Should I pay for my house with CPF or cash?
This is one of the most common questions that people tend to have when it comes to paying for their
house. The decision you make will affect you years down the road.
Why?
Arguably Singapore’s top financial blogger and the go-to person when it comes to anything regarding
one’s personal finances, SG Budget Babe had previously written an opinion piece sharing about why
she does not intend to use her CPF to pay for her house.
house. The decision you make will affect you years down the road.
Why?
Arguably Singapore’s top financial blogger and the go-to person when it comes to anything regarding
one’s personal finances, SG Budget Babe had previously written an opinion piece sharing about why
she does not intend to use her CPF to pay for her house.
She says,
“If I were to use my CPF OA to pay for my home today, I am basically borrowing from my
retirement funds for today’s expenses. That potentially leaves me with lesser money for my future.
retirement funds for today’s expenses. That potentially leaves me with lesser money for my future.
In fact, if I do use my CPF OA, I will then owe my retirement fund that capital (the amount I had
withdrawn to pay for my house i.e. principal sum) AND accrued interest.
withdrawn to pay for my house i.e. principal sum) AND accrued interest.
Accrued interest is the interest my CPF savings would have earned if I did not withdraw it.
You can love or hate the CPF accrued interest (I’m with the former), but its function remains the
same: to grow your CPF monies for your retirement. If you withdraw from it today, you have to make
sure you are more diligent in saving up for your retirement beyond what you currently have in your
CPF.
same: to grow your CPF monies for your retirement. If you withdraw from it today, you have to make
sure you are more diligent in saving up for your retirement beyond what you currently have in your
CPF.
In short, the more CPF monies you use for your house today, the less you leave for your retirement.”
She hits the nail right on the head in highlighting that CPF monies were designed and are meant for
one’s retirement. It was not designed for one to buy a house with, although that is indeed one of the
options available if one chooses to exercise it.
one’s retirement. It was not designed for one to buy a house with, although that is indeed one of the
options available if one chooses to exercise it.
However, 8 in 10 Singaporeans continue to use their CPF to pay for their house. It sounds sexy and
attractive enough when they excitedly announce that they don’t need to fork out a single cent of their
own cash to pay for their mortgage loan every month. This comes at a cost that many often don’t
realise (or forget about) : the accrued interest later on.
attractive enough when they excitedly announce that they don’t need to fork out a single cent of their
own cash to pay for their mortgage loan every month. This comes at a cost that many often don’t
realise (or forget about) : the accrued interest later on.
This is why even when some people have fully paid up for the house, they forget that interest is still
running on the CPF proceeds which you had taken out to pay for your house then. As a result, the
interest eats into the cash proceeds of the house when it is sold, and in the worst case scenarios, a
negative sale could occur where the owner has to fork out cash from his own pocket to pay the
difference.
running on the CPF proceeds which you had taken out to pay for your house then. As a result, the
interest eats into the cash proceeds of the house when it is sold, and in the worst case scenarios, a
negative sale could occur where the owner has to fork out cash from his own pocket to pay the
difference.
Even if this sum of money is technically paid to yourself (for your retirement), it is often painful for
many people who may not have the liquidity of cash to fork out such a sum. Perhaps cashflow is
tight, which was why they sold their house in the first place. Having to fork out even more money of
their own under such circumstances would be very difficult, or maybe even close to impossible, for
some.
many people who may not have the liquidity of cash to fork out such a sum. Perhaps cashflow is
tight, which was why they sold their house in the first place. Having to fork out even more money of
their own under such circumstances would be very difficult, or maybe even close to impossible, for
some.
Here’s an example of a scenario where I’ve encountered before at work.
The owner bought a 4-room flat for $480,000 where he stayed for 10 years.
He then sold it for $600,000.
Sounds pretty good, right? He should have profited $120,000 over 10 years, which amounts to a
25% capital gains. Not too shabby at all!
25% capital gains. Not too shabby at all!
But wait, it isn’t that simple. In fact, in this particular case he made a loss. Let’s see why.
Since the house had been paid in full using CPF, the total accrued interest = $134,440.
Total CPF used + accrued interest = $480,000 + $134,440 = $614,440
Cash proceeds = $600,000 - $614,440 = - $14,440 (negative sale)
Well, what if he had stayed 20 years instead? The figure gets more scary. Take a look:
Total CPF used + accrued CPF interest over 20 years = $480,000 + $306,535 = $786,535
Cash proceeds = $600,000 (house selling price) - $786,535 = - $186,535 (negative sale)
What if the owner managed to sell the house at a higher price of $700,000 instead? It would still
be a negative sale of $86,535. Moreover, other factors to consider includes whether $700,000 is a
feasible price given the ageing lease (after all, he has already stayed for 20 years) and with the
supply of younger flats in the market which are much cheaper. An asking price of $700,000 may not
even get sold.
be a negative sale of $86,535. Moreover, other factors to consider includes whether $700,000 is a
feasible price given the ageing lease (after all, he has already stayed for 20 years) and with the
supply of younger flats in the market which are much cheaper. An asking price of $700,000 may not
even get sold.
Now, let’s consider if the owner had paid the house in full using cash instead. For simplicity sake, we
will revert back to the original scenario of him having stayed for 10 years before selling.
will revert back to the original scenario of him having stayed for 10 years before selling.
Total CPF used = $0
Accrued interest = $0
Sold house at $699,000
Cash proceeds = $600,000 - $480,000= $120,000 in cash proceeds
Since no CPF was withdrawn to pay for the house, he does not owe CPF Board / himself any accrued
interest either.
interest either.
No wonder SG Budget Babe prefers to use cash instead!
But what if you do not have the liquidity to use cash? Well, the solution could be to use a mixture of
both CPF and cash. This prolongs the time taken for the interest rate to catch up, and you won’t have
to pay as much accrued interest compared to if you had used full CPF.
both CPF and cash. This prolongs the time taken for the interest rate to catch up, and you won’t have
to pay as much accrued interest compared to if you had used full CPF.
Alternatively, you can also move i.e. sell the house and change to another house before it breaks
even and falls into the territory of a negative sale.
even and falls into the territory of a negative sale.
Don’t forget that when you use cash to pay for your house, it means your CPF is making money for
you by generating interest in your OA, which will in turn put you in a very good position for the next
house at the right price, using the cash proceeds from selling your current house + the good sum of
CPF that was left to accumulate over the years.
you by generating interest in your OA, which will in turn put you in a very good position for the next
house at the right price, using the cash proceeds from selling your current house + the good sum of
CPF that was left to accumulate over the years.
This is why, if you learn how to manage your finances well and plan out your asset progression with
a trusted realtor, you can upgrade to your next house easily...or even get the option to upgrade to a
private house in the future without being too financially strapped.
a trusted realtor, you can upgrade to your next house easily...or even get the option to upgrade to a
private house in the future without being too financially strapped.
Working with a good realtor who can assess your circumstances and financial ability is key if you
wish to have your house become an asset for you, instead of a liability.
wish to have your house become an asset for you, instead of a liability.
If you wish to learn more and find out for your own house, leave me your contact details below and
I will get back to you within a week.
I will get back to you within a week.
(I’m unable to leave my email address here because of spam).
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