are lower than the outstanding HDB loan and CPF refunds), sellers do not need to top up the shortfall in cash provided the property is sold above or at market value

How to optimise your CPF for property purchase

As you can see, using your CPF savings for your home purchase is not so straight-forward. There are substantial opportunity costs involved. However, as property prices are high, using our CPF to fund some amount of our property purchases may be necessary. There are smarter ways though, to minimise the costs involved.

• 1. Paying mortgage instalments with cash

As the downpayment for a property is usually a large sum of money that is in the 6-digit range, most of us will likely use some of our CPF money as the down payment. However, paying your monthly loan repayments with cash rather than your CPF may be a better way to optimize your resources.

It will help you build up your retirement funds through the interest compounding effect when you leave your CPF savings in your OA. You can also maximise your retirement funds by shifting your CPF OA money to your SA to enjoy higher interest rates.

• 2. “Shielding” your CPF OA savings

From August 2018, homeowners can choose to keep up to S$20,000 each in their CPF when taking a HDB loan. Other than this $20,000, you will have to use the balance of your available CPF-OA funds to pay for your flat before taking a HDB loan.

Keeping this fund in your CPF OA acts as a buffer and allows homeowners living on tight income cashflows to be able to make monthly payments to HDB if an unexpected event occurs, such as retrenchment.

If you are confident of beating the CPF OA rates of 2.5% over the long term, you can invest your OA money (excess of $20,000) under the CPF Investment Scheme before you make your property purchase. This way, less of your CPF OA savings will be wiped out for your home purchase.

• 3. Refund your CPF money to earn more compound interest

If you have built up quite a bit of spare cash over the years, you can consider refunding some of the cash (principal amount and accrued interest) you have used for your property purchases back to your CPF account, without selling your property. This will help you to build up your nest egg and reap the benefits of the power of compounding. Do note that these cash refunds are irrevocable till you reach 55. Conditions apply.

Start Planning Now

Check out DBS MyHome to work out the sums and find a home that meets your budget and preferences. The best part – it cuts out the guesswork.

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Alternatively, prepare yourself with an In-Principle Approval (IPA), so you have certainty on how much you could borrow for your home, allowing you to know your budget accurately.

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