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Most of us use CPF for property. In fact, we jumped at the opportunity of using CPF for property, as it is one of the limited ways we can utilise our CPF monies.
However, SHOULD we use CPF for property? It is one hugely debated topic. In this article, let me share with you why we should stop using CPF for properties.
Opportunity Cost of Using CPF
CPF monies in Ordinary Account (OA) earn an interest rate of up to 3.5%, whereas those in Special Account (SA) earn interest rate of up to 5%.
These interests is basically risk free, earned without incurring additional transaction costs like brokerage fees and commission.
If we use CPF monies on property, we will lose attractive interest.
Let us do a simple illustration:
Mr & Mrs Tan and Mr & Mrs Lim are both servicing a housing loan with monthly instalment of $2,000 for 20 years. Mr & Mrs Tan choose to service the instalment using CPF, whereas Mr & Mrs Lim choose to leave their CPF in their OA and use cash instead.
Let's assume Mr & Mrs Tan did not use any cash for other investment. They would not have any monies in their CPF OA at the end of 20 years. Mr & Mrs Lim, on the other hand, would have amassed $613, 072!
Paying back to CPF after sale of property
Property owners who have used CPF for property need to return to their CPF OA whatever amount they have used, plus the interests that would have been accumulated if they have not used the CPF.
Therefore, property owners do not actually lose out interest from using their CPF for property, as they pay back the accrued interest after the sale of their property. However, it also means they will get back lesser cash proceed. Or non at all in a negative sale situation.
Let us look at the following case study.
Case Study 1 : Purchase of Private Property
Mr and Mrs Lim bought a 2 bedroom condominium at $800,000. They took the maximum 75% loan at 2% interest for a tenure of 20 years. The monthly instalment is $3,035.
Option 1
They paid the mandatory 5% in cash, and balance 20% using CPF. Stamp & legal fees were also paid using CPF.
Breakdown as follows:
Purchase Price : $800,000
5% cash ; $40,000 (Cash)
20% CPF : $160,000 (CPF)
Stamp & Legal Fees : $21,600 (CPF)
Monthly Instalment : $3,035 (CPF)
Total paid in instalments : $3,035 x 12 months x 20 years = $728,400
Total CPF used : $728,400 + $160,000 + $21,600 = $910,000
The couple decide to sell their flat 20 years later. Details as below:
Selling Price : $1,200,000
Current Market Value : $1,200,000
Outstanding Loan : $0
CPF Used + Accrued Interest : $1,227,909
Cash Proceeds : ($27,909)
Mr & Mrs Lim incurred negative sales proceed of $27,909. They will not have any cash proceeds after the sale of their property. They do not need to top up the CPF short fall as they sold their property at current market value.
However, this means they suffered CPF loss of $27,909. This is on top of the 5% cash they put into the property initially!
Option 2
Mr & Mrs Lim decide to use cash to fund their property.
Breakdown as follows:
Purchase Price : $800,000
25% cash ; $200,000 (Cash)
Stamp & Legal Fees : $21,600 (Cash)
Monthly Instalment : $3,035 (Cash)
Total paid in instalments : $3,035 x 12 months x 20 years = $728,400
This will be the cash proceed when they sell their property 20 years later:
Selling Price : $1,200,000
Current Market Value : $1,200,000
Outstanding Loan : $0
CPF Used + Accrued Interest : $0
Cash Proceeds : $1,200,000
After the sale of their property, Mr & Mrs Lim have a cash proceed of $1,200,000! On top of that, as they did not use their CPF monies at all, they earned 2.5% annual interest on their CPF monies.
The amount of $910,000 which was left in CPF OA has grown to $1,227,909!
Case Study 2: Purchase of HDB Flat with Grants
Option 1
Mr and Mrs Wong bought a 5room flat at $700,000. They took the maximum 90% HDB concessionary loan at 2.6% interest for a tenure of 25 years. The monthly instalment is $2,858
Breakdown as follows:
Purchase Price : $700,000
10% CPF : $10,000 (CPF) + Grants
First Timer Grant : $40,000 (CPF)
Proximity Housing Grant : $20,000 (CPF)
Stamp & Legal Fees : $17,000 (CPF)
Loan Amount : $630,000
Monthly Instalment : $2,858 (CPF)
Total paid in instalments : $2,858 x 12 months x 25 years = $857,400 (CPF)
Total CPF used : $857,400 (Instalments) + $10,000 (Part of downpayment) + $60,000 (Grants) + $17,000 (Stamp & Legal Fees) = $944,400
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Mr & Mrs Wong decide to sell the flat 25 years later. Details as follow:
Selling Price : $700,000
Current Market Value : $700,000
Outstanding Loan : $0
CPF Used + Accrued Interest : $1,332,768
Cash Proceeds : ($632,768)
Mr & Mrs Wong incurred negative sales proceed of $632,768! They will not have any cash proceeds after the sale of their property. They do not need to top up the CPF short fall as they sold their property at current market value. However, this means they suffered CPF loss of $632,768!
