Taking a HDB Loan: How the CPF rule change affects you

If you’re intending to buy a HDB flat, be it a BTO or resale unit, then this article is a must-read. On 28 August 2018, the Housing & Development Board (HDB) announced a rule change regarding the use of CPF monies to purchase your property when taking a HDB loan. Previously, every cent in your CPF Ordinary Account (CPF-OA) would be wiped out to pay down the flat you purchase before HDB would disburse the loan amount for the unit (resulting in a lower loan quantum). With this announcement, flat buyers now have the option to leave up to $20,000 in the CPF-OA when taking a HDB loan. Here’s how it works, and how the rule change affects you:

How does the new rule change the buying process?

To repeat, under the old rules, the flat buyer had to drain all available funds in his/her CPF-OA when taking the HDB loan. Couples making a joint purchase as co-owners will mean that both CPF-OA accounts would be wiped out. There was a good argument for wiping out your hard-earned CPF savings: if you could retain money in your CPF, you would effectively be borrowing more for your house, and at the same time it was also in HDB’s interest to minimise its liabilities as a lender. But now the scenery has changed, you can opt to leave up to $20,000 in your CPF-OA*.

*For co-owners such as couples, the maximum amount that can be retained is still $20K across both CPF-OAs, not $40K.

So here’s how it works:

Say you want to buy a flat that costs $350,000. The down payment – assuming you have full 90% financing^ – is a minimum of $35,000.

Now let’s say you have $60,000 in your CPF-OA.

Under the old rules, you would have to use all of towards paying off the purchased flat before HDB will issue you the loan. That means making a down payment of around 17% instead of the minimum 10&. Borrowers did not have the option to use less from the CPF-OA.

Under the new rules, however, you can choose to use only $40,000 from your CPF. This would leave you with $20,000 in your CPF-OA, and total CPF outlay at the time of completion of sale/key collection would be around 11% (i.e. your downpayment of 10% + around 1% extra).

^The maximum possible financing from an HDB loan is 90% of your flat price or value, whichever is lower. HDB is not obliged to give you the maximum.

Why would you want to do that?

The official reason given for the rule change was to provide flat buyers with “greater flexibility in using their CPF funds”. But delving deeper, there are three main reasons you would want to consider taking full advantage of this rule change, namely:

• To cover the mortgage repayments during emergencies
• To shift OA monies into your SA, for a higher interest rate than the HDB loan rate
• Meeting minimums to invest your CPF elsewhere

1. To cover the mortgage repayments during emergencies

Take your monthly loan repayment to be $1,800, for example. If you have $20,000 in your OA, that means you can go 11 months without contributing to CPF, and still pay your HDB loan without fail.

You can probably see how that would help in situations like sudden unemployment (e.g. retrenchment), or inability to work for medical reasons.

Mind you, 11 months is excessive in our opinion. Having six months’ worth of expenses in your emergency fund is usually good enough a buffer for job loss, as half a year should be enough time to find another job, or even to sell your existing flat at a good price and downgrade. For medical reasons, it’s best to be covered by an insurance policy that pays you a lump sum if you can’t work for prolonged periods.

2. To shift OA monies into your SA, for a higher interest rate than your HDB loan rate

Your CPF Special Account (CPF-SA) currently has a guaranteed interest of 4%* per annum. This is higher than the HDB loan interest rate of 2.6%**. So, the money in the CPF-SA is growing at 1.4% even after taking into account your home loan – this is better than most bank fixed deposits, which tend to be well under 1%.

So the rule change will appeal to Singaporeans who choose to rely primarily on CPF for their retirement (this group tends to pay their HDB loan in cash anyway, and always transfer their OA into their SA – they commonly target a goal of $1 million in their CPF upon retirement). Don’t underestimate the power of just $20k; it will turn into precisely $96,020.41 in 40 years’ time with a 4% per annum interest rate.

*For now, you get a bonus interest of 1% for the first $60,000 in combined balances (across SA, Medisave and Retirement accounts, it’s 4%+1%=5%; for CPF-OA up to $20,000, it’s 2.5%+1% = 3.5%). This bonus interest is reviewed every quarter, so don’t take it for granted.

**More precisely, the HDB loan rate is 0.1% above the prevailing CPF interest rate, which is revised quarterly. But the rate has been 2.6% for many years now, and is unlikely to change in the short term.

3. Meeting minimums to invest your CPF elsewhere

Some people want to maintain a minimum of $20,000 in their CPF OA and $40,000 in their CPF SA. Crossing this threshold qualifies them to invest a portion of their CPF monies in allowed products, such as gold, Exchange Traded Funds, blue chips, etc^.

You can refer to the CPF Investment Scheme (CPFIS) — link to official page — for more details on this.

^When you invest, always do your own due diligence. If you happen to lose CPF money investing it, the government won’t replace your losses for you.

But the CPF rule change is not without its drawbacks.

We foresee many people opting to keep $20,000 in their CPF-OA but leaving it untouched. Guess what, if you’re not transferring the $20,000 into your CPF SA, or otherwise investing it, you’re effectively “losing” a bit of money every month if you’re only earning 2.5% interest on that amount. Keep in mind that the CPF-OA interest rate is 2.5% without the bonus interest of 1% (which is not permanent and is reviewed every quarter). Meanwhile, the HDB loan interest rate has always been kept at 0.1% above the standard CPF-OA interest rate (i.e. 2.6% vs 2.5%).

So while having an added buffer in your OA can prevent sudden emergencies from curtailing your mortgage payments, it might end up costing you a bit of money to keep money lying dormant in your CPF-OA.

Another important thing to note is that, by using less of your CPF money than you could, you’re effectively taking a bigger loan. This brings all the usual issues, such as paying more for interest, having a higher loan tenure, paying more every month, etc.

So, is it worth keeping extra cash in your CPF-OA?

If you already have an emergency fund (sufficient savings for six months of expenses including your mortgage), you might not need to keep more in your CPF.

Holding your emergency fund in your bank account, rather than in your CPF-OA, also gives you more flexibility. For instance, you can use the funds for groceries in a pinch, for instance, whereas CPF-OA monies can only go toward servicing the home loan. And if you’ve ever been dead broke and had to raise a family at the same time, you’ll understand how important that flexibility is.

Also, as we mentioned above, keeping the full $20,000 could be excessive. It could make more sense to keep six months’ worth of mortgage repayments, and then use the rest of your CPF-OA to minimise your loan quantum (e.g. setting aside $9,000 for six months of the mortgage, then using the remaining $11,000 to reduce your total loan).

As for keeping your CPF-OA funds to invest it, or putting it into your SA, it’s not our place to tell you whether that’s a good idea. That’s an investment issue, and we advise consulting a certified Financial Advisor on whether that strategy works for you.

What do you think about the CPF rule change for HDB loans? Voice your thoughts in the comments section or on our Facebook community page.

If you found this article helpful, 99.co recommends Deciding between HDB loans and bank loans? Here’s a quick reference and, speaking of rules, here are 9 questionable HDB rules you probably didn’t know about

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