Paying with your CPF funds won’t require forking money out of your pocket, but it does result in a hefty accrued interest you’ll have to pay back later on. Is cash a better option? We explore the pros and cons of paying with CPF or cash for your home.
Buying a home will probably be one of the biggest purchases you’ll make in your life so choosing the best mode of payment is important as it can affect your personal cash flow significantly.
While most would lean towards using all of their CPF Ordinary Account (OA) funds to splash on their home without touching a single cent from their wallet, it may not always be the best option. In some situations, couples may prefer to rely on cash solely to finance their homes.
Not sure which is a better choice for you? We explore the pros and cons of using CPF or cash to pay for your home, so you can make an informed decision about this huge purchase.
What can I use CPF on?
There are certain things you can use CPF to pay, while some might require cash. Here’s what you can pay in full CPF funds:
- Leftover portion of the purchase price not covered by housing loan
- Home loan repayments
- Legal fees and stamp duty
- Home Protection Scheme fees
Things to note when using CPF
Before we deep-dive into why using CPF and cash can be a viable option for financing your home, there are some things you need to note if you want to use your CPF.
#1 You may still need to use some cash for down payment/deposit
When it comes to the downpayment of your home, you may still need to fork out some cash to pay a portion of it, depending on the type of loan you take and the type of house you purchase:
|Type of house you’re purchasing
|Type of loan
|Mode of payment
|15% downpayment, can be completely paid with CPF
|25% downpayment, up to 20% in CPF and at least 5% in cash
|25% downpayment, up to 20% in CPF and at least 5% in cash
#2 CPF can pay up to Valuation Limit (VL)
The Valuation Limit (VL) refers to the market value of your property, which is not the same as the purchase price of your property. For example, if you sell your property for S$600,000 but the market value is only S$550,000, the VL is S$550,000.
If you want to use your CPF, your CPF can only cover up to the VL, including your downpayment and home loan repayments.
#3 CPF can pay up to Withdrawal Limit (WL)
The Withdrawal Limit (WL) is higher than the VL and lets you borrow above the VL. Currently, the WL is 120% of the VL.
Depending on the type of property or housing loan, the WL differs.
|Type of property
|Type of housing loan
|Maximum CPF you can use
|New HDB flat
|Resale HDB flat
|Valuation limit, or no limit if you can park aside Basic Retirement Sum (S$96,000 in 2022)
|HDB flat or private property
|Valuation limit, or 20% from OA if you can park aside Basic Retirement Sum (S$96,000 in 2022)
#4 You can retain S$20,000 in your OA
According to the new measures, CPF Board allows you to retain up to S$20,000 in your OA if you take an HDB housing loan, with the remainder going towards your housing loan payment.
This is so that the remaining funds provide a safety net for you to pay for your monthly instalments during unforeseen circumstances. To build more emergency funds, you can also make a voluntary housing refund. But of course, you don't have to retain any if you don’t wish to.
Why you should use CPF
#1 Your CPF OA funds are meant for your housing anyway
The CPF funds that we have is split into different accounts, and cannot be withdrawn unless you reach the retirement age. Since our CPF OA is already meant to pay for housing, insurance, investment and education, many might choose to use the funds out of convenience.
Using the funds in our OA may also seem less painful than using our own hard-earned cash from our own pockets since a portion of our income already automatically goes into our OA.
So if the funds are already allocated for housing, we might as well just use it since you can’t use it for other purposes if you don’t have the need to. This is the main way Singaporeans can tap on their CPF before they reach the age of 55.
#2 You have more cash to free up for expenses
Paying with your CPF also means that you have cash freed up for other expenses. Since 20% of our income goes to our CPF, financing your home solely with CPF frees up the other 80% of your salary to spend on other necessities like clearing your debt, saving up for retirement and your day-to-day expenses.
However, if you decide to use cash and leave your CPF untouched, you would probably use about 20% to 30% of your salary (depending on how much your home loans are) to finance your home loans. Factoring in your CPF contributions per month will leave you with only about 50% to 60% of your salary left for your own expenses.
Additionally, if you opt for a bank loan with floating rates, the home loan repayments fluctuate according to the market conditions. If the monthly repayment increases on a particular month when your finances are tight, you may not have enough liquid cash for your other expenses.
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#3 You can use the cash to invest
Having additional liquid cash also means that you can invest in a greater variety of investment vehicles. While you can also use your CPF to invest through the CPF Investment Scheme, the investment options are very limited. With cash, you have access to a wider range of investments like robo-advisors and stocks that can give you higher potential returns.
If your investments do well, the returns may also be able to cover the interest of your home loan, and even the accrued interest that you’ll have to pay back to your CPF when you sell your home.
New to investing? Check out the best robo-advisor platforms to kickstart your investing journey.
Why you should use cash
#1 Maximise CPF funds for retirement
At age 55, the money in your CPF OA will automatically be transferred to your Retirement Account (RA). If you wipe out all your funds in your OA to finance your home, you will be missing out on money that can be used for your retirement. Though you’ll have to pay back the amount used in full on top of the accrued interest (only if you decide to sell your house), what you will be missing out on is the power of compounding interest for your CPF funds.
On top of that, the first S$20,000 in your CPF OA will be an extra 1% p.a. on top of the 2.5% p.a. base interest rate, bringing the total interest rate to 3.5% p.a., allowing you to take advantage of the higher interest.
Since your CPF funds give you guaranteed interest, this makes CPF a safe and stable way to save for your retirement, backed by the government.
#2 You don’t have to pay accrued interest
When you sell your property, you have to return the principal amount of CPF funds that you used to finance your home. This includes the downpayment, monthly mortgage payments and other costs like stamp duty and survey fees. On top of that, you’ll also have to pay the additional accrued interest pegged at a minimum of 2.5%, which is the money you would have earned if you did not use your CPF funds.
Because of this, many homeowners might result in a negative cash sale. If they sell their house at a low price, the profits they earn might not be enough to finance the accrued interest and even the outstanding balance for the home loan.
By using cash to fully finance your home, you would mitigate the risk of a negative cash sale, since you would have one less thing to worry about — the accrued interest. However, in the event of a negative cash sale, homeowners do not have to top up the remaining amount to their CPF account with cash. The consequence for this group is that they would have less CPF monies to tap for their next property or for retirement purposes.
#3 Reserve CPF as your ‘emergency funds’
If you have sufficient cash reserves, using cash also provides you with a safety net of having your CPF OA available.
For instance, if you unexpectedly lose your job due to retrenchment or meet with an unforeseen medical condition that requires a large sum of money, you might not have enough liquid cash to finance your home loan. This is when your CPF OA can act as your emergency funds to pay for your home loan so you don’t incur any penalty fee due to late payment.
Ultimately, the decision lies with you. Clearly, there are different advantages when it comes to financing your home with cash or CPF in full, and it all boils down to your priorities and your financial situation.
While you might want to take advantage of the guaranteed interest and compound interest that your CPF OA can provide, your financial situation might not be stable enough to pay for your home in full cash.
In such situations, it’s important to carry out financial planning and ensure that the mode of payment you choose is sustainable. To get the best of both worlds, you can also opt to pay a portion of your home in cash and CPF, so you don’t stress yourself out with the financial burden.
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