Why you shouldn’t use your CPF to pay for your house

There’s been a lot of news about the CPF lately. Apart from changes to the CPF Investment Scheme (CPFIS), there’s been some popularising of investing via the Special Account (SA). This is when you transfer all your Ordinary Account (OA) funds into the SA, to obtain a high, risk-free interest rate of five percent. But there are many other reasons to consider not using your CPF for housing:

A brief rundown on CPF and mortgages

Singaporeans can use money in their CPF OA to make the downpayment on a home. For HDB loans, up to 90 percent of the flat value can be financed by HDB, and the remaining 10 percent can be paid with CPF OA monies.

For private bank loans, up to 80 percent of the house value can be financed by the bank. Of the remaining 20 percent, 15 percent can be paid through the CPF OA (the remaining five percent must be paid in cash).

Besides the initial downpayment, Singaporeans can have their monthly mortgage subtracted from their CPF OA. This applies for both HDB loans and private bank loans.

In addition to this, certain additional fees – such as the legal fees incurred in the purchase – can be paid via the CPF OA.

(Read the full list on what can be paid by CPF with regards to condos, executive condos, resale flats and BTOs)

As most Singaporeans see their CPF as “money we can’t touch”, they are often eager to use as much of it as possible. However, there are some reasons why you may want to pay for your housing with cash, instead of tapping your CPF. Here’s why:

1. Pushing the OA funds to SA

If you are a big fan of the CPF, you can try to maximise your retirement funds by not using them on a house. You can voluntarily shift money from your OA to your SA, which will give you an interest rate of up to five percent (the OA interest rate is only up to 3.5 percent).

Of course, this means your OA will be fairly empty, and you will probably have to pay for your house in cash. This is not as impossible as most people imagine. A three-room flat, after subsidies, might be around $310,000, which equates to monthly repayments at around $1,266 for this flat over a 25 year period. Assuming that this amount is divided equally amongst a couple, that be around $633 per month.

It takes discipline but isn’t impossible.

Singaporeans who use this method are typically aiming to transfer as much as possible to the risk free SA, to eventually end up with a retirement fund of just over $1 million (this is possible with compounding interest).

2. The CPF withdrawal limit

If you have purchased a Built To Order (BTO) flat, you do not need to worry about the withdrawal limit.

However, if you have purchased private property or a resale flat, there is a limit on how much you can withdraw from the CPF OA for your property. This limit is inclusive of the interest you pay over the years (with some exceptions, such as whether you can meet the basic retirement amount).

(You can calculate your withdrawal limit on the CPF website)

One potential danger of “automating” your mortgage repayments, via the CPF, is that you lose track of this. The last thing you want is to receive a letter saying you’ve hit your withdrawal limit, and then realising you don’t have enough to pay the mortgage next month.

On a related issue…

3. You could end up paying more because you’re not keeping track

This is especially true if you have a bank loan. There are no perpetual fixed rates in Singapore (usually loans are fixed for only three to five years, before reverting to a floating rate). This means that the interest rate can change significantly over time.

In particular, note that home loan interest rates rise significantly from the fourth year onward. Sometimes, a mortgage broker or banker will recommend a low rate package with a higher rate later. They are not trying to trick you, they are assuming you will be savvy enough to refinance when the rate spikes.

When you are not checking on your home loan regularly, you tend to lose track of all this. For example, home loan rates right now (September 2016) have been at a record low; some banks have hit rock bottom of one percent. But there are still plenty of buyers who pay double that, because they just haven’t checked.

Property investors, take note: the more interest you pay, the lower your capital gains upon resale.

4. Paying in cash stops you from wasting money

Don’t believe us? Well just look at the main reasons most people don’t want to pay in cash. Most of the time, the reason is that they want to spend the money instead of saving it. It’s a rare handful that use CPF because they want to use cash to invest in a well-diversified portfolio, or start a small business.

Most of the time, we want to use our CPF because we’d rather use our bank account to fund holidays, nice dinners, the latest iPhone, etc. Remember that, while you do that, you’re losing out on a risk-free rate of up to 3.5 percent (or up to five percent if you follow point 1).

On the other hand, if you are using the CPF because you are investing your cash (and beating the CPF rate) then by all means carry on.

Use your CPF if you are inherently disciplined

It’s a little ironic, but the CPF – which is meant to enforce disciplined financial behaviour – can actually make you lazier when it comes to housing. You know yourself best: if you hate having to understand issues like refinancing and budgeting, and you are precisely the type who may benefit from paying in cash. What gets seen and measured, gets managed.

When you understand the intricate details of retirement planning and property loans, then you can cut yourself some slack, and use your CPF.