Have you ever thought about what are the implications of choosing one over the other?
Whether you choose to take up a HDB Loan or a Bank loan, you can pay your housing loan instalments using your savings in your CPF Ordinary Account(OA) or cash in your bank.
When buying a home, this decision is often overlooked as many of us will be more excited looking at interior design renovation brochures!
However, if you make this decision without considering the consequences, it could mean a lifetime of financial difficulties and having to go back to the work force again after you have declared yourself retired!
Here is the breakdown of the pros and cons of each mode of payment.
When you use CPF to repay your house, you will undoubtedly have more cash on hand.
This will give you the liquidity and the freedom to do what you want with the money.
However, this liquidity comes at a price if you have impulsive spending habits.
Owning a house itself is additional liability for you, so you don’t want to make this even more difficult for yourself by spending impulsively, especially if you can’t afford it.
So here are 4 ways you can use this excess cash.
1. Clear your debt
If you have existing personal loans, credit card loans and other debt that you are struggling to pay off, use this money to clear your debt first!
2. Set aside Emergency Funds
If you have not set aside 3 to 6 months’ worth of your living expenses, now is the time to do so!
You really cannot afford to have no safety net if you lose your job and default on your monthly loan instalments.
3. Insure Yourself
Check with a trusted Insurance Advisor if you are adequately insured, identify and patch up any holes in your insurance portfolio. However, do not overpay for insurance!
If you have the time and expertise, please do it yourself.
If you don’t, you can invest in an Exchange Traded Fund/Index Fund or look for a trusted Investment Advisor to help you invest.
Remember, the main purpose of your CPF is to save up for your retirement.
If you use your CPF to pay your housing loans, you will have lesser in your CPF.
On March 05, 2017, Channel News Asia reported that only 36% in 2007 and 45% in 2011 were able to meet their Minimum Sum.
Tharman, Singapore’s Minister of Manpower and Deputy Prime Minister said, “About 70% to 80% should be able to attain the Minimum Sum in cash by the time they are retired adjusted for inflation, even after they have withdrawn money for a home.”
Link to article here.
With all due respect, 70% to 80% is just an estimated projection. But I personally wouldn’t recommend resting on your laurels especially if you do the calculations yourself between your CPF contribution rate and your monthly loan instalments.
The lack of retirement income isn’t an issue if you plan to create and rely on other sources of passive income during your retirement.
However, if you have no plans on creating other sources of passive income, then using your CPF to pay for your housing loan can have negative implications during your retirement.
That’s the issue that many Singaporeans are facing now as they rely on their CPF to pay for their house and for their retirement, thus most are unable to meet the required Retirement Sum.
This is a huge consideration if you plan to sell your house in the future.
You will have to pay the principal amount and the interest that you could have earned if you have left your CPF in your OA!
That means, if you bought a $300,000 house, your accrued interest will amount to $191,584. That means if you sell your house, you will have to pay $491,584 ($300,000+$191,584) back to your own CPF before profiting the rest!
If you use cash to pay for your house instead, you can leave your CPF untouched and let your money snowball!
Your CPF savings in your OA can earn a guaranteed interest rate of 2.5% per year, while savings in your Special Account(SA), Medisave Account(MA) and Retirement Account (RA) earn interest rates of 4% per year.
The first $60,000 of your combined CPF balances, of which up to $20,000 comes from your Ordinary Account(OA), earns an additional 1% per year!
This means more money in your CPF OA for other purposes such as Child’s Education, Insurance and investments! Or you can choose to leave it in there to accumulate more money for your retirement!
However, since the purpose of your CPF is for your retirement, there are certain limitations you have to adhere to.
You can only withdraw your CPF savings when you are 55 years old, up to $5,000. The rest have to be paid out monthly starting from your payout eligibility age (currently at age 65).
Paying your house in cash also means lesser cash on hand! This means you will have lesser room for making bad financial decisions!
This could actually be a good point as it makes you be more cautious on the things you spend on!
There’s an opportunity cost for leaving too much in your CPF as you can get higher returns from other investment platforms.
Your CPF OA grows at a rate of 2.5%, if you have the time and expertise to invest, you can get much higher returns in other platforms! If you don’t, you can always consult an Investment Advisor.
If you are a really risk-averse person, then leaving your money to grow in your CPF would be a wiser choice.
Whether you use your CPF or Cash to pay your housing loans, both has its’ advantages and disadvantages. It is wise to make an informed decision based on your plans for the future.
Here’s my suggestion:
Pay by CPF
Pay by Cash