When we buy a home in Singapore, most of us will need a hefty home loan spanning several decades. If we’re buying a BTO or resale HDB flat, we can tap on the HDB concessionary housing loan, up to a maximum of 80% of the property price, otherwise, we can get a bank loan, up to a maximum of 75% of the property price.
This still means we need to fork out a downpayment of between 20% and 25%, depending on whether we take an HDB or bank home loan. To pay for the downpayment, majority of us will dip into our CPF Ordinary Account (OA) savings.
Obviously, we need to start servicing our home loan after that. This means paying back a portion of the principal as well as an interest rate component for borrowing the funds. What many of us may not realise is that we are also being charged an “interest” for using our CPF OA funds for the downpayment and monthly instalments – or more commonly known as our accrued interest.
Read Also: Taking A HDB Housing Loan: Should You Keep More Than $20,000 Or Let Your CPF OA Be Wiped Out
Why Do We Need To Pay Interest To Use Our Own CPF Ordinary Account Money?
We need to understand that CPF is meant for our retirement. At age 55, our combined CPF Ordinary Account and Special Account balances will be transferred to a newly created Retirement Account (RA).
By taking out money from our Ordinary Account to pay for our home today, we are essentially “borrowing” from our retirement funds in the future. To safeguard our retirement, we need to refund our CPF OA account with the:
1) principal amount used for downpayment;
2) monthly instalments used for our mortgage repayment;
3) any HDB Housing Grants that we received;
4) accrued interest, or the interest we would have received on the principal, monthly instalments and CPF Housing Grants, compounded at 2.5% per annum;
As point 4 is a component not many of us think about, we may run into liquidity issues when we sell our homes or start planning for our retirement. When we buy an HDB BTO flat, we can also use our OA savings to pay for stamp duty, legal fees and other related costs.
Read Also: Here’s What Your CPF Full Retirement Sum Might Look Like When You’re 55
Accrued Interest Can Snowball To A Huge Amount Over Time
To calculate how much our accrued interest can snowball over time, we will use an example of buying a BTO flat today.
For example, if we purchased a 4-room unit at $472,000 today, we would have to put down a minimum downpayment of 5%, or $23,600 if we take a housing loan from HDB. We would also have to pay a stamp duty, legal fees and other related costs that will likely amount to close to $11,400. This combined $35,000 can be paid for with our CPF Ordinary Account balances as well. We would have to pay a further 5% of the property price at the point of our keys collection.
Assuming it takes three years before we receive our keys to the BTO flat, we would have already racked up $2,700 in accrued interest owed to our CPF before we have even lived in it.
Year
Amount We Have To Refund To CPF OA
Estimated Accrued Interest In Year
Estimated Total Accrued Interest
-3
$35,000
$875
$875
-2
$35,875
$896
$1,771
-1 (Collect Keys)
$36,771
$919
$2,691
Once we collect the keys at the end of the third year, we would have to pay the remaining 5% downpayment, which can come from our CPF OA balances, as well as start paying the monthly instalments on our home loan. Our monthly instalments will likely add up to $21,000 a year, and can be entirely paid from our CPF OA balances as well.
Year
Amount We Have To Refund To CPF OA
Estimated Accrued Interest In Year
Estimated Total Accrued Interest
1 (Monthly Instalments Start)
$82,291
$2,057
$4,748
2
$105,348
$2,633
$7,382
3
$128,982
$3,224
$10,606
4
$153,206
$3,830
$14,436
5 (Reach MOP)
$178,036
$4,450
$18,887
By the time we hit our Minimum Occupation Period (MOP) in five years, and can sell our HDB flat if we choose, we would owe our CPF OA close to $178,000, of which close to $19,000 would be in accrued interest.
Over the next 25 years, this will continue to compound in a larger amount.
Read Also: Buying A BTO: Does It Make Sense To Always Take A HDB Loan With A Longer Tenure?
Year
Amount We Have To Refund To CPF OA
Estimated Accrued Interest In Year
Estimated Total Accrued Interest
6
$203,487
$5,087
$23,975
7
$229,575
$5,739
$29,714
8
$256,314
$6,407
$36,122
9
$283,722
$7,093
$43,215
10
$311,815
$7,795
$51,010
11
$340,610
$8,515
$59,525
12
$370,125
$9,253
$68,779
13
$400,379
$10,009
$78,788
14
$431,388
$10,784
$89,573
15
$463,173
$11,579
$101,152
16
$495,752
$12,393
$113,546
17
$529,146
$13,228
$126,775
18
$563,375
$14,084
$140,859
19
$598,459
$14,961
$155,820
20
$634,420
$15,860
$171,681
21
$671,281
$16,782
$188,463
22
$709,063
$17,726
$206,190
23
$747,790
$18,694
$224,884
24
$787,484
$19,687
$244,571
25 (End of loan)
$828,171
$20,704
$265,276
At the end of our loan tenure of 25 years, we would have to refund $828,171 to our CPF OA account when we sell our property. Of this, close to $265,276 will be accrued interest.
At this point, we have to note that this does not take into account the 2.6% in yearly interest that we have been paying on the loan amount. We also will continue racking up more in total accrued interest the longer we keep our flat. In addition, if we have taken any CPF housing grants, our accrued interest will be higher as well.
If we sell our property once it is fully paid up at the 25-year mark, we have to pay the $828,171 into our CPF OA.
What Happens When We Sell Our HDB Flat?
Throughout the entire 25 years, we may have thought that living in our HDB flat was “virtually free” because we didn’t need to fork out a single cent in cash. However, the tables above clearly depict the amount we have to refund to our CPF OA if we ever sell our HDB flat.
This means we have less flexibility to use cash proceeds from our home sale as a substantial percentage of it will flow back into our CPF Ordinary Account. This also means the longer we hold on to our HDB flat, even if it is fully paid, the higher our accrued interest is going to be.
After refunding the $828,171, or more, back to our CPF OA account, we may find that we have less cash on hand that anticipated. This could throw a spanner into any retirement plans that we have set in place for ourselves.
While we may not have as much cash as we may have expected, the funds that go into our CPF OA account can still be used to purchase our next property. Therefore, we should not worry about not having the financial firepower to purchase another home for ourselves.
If we are over 55, our funds returned to our CPF OA may get locked up in our Retirement Account, up to the Full Retirement Sum (FRS). If we purchase another home, and pledge it, we can choose to only contribute the Basic Retirement Sum (BRS), and use the difference to purchase our next home.
Read Also: What Happens To Your Money After You Sell Your Flat In Singapore
Using Cash To Pay For Our HDB Homes
As mentioned, our CPF is meant to build our retirement nest egg. When we were younger, we may have used our CPF to fully pay for our downpayment and monthly instalments on our homes to ease the burden on our finances.
To ease the impact of how much we need to refund into our CPF Ordinary Account, we can consider paying part of our downpayment or monthly instalments in cash. We can also choose to purchase a less costly home rather than “borrow” more from our retirement to fund a home we actually should not have been able to afford.
This would have two main benefits on our retirement plans.
1) It will lower the amount we will have to refund into our CPF OA
2) The funds we would have used to pay for our homes will remain in our CPF accounts paying us an interest of 2.5%, rather than incurring an interest of 2.5%.
Read Also: Why Singaporeans Should Stop Using Their CPF Money To Pay Their HDB Home Mortgage
Editor’s Note: This article was originally published on 23 January 2019 and we have updated it to include the latest information.
The post Here’s How CPF Accrued Interest On Your Home Affects Your Retirement Planning appeared first on DollarsAndSense.sg.