Option 2
Mr & Mrs Wong decide to use cash for the monthly instalment. They will take a 90% HDB concessionary loan. They will also be taking the HDB housing grants.
Breakdown as follows:
Purchase Price : $700,000
10% CPF : $10,000 (CPF) + Grants
First Timer Grant : $40,000 (CPF)
Proximity Housing Grant : $20,000 (CPF)
Stamp & Legal Fees : $17,000 (CPF)
Loan Amount : $630,000
Monthly Instalment : $2,858 (Cash)
Total paid in instalments : $2,858 x 12 months x 25 years = $857,400 (Cash)
Total CPF used : $10,000 (Part of downpayment) + $60,000 (Grants) + $17,000 (Stamp & Legal Fees) = $87,000
When the couple sells their flat 25 years later, the will be their cash proceeds:
Selling Price : $700,000
Current Market Value : $700,000
Outstanding Loan : $0
CPF Used + Accrued Interest : $161,293
Cash Proceeds : $538,707
After the sale of their property, Mr & Mrs Lim have a cash proceed of $538,707! On top of that, as they did not use their CPF monies for the monthly instalment, they earned 2.5% annual interest on their CPF monies.
The monthly instalment that sat in their CPF OA accumulated to $1,171,475 after 25 years!
Property Vs Retirement
With advance technology and healthcare, we are likely to live longer than our parents' or grandparents’ generation. While we look to live our lives to the fullest, we should also be prepared for a longer retirement.
CPF savings can help to provide for our basic retirement needs. The more we have in our CPF accounts, the more income we have when we retire. It therefore makes sense for us to build our CPF savings.
By not using CPF for properties, we can transfer our monies in OA into SA to earn higher interest. As mentioned earlier, the interest for OA is up to 3.5%, while SA is up to 5%.
For example:
Scenario 1
Peter is 40 years old now. He has $200,000 in his OA. He is earning 3.5% interest on the first $20,000, and 2.5% on the remaining $180,000.
At aged 55, he would have accumulated $294,201.
At estimated 3% increase in Retirement Sum each year, Peter would be able to reach the Full Retirement Sum amount and get a monthly payout of $1,390 to $1,490 under the standard plan.
Scenario 2
Peter decide to transfer the $200,000 from his OA to SA. The first $60,000 will earn interest of 5%, while the remaining $140,000 earn interest of 4%.
At aged 55, he would have accumulated $376,868!
It is important to have a place call Home. However, we should not allow our monthly housing loan obligations to prevent us from retiring, or having a sound retirement plan.
Conclusion
In my opinion, CPF is a good tool to save for retirement. Given that SA is paying a decent and guaranteed interest rate, it might be better not to use CPF for properties and transfer the monies from OA to SA.
However, this might not be appropriate for everybody. A very savvy investor might find interest rate on SA not attractive. Or it is hard for property owners to service the monthly instalment by cash only.
Whichever it is, I hope the above article gives you something to think about.
If you would like to have a chat on any real estate matters, make an appointment with me for a non-obligated discussion!
*The financial calculations in this article is for illustration purpose and is based on hypothetical situations.
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About The Author
Vivian is an experienced real estate agent who has been in the industry since 2002.
Over the years, she has transacted numerous property deals including HDB and private properties. She is well-versed in policies and regulations involving the sale and purchase of residential properties. She has also handled many transactions involving complicated situations like contra, divorce, administration / probate cases, and decoupling / part-share purchase.
Vivian is also a mother to 2 boys. Being a real estate mom allows her to spend more time with her children as they were growing up. Both boys are avid footballers representing their schools and clubs. She loves watching their games and hardly miss a game whenever they play.
Vivian is an active real estate salesperson and team leader. Call her at 98577714 for your real estate matters, or if you are looking to join the real estate industry.