While it may seem convenient (and appealing) to use your CPF monies to appear “Debt-Free”, at the end of day, there are a few reasons why you may not want to rush in to it.
You Lose Money In CPF Interest Gains
Using your CPF Ordinary Account (OA) savings to pay for your outstanding housing loans results in you losing the interest you stand to gain from CPF. Sure, it allows you to clear your debt at a quicker rate. But is the amount loss worth it?
Your CPF OA savings brings you an annual interest rate of 2.5%. This means that if you had $100,000 in your CPF OA, you would be earning an interest of $2,500. The housing mortgage loan from a bank usually charges an interest rate of anywhere between 1% - 1.5% as of today. This means that the interest rate paid to the bank would be at (using a sum of 1.5%) $1,500.
This means that you’re giving up $1,000 a year that you could have earned from your CPF just by redeeming the housing loan with that amount. Stretching your loan to over 25 years of loan tenure, this also means that you’ve given up over $25,000 worth of interest generated from your CPF OA Savings. We haven’t even talked about what happens if you’re using your CPF Special Account (SA) Savings, which earns over 4% per annum.
Repaying CPF Monies + Accrued Interest
Using your CPF monies means that you’ll have to return every dollar you’ve withdrawn, including your CPF accrued interest of 2.5%, to your CPF account. This happens when you’re planning to sell your home to upgrade (or downgrade) to another property. If you’ve found your dream home and are set for life, this won’t be an issue for you.
To calculate the CPF Accrued Interest, let’s look at a simple case study. If Mr Tan took out $100,000 from his CPF to pay for the downpayment of his house with plans to sell it in the next 5years, here’s how his accrued interest would look like:
1st year: $100,000 x 2.5% = $2,500
2nd year: ($100,000 + $2,500) x 2.5% = $2,562.50
3rd year: ($102,500 + $2,562.50) x 2.5% = $2626.56
4th year: ($105,062.50 + $2626.56) x 2.5% = $2692.23
5th year: ($107,689.06 + $2692.23) x 2.5% = $2759.53
At the end of 5 years, the amount of accrued interest alone would be: $13,140.82
This means that Mr Tan would have to pay over $113,140.82 from the sale proceeds back to his CPF account.
Reaching The Withdrawal Limit (For Resale HDB & Condos)
When using your CPF savings to buy a property, there’s a chance that you could deplete the funds in your OA to the point of hitting the CPF withdrawal limit. This is especially so if you neglect to check how much money remains in your OA after your monthly instalment payouts. Once you reach the cap for using your OA, you’ll have to use any cash on hand to pay for your monthly mortgage instalments.
The worse case scenario could occur if you don’t have enough cash on hand for the mortgage instalment, which could lead to late payments (resulting in additional penalties) or even a foreclosure of your home if there’s a default in payment of your housing loan.
Shoutout to those who’re turning 55 and above; in this case, so long as you meet the Basic Retirement Sum (BRS) in your CPF OA, you’ll be exempted from this limit.
Do note that the Withdrawal Limit is determined based on the Valuation Limit. If the property tenure can cover the youngest buyer to a minimum of 95 years old (they must be able to stay there until they’re at least 95), your applicable withdrawal limit will be higher.
At the end of the day, your CPF OA is intended to partially fund any home purchases you have, so feel free to use your CPF OA to offset any necessary payment if you need to. It’s not a do-or-die situation where you can only choose cash OR CPF monies. However, if you’re struggling with funds and financial budgeting, the recommended option would be to pay off your home in cash.
Commenti