A common question many Singaporeans ask when taking up a housing loan from HDB for their flats is whether they should let HDB exhaust their Central Provident Fund Ordinary Account (CPFOA).
If you don’t already know, let us explain. When purchasing an HDB flat, whether new or resale, you have the option of securing a housing loan from HDB. The interest rate for this loan is 2.6% per annum, making it an attractive option given that bank mortgage rates are likely to be higher in the current environment of high-interest rates.
There are some conditions to taking an HDB loan. You can find them all here on the HDB website. Most of these conditions relate to your age, income, and whether you have an interest in any private properties.
One important consideration is whether you should allow HDB to exhaust your CPF OA before they grant you an HDB loan.
According to HDB, two options are available for homeowners taking a housing loan from HDB.
Option 1: Allow HDB to use up your CPFOA monies for the purchase of a flat before a housing loan from HDB will be granted to them for the remaining amount they need.
Option 2: Retain up to $20,000 of the available savings in each owner’s CPFOA. If you are buying your HDB flat with your spouse, this means both of you can retain up to $40,000 collectively in your CPFOA.
For example, if an HDB flat costs $400,000, the loan-to-value (LTV) limit would be 80%, which means the minimum down payment required would be $80,000 (20% of $400,000). However, if homeowners have a combined $200,000 in their CPFOA and wish to use a housing loan from HDB, they can only retain up to $20,000 each in their CPFOA (or a combined $40,000). Therefore, $160,000 will be used as a down payment for the flat before HDB loans them the remaining $240,000.
Since the first $20,000 in your CPFOA earns a risk-free interest of 3.5% per annum (1% bonus interest + base interest of 2.5%), and the housing loan from HDB is at 2.6%, it makes financial sense to retain the $20,000 as far as possible. The only reason not to do so would be if you need the $20,000 to help you afford the minimum down payment and other administrative expenses.
What Other Options Do I Have?
You have some options, but they are not immediately obvious. That is to say, you won’t find them being discussed on the HDB or CPF website.
If you are familiar with CPF, you would know that CPF members can invest any amount above $20,000 in their CPFOA. For instance, if you have $100,000 in your CPFOA today, you can invest up to $80,000. CPFOA investments can include stocks, unit trusts, exchange-traded funds (ETFs), investment plans offered by insurance companies, and even Singapore Government Securities.
The key here is that if you invest in some of these instruments before taking an HDB loan, HDB will not require you to liquidate your investment holdings when granting you a loan. They will provide a loan based on how much you need after your CPFOA has been used, regardless of whether the CPFOA funds have been invested.
Furthermore, if you liquidate your investments after the loan has been disbursed, the funds would be returned to your CPFOA. HDB will not retract the loan they have given just because you suddenly have an influx of fresh cash in your CPFOA.
Here are two simple scenarios.
Scenario 1:
Alex needs a $400,000 housing loan. He has $100,000 in his CPFOA. He will be expected to use at least $80,000 (he can retain up to $20,000) in his CPFOA first before HDB loans him the remaining $320,000.
Scenario 2:
Ben needs a housing loan of $400,000. He has $100,000 in his CPFOA, but he invests $50,000 in Singapore Government Securities, so he only has $50,000 left. He is expected to use the $30,000 in his CPFOA before HDB loans him the remaining $370,000 he needs.
If Ben liquidates his investments in Singapore Government Securities holdings after that. The $50,000 will be returned to his CPFOA.
What Are The Considerations?
While using the CPFOA funds can reduce the housing loan and monthly mortgage payments that homeowners need to make, some people may prefer to maintain an extra cash balance in their CPFOA. This approach offers greater short-term flexibility by allowing them to use the balance in their CPFOA for mortgage repayments in the future.
For example, if a homeowner plans to take a break from work for a couple of years, having a balance in his CPFOA can help cover the mortgage during this period.
With the exception of retaining the first $20,000, most Singaporeans typically allow their CPFOA to be fully utilised before taking an HDB loan. However, if unique circumstances (e.g., plans for further studies, impending job resignation) make it advantageous to retain some extra CPFOA cash balance, then it is worthwhile to consider whether “parking” some CPFOA money in investments could make financial planning sense for you.
Read Also: Taking A HDB Housing Loan: Should You Keep More Than $20,000 Or Let Your CPF OA Be Wiped Out
This article was first published on 16 March 2017 and has been updated.
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