Should I use CPF for my home purchase is the wrong question to ask !

Another article on CPF and housing?  You might be asking.

Well yes… there are many articles on this topic and recent flurry of bloggers weighing in on this issue, some of whom I follow and respect their point of views.

 And no I do not have the answer for you. 

What I want to do today is reframe the question to help you find the answer yourself and along the way, get something out of this thing we know as “CPF”!    

I am sharing lessons I learnt based on my personal journey using both CPF and cash for my housing. So it is from hindsight, and again everyone's situation is different. 

However, there are always key lessons to take away. 

To start off, whether one should use CPF for housing is not the right question to ask.  

If you see your OA as a "bank" - when you use OA funds to buy a flat or invest, you are borrowing from yourself at an interest rate of 2.5%.

Hence, the question to ask is what is the best way to fund your purchase? Cash, bank loan or CPF?  There will be an opportunity cost for using cash or CPF. You need to decide based on your own set of circumstances. 

The key here is flexibility and to adapt based on your circumstances, especially during this period of great uncertainty.

CPF is a really great tool and offers more flexibility than you think (besides restricted use til 55), we just need to learn how to harness it to our advantage.

There are two things you need to know about CPF.

1.   Use CPF OA  to buy your flat as the default setting

What I mean is when your lawyer ask you if you want to use CPF to pay for stamp duty, legal fees, down payment and monthly instalments.  Say yes.

Why? 

Because you can pay back the OA used or turn off the instalment plan by using cash instead. Anytime. 

That's the flexibility that CPF offers. 

It is like installing a tap to your OA. You can turn it on or off when necessary.

2. Know that you can refund to OA anytime 

You can refund monies to your OA anytime. No penalty as there is no lock in like the bank loan. This applies to both down payment and monthly mortgage. All can be done online via CPF website.

 3.    Limit refund to CPF OA

You can refund the full amount of OA used for housing (including stamp duty, legal fees etc), but do not pay off the accrued interest. 

Why? 

To keep the flexibility of paying for this flat with your OA when the need arises. It is like leaving the tap there. 

In my case, I left an accrued interest of $1200 in my OA even after I refunded all the monies used. 

I am aware that this amount will continue to incur accrued interest, but the quantum is acceptable to keep the flexibility.

4.     Check your accrued interest

I think many are shocked by the amount of accrued interest when they sell their flat.

If you know how much you owe the bank, then you should know how much you "owe" yourself, right?  

I know I was caught off guard. I first found out I incurred S68,000 in accrued interest from the sale of my flat back in 2013 only at the lawyer's office!

Go to www.cpf.gov.sg and check the accrued interest on the OA portion used for your property today.

Okay you checked. Were you surprised by the amount? 

Or is it an acceptable amount for your situation now? Then you don’t have to do anything. 

Even if the accrued interest is “high”, take it in your stride and don’t beat yourself up over this. 

The key is to have a grasp of the quantum and where it is heading. Don’t be caught unaware.

CONCLUSION

Would I use Central Provident Fund for my home purchase if I had the knowledge I have now?

Of course!  

I would use cash for the down payment (lump sum) and pay monthly instalment with my OA. 

Why?

Because the accrued interest will not snowball as much on a lower monthly sum compared to a lump sum.

It improves my cashflow on a monthly basis, and I can choose to pay back to my OA when I have spare cash like a year-end bonus.  

If cashflow is tight, keep the cash.

That's the kind of flexibility I am talking about.  

AT THE END OF THE DAY

There is no one size fits all answer. 

Everyone has their own set of considerations, it depends the life stages you are in and the kind of financial future you want.

My OA has since compounded and grown at a rate that comes as a pleasant surprise. It is now a cornerstone of my retirement income stream. And I intend to keep it growing.    

If you are above 55 years old and want to leverage your OA and SA as high-yielding accounts, subscribe below and I will share more how to do that.

If you are in your 40s or turning 55 soon, don't wait, subscribe NOW.

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