CPF or Cash for your Home | Pros and Cons of Paying Home Loans with CPF or Cash

by Priyadarshini 9 November 2022

Paying with your CPF funds does not require you to pay anything out of pocket, but it does result in a significant amount of interest that you will have to pay back later. Is it better to pay in cash? We discuss the advantages and disadvantages of paying with CPF or cash for your home.

Buying a home is likely to be one of the largest purchases you’ll make in your life, so selecting the best mode of payment is critical because it can have a significant impact on your personal cash flow. While most people would prefer to spend all of their CPF Ordinary Account (OA) funds on their home without touching a single cent from their wallet, this is not always the best option. In some cases, couples may prefer to finance their homes entirely with cash.

Advantages and Disadvantages of Paying with CPF or Cash for your Home

What can I do with CPF?

Certain things can be paid with CPF, while others may require cash. What you can pay in full CPF funds is as follows:

  • Downpayment
  • The unused portion of the purchase price not covered by the mortgage
  • Repayment of a mortgage
  • Stamp duty and legal fees
  • Fees for the Home Protection Scheme

Why should you use CPF?

You have more money available for spending

Paying with your CPF also means you have extra cash for other expenses. Because CPF takes up 20% of our income, financing your home entirely with CPF frees up the remaining 80% of your salary for other necessities such as debt repayment, retirement savings, and day-to-day expenses. However, if you decide to use cash and leave your CPF alone, you will most likely use 20% to 30% of your salary (depending on the number of your home loans) to finance your home loans. After deducting your monthly CPF contributions, you will have only about 50% to 60% of your salary left over for your personal expenses.

Furthermore, if you choose a bank loan with floating rates, your home loan repayments will fluctuate based on market conditions. If your monthly payment increases during a month when your finances are tight, you may not have enough liquid cash for other expenses.

Your CPF OA funds are already designated for housing

The CPF funds have been divided into different accounts and cannot be withdrawn until you reach retirement age. Because our CPF OA is already intended to pay for housing, insurance, investments, and education, many people may choose to use the funds for the sake of convenience. Because a portion of our income already goes into our OA, using the funds in our OA may appear less painful than using our own hard-earned cash from our own pockets.

You can put the money to good use by investing it

Having more liquid cash also allows you to invest in a wider range of investment vehicles. While you can invest with your CPF through the CPF Investment Scheme, your investment options are limited. With cash, you have more options for investments such as Robo-advisors and stocks, which can provide higher potential returns. If your investments perform well, the returns may be sufficient to cover the interest on your home loan as well as the accrued interest that you will have to pay back to your CPF when you sell your home.

CPF or Cash for your Home – Why should you use cash?

Make the most of your CPF funds for retirement

The money in your CPF OA will be automatically transferred to your Retirement Account when you reach the age of 55. (RA). If you use all of your OA funds to finance your home, you will lose money that could be used for retirement. Though you will be required to repay the amount used in full, in addition to the accrued interest (only if you decide to sell your house), you will be missing out on the power of compounding interest for your CPF funds.

Furthermore, the first S$20,000 in your CPF OA will earn an additional 1% p.a. on top of the base interest rate of 2.5% p.a., bringing the total interest rate to 3.5% p.a., allowing you to benefit from the higher interest rate. Because your CPF funds earn guaranteed interest, they are a safe and secure way to save for retirement that is backed by the government.

You are not required to pay any interest that has accrued

When you sell your home, you must return the principal amount of CPF funds used to finance it. This includes the down payment, monthly mortgage payments, and additional costs such as stamp duty and survey fees. You’ll also have to pay the additional accrued interest, which is set at a minimum of 2.5% and is the money you would have earned if you hadn’t used your CPF funds.

As a result, many homeowners may face a negative cash sale. If they sell their house for a low price, the profits they make may not be sufficient to cover the accrued interest and even the outstanding balance on the mortgage.

You would reduce the risk of a negative cash sale by using cash to fully finance your home because you would have one less thing to worry about — the accrued interest. In the event of a negative cash sale, however, homeowners are not required to top up their CPF account with cash. As a result, this group will have fewer CPF funds to tap for their next property or for retirement purposes.

Set aside CPF as “emergency funds.”

If you have enough cash reserves, using cash also gives you the security of having your CPF OA available. For example, if you lose your job unexpectedly due to retrenchment or suffer from an unforeseen medical condition that necessitates a large sum of money, you may not have enough liquid cash to finance your home loan. This is when your CPF OA can be used as an emergency fund to pay for your home loan, avoiding late payment penalties.

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