Should I use Cash or CPF for down payment and monthly mortgage installment?

Understanding CPF accrued interest in deriving to an informed decision

When you sell your property, you will have to refund the principal CPF withdrawn towards the property (including the CPF Housing Grant, down payment, and monthly withdrawn to service loan) plus its accrued interest to your CPF Ordinary Account.

What is Accrued Interest?

Accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing. The interest is computed on the CPF principal amount withdrawn for housing on a monthly basis at the current CPF Ordinary Account interest rate of 2.5% and compounded yearly.

A case study

Suppose you are buying an HDB 4R flat in Bishan for S$500,000. For illustration, let’s assume both of you are couple and eligible for CPF Housing Grant of $80K, and both of you have $135k in your CPF Ordinary Account, and will take HDB loan and pay monthly loan from your CPF Account.

Cost of Purchase

Sale Price: S$500,000

+ Stamp Duty Fee: S$9,600

+ Conveyancing Lawyer Fee:  $1,400

+ Agent Fee: $5,000                    

= Total S$520,000

Here’s how you would finance your purchase:

CPF Housing Grant: $80K

CPF Ordinary Account: $135K

Cash: S$5k (Agent fee)

HDB Loan $300K (loan tenure: 25 years, concessionary rate: 2.6%, monthly installment $1,361)

Now, suppose you decide sell your flat in 10 years at then market rate of $550,000.

Cost of Selling

Sale Price: S$550,000

- HDB Outstanding Loan: $202,680

- CPF Principal Amount: $378,320 +

- CPF Accrued Interest $83,004

- Conveyancing Lawyer fee: $1,000

-  Agent Fee: S$11,000

Cash proceeds: $0.

The Accrued Interest of $83,004 is an interest you would have earned if your CPF savings had not been withdrawn at all. Instead, now you will have to “top up” this amount into your CPF Account. You are allowed to use your entire fund OA Account (including the Accrued Interest refunded) for your next property purchase.

If you need funding from your CPF OA to purchase this property, by all means do so. However, what if you have this cash of $135,000 and are able to pay your monthly instalment in cash?

You should ask yourself what you are planning to do with your current cash and expected income. Are you getting better returns elsewhere (earning more than $83,004 in 10 years in riskier-than-CPF investments) or  are you going to leave it in your bank savings account that is earning near-zero interest? If your answer is the former, then it is clear that you should exhaust your CPF Ordinary Account for down payment and monthly mortgage instalment. If the answer is the latter, you should plan to set aside funds equivalent to 6 months of expenses for emergency use and utilise the remaining cash for the property purchase. Your fund inside your CPF OA will sit in there and earn guaranteed 2.6% returns annually. In the future, you can still decide to use this fund for your next property purchase, or withdraw it at the age of 55 after setting aside Full Retirement Sum, or Basic Return Sum and a property.


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