The Silent Threat of Cpf Accrued Interest And How It Can Affect Your Property Cash Proceeds
Common terms that we can easily relate with
When we bring up the topic about buying a home, we often get excited and relate this to how we can utilize our CPF savings and/or HDB grants to purchase and finance our home.
However, we tend to overlook the longer term perspectives during this initial stage.
Uncommon terms that we easily FORGET to relate with
So, what happens after? When the family is bigger now and a larger home is required?
Or perhaps a home is now needed in a different location?
It is prudent to think for the future and get acquainted with the term, CPF Accrued Interest.
Table of Contents
What is CPF Accrued Interest?
First things first, CPF Accrued Interest is applicable to all CPF members who have utilized funds in their CPF Ordinary Account (OA) to pay for the initial down payment and monthly mortgage loan installments for their property.
It is the interest amount that CPF members would have earned in their OA, had they not withdrawn for their housing needs.
With CPF’s goal to ensure that we have sufficient retirement savings, when the property is sold, owners will need to return the drawn down principal amount PLUS the Accrued Interest, back into your CPF OA.
This amount may include the following:
- The initial down payment that was withdrawn from our CPF account
- The monthly installments that was withdrawn to pay our mortgage loan
- Any HDB housing grant(s) that we received for our HDB flat
- The CPF Accrued Interest on all the above
Note: Our HDB housing grants are given to us via our CPF when we buy our BTO or HDB resale flat.
This means that we will start to accumulate CPF Accrued Interest on these funds as well.
Now, with this understanding, let us dive deeper to take a good look into this policy and learn how to apply this to our best advantage.
How CPF Accrued Interest affects HDB cash proceeds after selling?
Let’s re-establish some basic information before we move on with our case study:
1) CPF pays you 2.5% interest per annum for funds in your CPF Ordinary Account (OA)
2) When you withdraw your CPF funds to finance a property, you will “stop” earning the 2.5% per annum (as above)
3) When you sell your property, the 2.5% interest per annum that you were supposed to have earned, will be paid back into your CPF Account (OA) as if the funds had not been withdrawn. This is on top of the sum that was used for initial down payment and serving of monthly mortgage loan
4) When you sell your property, the sales proceeds are being paid in the following order – (1) Bank (2) CPF (3) excess in cash to you
Case Study:
Mr and Mrs Ong, purchased a 4-room BTO flat in Punggol for $350,000.
They used $200,000 from their CPF OA and $150,000 loan to finance the house.
Scenario 1
Assuming they had only used $200,000 CPF as the initial down payment.
After the 5-year MOP, they decide to sell their 4-room BTO flat and upgrade to a bigger home.
With reference to the table above, at Year 5, the total accumulative CPF Accrued Interest stands at $26,281.64.
So upon selling their flat, the amount to be returned to CPF OA, will be $226,281.64 – the principal amount PLUS Accrued Interest over 5 years.
If the selling price of the flat is $450,000, Mr and Mr Ong will get the remaining sales proceeds after settling any outstanding HDB loan amount and repaying $226,281.64 to their CPF OA.
Scenario 2
Mr and Mr Ong stayed in the flat for 10 years before deciding to sell their home.
Again, with reference to the table above, at Year 10, the total accumulative CPF accrued interest stands at $56,016.90 and the total amount to be returned to CPF OA, will be $256,016.90.
If the selling price of the flat remains at $450,000, it would mean lesser cash proceeds for Mr and Mr Ong to use, towards their next property.
Summary
From the case study above, we now know that CPF Accrued Interest is a take-back for everyone to give thorough attention to, simply because most owners leverage on sales proceeds from their current home, to finance their next home
Regardless of your desires;
- Is it to upgrade for a better lifestyle,
- To Sell one Buy two,
- To downgrade for retirement or for lower commitment
- Or to relocate for personal reasons,
Do know that the cash proceeds plays an utmost important role in our decision making.
“Planning is bringing the future into the present so that you can do something about it now”
If you have not started planning your future or need professional advice – do feel free to contact me at 9369 4797 (Rick) for a one-time Free Consultation.
Property with Negative Sales – When the Sale of Flat is not enough to refund CPF
Now that we have seen cases where owners get cash proceeds, let us move on to Property Negative Sales and see what will happen in such cases.
A Property Negative Sale can happen when the price of the house, increases at a rate slower than:
- The amount of interest you pay to HDB (2.6% per annum) or the bank (commonly 1.2% – 2.2%)
- And the CPF Accrued Interest of 2.5% per annum
In April 2017, there is also an article featured on Straits Times that illustrates how HDB prices might depreciate as the balanced lease is gradually reduced.
