Buying your first home is a big milestone, and it’s likely when you’ll truly appreciate those Central Provident Fund (CPF) contributions. After all, they can help you buy your dream property. Besides, using CPF to pay for your mortgage is practically the norm in Singapore. However, not everyone’s convinced it’s the best move. So let’s look at the pros and cons of tapping into your CPF for your mortgage payments.
Table of Contents
- What is CPF and how do you use it?
- Pros of using CPF for mortgage payments
- Cons of using CPF for mortgage payments
- Pros and cons of using CPF for mortgage payments
- How to maximise CPF for property purchase
- To use CPF, or not to use CPF for your mortgage?
- Ready to buy a home but need some help with financial planning?
What is CPF and how do you use it?
Some have the misconception that their CPF monies can only be used for housing needs. The fact is, CPF funds are versatile and serve multiple purposes beyond retirement savings.
The CPF Ordinary Account (OA) allows for various uses, including CPF LIFE, insurance, housing, education and training, and CPF Investment Scheme (CPFIS).
| Purpose | Details |
|---|---|
| CPF LIFE | CPF members can use their CPF savings to join CPF LIFE, providing a monthly payout for life upon reaching the payout eligibility age. |
| Insurance | Funds in the OA can be utilised to purchase insurance policies, providing coverage for critical illness, disability, and death. An example is the Dependants’ Protection Scheme (DPS), a term life insurance plan providing coverage of S$70,000 until age 65. Funds from the OA or SA can be used to pay the premiums for DPS, offering protection against death, terminal illness, or disability. |
| Housing | OA funds can be used to finance home purchases, covering down payments, legal fees, stamp duty, monthly mortgage payments, and other related costs. |
| Education and training | OA funds can be used to finance education and training expenses for oneself or family members under the CPF Education Loan Scheme, which allows individuals to use CPF OA funds for tuition fees in approved courses. |
| CPF Investment Scheme (CPFIS) | CPF members can invest their CPF OA and SA savings in various instruments under CPFIS to aim for higher returns. |
Pros of using CPF for mortgage payments
- Cash flow management: Using CPF for mortgage payments can free up cash flow, allowing homeowners to allocate their cash resources to other needs or investments.
- Capital appreciation: Property values tend to appreciate over time, potentially offsetting the opportunity cost of using CPF for mortgage payments.
Cons of using CPF for mortgage payments
- Reduced retirement funds: Utilising CPF for mortgage payments can deplete retirement savings, potentially impacting one’s financial security in retirement.
- Opportunity cost: The funds used for mortgage payments could have been invested elsewhere for potentially higher returns, representing an opportunity cost.
- Accumulated interest upon sale of property: Should you plan to sell your property down the line, it’s important to bear in mind that besides settling your remaining home loan balance, you’re also obligated to reimburse the CPF funds withdrawn for your property purchase. This repayment includes the principal sum along with the accumulated interest on the amount withdrawn from your OA over the years, as well as any housing grants received.This can reduce the proceeds from the property sale.
Pros and cons of using CPF for mortgage payments
| Pros | Cons |
|---|---|
| Cash flow management: Frees up cash flow for other needs or investments. | Reduced retirement funds: Using CPF depletes retirement savings, impacting future financial security. |
| Capital appreciation: Property values tend to appreciate, potentially offsetting costs. | Opportunity cost: Funds used for mortgage could have been invested elsewhere for potentially higher returns. |
| Accumulated interest upon sale: Must repay CPF withdrawn for property purchase, including accumulated interest, which reduces proceeds from the property sale. |
How to maximise CPF for property purchase
1. Pay mortgage with cash
The down payment required for a property purchase typically constitutes a substantial sum, making it prudent to utilise a portion of your CPF funds for financing. However, opting to cover your monthly loan repayments with cash instead of CPF may prove viable and more effective in resource management.
By leaving your CPF savings in your OA, you can benefit from the compounding effect of interest, thereby bolstering your retirement funds. Additionally, you can enhance your retirement savings by transferring some of your CPF OA funds to your SA to capitalise on higher interest rates. While the OA provides an annual interest rate of 2.5%, the SA offers a higher rate of 4%. This additional 1.5% can yield a substantial impact as interest compounds over time.
2. Shield CPF OA savings
Homeowners have the option to retain up to S$20,000 each in their CPF when opting for a HDB loan. Beyond this amount, the remaining balance of available CPF-OA funds must be utilised for the flat purchase prior to securing a HDB loan.
Maintaining this reserve in your CPF OA serves as a safety net, enabling homeowners with constrained income streams to meet monthly HDB payments in the event of unforeseen circumstances such as job loss.
For those confident in surpassing the CPF OA’s 2.5% interest rate in the long run, there’s the opportunity to invest excess OA funds (beyond $20,000) through the CPFIS before embarking on a property purchase. This approach minimises the depletion of CPF OA savings for the home acquisition.
To use CPF, or not to use CPF for your mortgage?
The decision to use CPF for mortgage payments requires careful consideration of the trade-offs involved. Homeowners should weigh the pros and cons based on individual financial circumstances and goals.
Leveraging your CPF funds for home financing can be convenient and advantageous, but involves opportunity costs. Opting for a blend of cash and CPF funds could be more optimal for financing your home acquisition. Keep in mind that the CPF’s primary objective is to bolster your retirement savings, and that makes it essential to exercise caution when structuring your home budget.
Maximising your CPF for property purchase involves thoughtful planning and strategic use of resources. By exploring alternatives to using your CPF for mortgage payments and prioritising long-term financial security, you can make informed decisions that align with your objectives.
Ultimately, whether to use CPF for mortgage payments depends on a combination of factors including personal preferences, risk tolerance, and future financial outlook.
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Originally published on PlannerBee.
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