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Is It Smarter To Pay Home Loan Using Cpf Or Cash?

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Many first-time homebuyers (be it BTO, resale or private) tend to ask this question: “Should I pay my home loan using CPF or Cash?” and depending on who you are asking (your friend, your family member or property agent), you will get different answers.

So why not let me share my experience with everyone here, as part of my series of useful guides [Singapore Property Blog] for all new homeowners out there.

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Table of Contents

How Can I Use My CPF To Pay for My House?

First things first, this is a straightforward list of items you can use your CPF (OA account) for your property purchase.

  1. Using it for all or part of the purchase price (Up to a limit – You can calculate the limit via the official CPF Housing Usage Calculator here) 

  2. Repaying your monthly home loan installments (either to HDB or Bank)

  3. Paying of stamp duties, legal fees, and other housing-related expenses

To answer the question in focus, we will study further on point no.2: repaying your monthly home loan instalments.

Available Options of Home Loan Repayment

There is no doubt that many Singaporeans choose to repay their monthly home loan installments using their CPF.

It is convenient and easy to do so, without seeing actual cash depleting from your bank accounts. As the saying goes “Out of sight, out of mind”.

But is this a SMART option? As compared to other less popular yet available options out there?

Are you curious now? I urge you to read on and add to your knowledge bank.

1. Repaying home loan using CPF

Option 1 is the most popular method of home loan repayment amongst Singaporeans.

Why? This is because many believe that CPF monies are “trapped” and have limited chance of usage.

Therefore, might as well use it to finance big-ticket item, like a house! Since this method draws down monies from your CPF OA account, which are ready cash and money that you have absolutely no access to, until you are aged 55.

This makes a lot of people feel better and happier with their current finances.

Pros of using cpf for mortgage repayment

You will have more available cash on hand (since the repayment comes 100% from your CPF OA account).

Flexibility to use available cash on other forms of investments with returns, higher than 2.5% (CPF interest rates per annum), to grow your retirement fund.

Cons of using cpf for mortgage repayment

Being unable to grow your “retirement nest egg” in your CPF OA savings with a stable 2.5% p.a. interest.

HDB and Bank home loans are sometimes lower than 2.5% p.a. interest. (SIBOR-pegged mortgage rates have also been on a downward trend!

There is a maximum withdrawal limit of up to 120% of the valuation sum that you can use your CPF for.

You will need to return all CPF monies with accrued interest when the house is sold.

As you can see, even though tapping on CPF OA account is simple and fuss-free, it does come with opportunity cost!

But it is still very popular because some may not want to fork out ready cash, as monthly repayments or because they may need to use those cash on other forms of perhaps more lucrative investments.

2. Repaying home loan using Cash

So, what is the alternative? Cash of course!

Many first-time owners may freak out at this glaring option, “You mean I have to draw down on my bank account monthly for the next 25 years of my life?”

Okay, before anyone falls off their chair, let us do some math to help allay your concerns.

Consider this! An average 4-room BTO in Singapore costs around $350,000 (excluding grants). Given that you can typically get a bank home loan (75% of the home price or value), or HDB housing loan (90%), that works out to:

Estimated Loan (90% of price/value): 90% x $350,000 = $315,000

Assuming a maximum loan period of 25 years with an interest rate of 2.6% (Hdb loan interest), the estimated loan repayment is approximately $1,429 per month, over 25 years.

Not so good with math? Don’t worry, simply use this Monthly Instalment Calculator courtesy of HDB to calculate your estimated monthly instalment amount.

That is not so bad is it? Between two homeowners, that works out to just about $700+ each per month. And imagine this amount could be even lesser if you take up a bank loan with lower interest rates.

Another Bonus! you can consistently try to refinance your home loan to continue keeping the interest rates low.

Pros of using cash for mortgage repayment

Allows you to accumulate CPF OA savings at a stable 2.5% p.a. for retirement fund.

You can even transfer unused CPF OA savings into Special account for an even higher guaranteed interest rates.

Prevents negative cash sale in the future. There are real situations where homeowners end up without cash on hand. 

Upon the sale of the property, all proceeds are refunded to CPF account.

Cons of using cash for mortgage repayment

This option requires you to have sufficient cash on hand and not everyone can consider this alternative.

3. Repaying home loan using partial CPF and partial Cash

While you can choose to use either one or the other, do note that there is also an option to use both: partially in CPF and partially in cash.

This method will allow you to access the benefits of both worlds and minimizes the drawbacks of both options.

In the situation where your home loan interest (i.e. in the low range of 1%) is lower than CPF interest rates of 2.5%, it is beneficial to pay more in cash – since you can “earn” more from the CPF interest rates.

And vice versa if the situation is flipped. You get the drill!

Alternatively, you can decide how much cash you want to fork out each month, and use CPF to top up the remaining sum.

Food for Thoughts

  • Do you know that new mop flat may also experience negative sale because of cpf accrued interest?

  • Will you be keen to go the extra step and further understand successful concepts practiced by home-owners to make the change today, for a better tomorrow!

  • What is holding you back from approaching a professional, who may be able to help you progress and upgrade your lifestyle without the hassle?

  • Did you know that Financial Freedom and a comfortable retirement is possible, for those who knows how?

Conclusion - Should I Repay My Home Loan Using CPF or Cash or Both?

While it depends on everyone’s personal financial health, the short answer is: Pay with cash if your money is not being used for any other purposes.

If cash is insufficient, there is no dilemma – simply pay with CPF. Unfortunately, you must deal with the cons of this option as shared above.

In other situations, CPF payment is a good alternative only if you require the cash liquidity to invest in other investments which can yield better returns than the 2.5% of your CPF OA account.

I sure hope this breakdown is helpful to your decision-making process.

Do check out other useful articles for new readers in my property blog!

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Self Introduction

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Rick Huang, Associate Deputy Group Director of OrangeTee & Tie, has been in the Real Estate industry for a decade.

He is driven, committed and is enthusiastic about real estate investments.

Today, he leads Team Youhome.sg, and together, he aims to provide his clients with the best experience in their property journey.

The team focuses on understanding the client’s finances and needs and is determined about delivering the best solutions and results for them.

Amidst the hustle and bustle, Rick enjoys quiet time and indulge himself in the intricate art of tea-brewing and teapot appreciation.

He would also take this chance to energize himself and reflect on his personal development and areas of improvement.

Related Articles:

Ever wonder if you are suitable for Sell one buy two investment concept? – Read more (Sell one buy two)

Is buying new launch or resale condo have better returns? – Read more (New Launch vs Resale condo)

Looking to upgrade from Hdb to condo? – Read more (Sell Hdb buy condo)

What to take note when selling Hdb resale flat? – Read more (Hdb Resale Process)

Buying another Hdb flat, and using the fund from current home? – Read more (Hdb contra)

Why do some Hdb flat price depreciate so much? – Read more (Hdb depreciation curve)

What is one of the most common reason for property negative sales? – Read more (Cpf accrued interest)

Financial calculation for selling a Hdb flat? – Read more (Hdb resale calculator)

Buying EC before selling your HDB? – Read more (Upgrade to EC before selling your HDB)

Should you sell your EC after 5 years? – Read more (Selling EC)

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