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Is Paying Your Home Loan With Cash or CPF a Better Option Today?

Hey guys, it's been a while since I updated as life became busier after the circuit breaker ended.

I hope you're still staying safe, even though our Covid-19 numbers are way down now! Low cases of infection doesn't mean no infection! (Low Crime doesn't mean No Crime haha!)

Covid-19 Vaccine

The world is still fighting Covid-19 with parts of Europe going into lockdown again. But good news is that the vaccines are having good success rates and vaccines will probably be available in 2021.

So Singapore has seen property sales volume shoot up to monthly record highs. I sincerely hope we do not get a second circuit breaker as this will devastate our government's efforts to revive the economy.

Now, on to the topic at hand..

Is Paying Down Your Home Loan by Cash or CPF A Better Option Today?

This is a common dilemma. The loan interest rates are as low as 1.1%!

Whether you own a private or a HDB, you can choose to use your CPF Ordinary Account (OA) and/or cash to service your monthly loan installments.

Use cash or CPF to buy your home?

You may wonder why some people may choose to pay down in cash when (we've all heard this saying) - Cash in hand is King.

Let me explain why.

Benefits of paying your housing loan installments in cash

If you're planning to upgrade from a HDB flat or private property, paying down your mortgage in cash helps to prevent a negative cash sale in the future.

This is a scenario where, upon selling your property, you are required to refund all your proceeds to CPF, leaving no cash in hand to foot the deposit for your next property.

For example, you buy a flat for $350,000 using a bank loan.

You use $70,000 from your CPF for the initial down payment.

Over the next five years, you pay more than $1,120 monthly for the home loan using your CPF.

In total, you would have used $137,200 from your CPF.

However, when you resell your flat after five years, you must refund this amount, plus the accrued interest (2.5 per cent per annum for OA), to your CPF, which comes up to approximately $155,200+.

Read: New Launches or Resale? Which is a better choice?

Now, say you sell during a downturn, and the nett sales proceeds are little.

After paying off the costs (legal fees, outstanding home loan, misc fees, etc), you are left with just $150,000.

This entire amount will go back into your CPF (including the cash deposit you received from the buyer) leaving you with no cash in hand. (This same scenario also happens to private property owners, not just HDB owners.)

While, yes, you can still use your CPF to fund your next home, but there are cases where people do not have enough savings in cash to put as downpayment for their next purchase.

So because of such scenarios, some buyers prefer to service their loan in full cash to avoid a negative sale situation to prevent them from their upgrading plans in the future.

As a recap, for private property purchase, the first 5% must be paid in cash, and the next 20% can be covered by CPF. The combined 25% is the absolute minimum down payment on any purchase. Buyer stamp duties of 3-4% (depending on purchase price) would also have to be paid in cash before it is refunded by CPF.

There is also the risk of using your CPF for many years, maybe 10 years or more, the CPF amount plus accrued interest to be refunded to your CPF could have snowballed into a really huge figure.

On a brighter note, if your sales proceeds is not sufficient to cover the amount you owe to your CPF, you can appeal through your lawyers to get it waived.

Another reason to use full cash is to fully capitalise on the risk-free returns that CPF pays us.

Very few investments in the world pays us 2.5% in our OA which compounds well over the long run that helps to hedge against inflation.

Read: How to Beat ABSD with Creative Methods and own multiple properties

We can even transfer all of our OA funds to SA to enjoy 4% risk-free returns on our money.

Whether this method works for you depends on several factors and everyone has their preferred approach to retirement savings. But it is a sound and defensive strategy that some home owners apply; even if it means more financial discipline.

Usually though, it is not advisable to pay all your installments in cash as it is important to set aside funds for rainy days or to take advantage of investment opportunities.

If you have nothing in the bank, that can mean turning to personal loans or lines of credit which cost a high interest of 6-9% per annum. This certainly defeats the purpose of trying to grow your CPF and can spoil your upgrading plans.

Additionally, having more cash in your hand allows you to invest in subsequent properties earlier in your lifetime, which typically delivers superior long term returns on equity than CPF does.

To summarise, paying your home loan in cash can be rewarding for certain home owners; such as those who use CPF as a cornerstone for their retirement, or those who prefer being extra cautious/disciplined in the five year period before they upgrade.

For anyone else, it's best to consult with a Property Wealth Planner, and see if the opportunity costs are worth the trade offs.


Need an opinion on your property investment plans, the best buys available or help marketing your properties?

Get a 1-time free 30 minute Property Wealth Planning Consultation. Schedule one right now.

A PWP consultation includes:

  • An in-depth financial affordability assessment and timeline planning

  • Highly relevant investment insights

  • A clear and customised investment road map

  • A curated list of best buys in today's market with good growth potential & minimal risks

  • Selecting units with the highest potential in a new launch project

  • Advice on marketing and getting a buyer for your property fast


About the Author, Susanna Wong:

Susanna has been in real estate since 2006. She has transacted many private properties including GCBs (Good Class Bungalows) and Sentosa landed properties and of course HDBs. She is married with two lovely girls, Sophie, 6 and Sage, 2. Her husband, Roger and her share an obsession for MMORPGs and scrabble (before they had kids!). They met on OKCupid (dating app) while challenging each other on Words with Friends (iphone App game). She loves watching binge watching Netflix in her free time (very rare with two children!) with a tub of Ben and Jerry's.

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