Case Study:
Mr and Mrs Huang fully paid their 4-room HDB flat for $350,000 using their CPF OA.
They had planned to sell their home after 20 years and use the cash proceeds as retirement fund thereafter.
So, let us see if their plan can succeed.
With reference to the table above, at Year 20, the total CPF PLUS Accrued Interest stands at $559,527.56.
The CPF Accrued Interest had increased from $8,750 to $209,527.56 in 20 years – the longer you “use” your CPF amount, its amplifies the Accrued Interest.
Moreover, the chances are that HDB prices will start to depreciate as the balanced lease gets reduced.
It is also highly unlikely that we can sell the same 4-room HDB flat for above $600,000, 20 years later.
As such, a property negative sale will occur as the selling price will not be sufficient to repay the CPF PLUS Accrued Interest.
*Note – you may appeal to CPF Board to waive accrued interest during a property negative sale and CPF will review on a case-to-case basis. However, it is a risk as we will not know how regulations will change in 20 to 30 years’ time.
Using the same case study, let us take a closer look at how CPF Accrued Interest can play a part in our decision making and whether it makes sense to rent your HDB flat while staying in a private property.
Renting out HDB and buying a private property for own-stay
Mr and Mrs Huang have extra cash on hand and decide to upgrade their home, and purchased a private property for $800,000.
Once their HDB reaches MOP of 5 years, they will rent their 4-room HDB flat for $2,000 a month as passive income while staying in their private property.
Our quick calculations:
- They will have spent $96,000 (12% x $800,000) on Additional Buyer Stamp Duty ABSD
- The rental income is estimated at $14,000 a year [($2,000 x 12) – ($10,000 accrued interest)]
- At $14,000 a year, they will need about 7 years to recover the initial $96,000 ABSD paid
- And after 15 years, they will make an estimated income of $210,000
However, at the end of 20 years (5 years to reach MOP + 15 years of rental), the CPF Accrued Interest stands at $223,515.75.
So, if they decide to sell their HDB flat after 20 years, again, the chances of property negative sales is relatively high.
Why? Simply because the rental income made is less than the accumulated CPF Accrued Interest ($210,000 vs $223,515.75). (Referring to the table above)
And so, it may not be such a good idea to rent out the HDB flat and purchase a private property for your own-stay.
Conclusion
There are many home owners who are unable to sell their HDB flats due to the high accumulated CPF Accrued Interest over the years, and had to stay in the same flat.
From the chart above, we do see that CPF Accrued Interest and HDB price depreciation are the main reasons why many HDB owners are choosing to sell their HDB flats right after MOP, to maximize their profits and to reduce their accumulated CPF Accrued Interest.
Hence, I cannot stress further the importance of having the right knowledge and understanding of our CPF and housing options available.
Planning ahead and making informed decisions are essential in maintaining decent savings, investment opportunities, paying children’s education and for your own retirement funds.
Bonus for my readers
My readers can request a 1-time free 30 min Dynamic Re-assessment consultation
Dynamic Property Re-assessment consultation includes:
- Assess current stage your HDB is – Growing, Stagnant or Depreciating
- An IN-DEPTH Financial affordability assessment and timeline planning
- Proven methods on maximising usage of Cpf and cash proceeds ‘park’ in your current flat
- Propose a step by step action plan for consideration
Last but not least, we must be thankful to our Government and appreciate the fact that many of us can leverage on our CPF, to own homes because of our compulsory comprehensive CPF savings.
An alternative property you can buy after selling your HDB
If the value of HDB flats gradually depreciates over time and in order to capitalize on its appreciation thus far, many have opt to sell their HDB flat to buy a private property instead.
Just take a look at the chart above!
Of course not all private properties are worth buying!
With the correct analysis on future growth potential such as transport accessibility and planned progression and developments, it would be reasonable to say that the chances of having your home as an asset are relatively high.
How do you determine if you should Hold or Sell your current property?
Follow YouHome.sg’s decision making matrix to determine your best option.
Check Your Home Price Indication
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Self Introduction
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.
Property agent review
I have successfully helped hundreds of homeowners just like you since 2010
Can i check how do i know if i can afford to upgrade even i find that my flat is depreciating?
Hi Pauline, thanks for reading our article. The key is by doing an in-depth financial calculation. If upgrading is your priority, we will assess the options available after calculation. And we will provide proven methods and steps on how to go about it. Keep in touch, already send you an email. Thanks