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Use CPF savings or cash to pay for our home?

Saturday, November 28, 2015

I remember telling a friend who was disgruntled with the CPF that we don't really have a choice. 

It is like being married and not liking our mother-in-law.

We can kick our mother-in-law in the butt if we divorce our spouse. 

We can kick the CPF in the butt if we give up our citizenship.

Fortunately, I rather like my mother-in-law, er, I mean, the CPF. 

Some might not have mandatory contributions to the CPF for various reasons and might wonder how the CPF fits in their lives?



Here is one example:


Reader:
I accidentally came across your blog only this year, find it very sensible & rational. So, I took few weeks to read all your past articles since Day 1 (I think).
Need your advice or please to talk to yourselves J

I’m a self-employed & have been doing max voluntary contribution to CPF some of the years to service our HDB mortgage through our CPF…

We have no intention to fully pay maybe until when we buy our 2nd property

My question is what is the downside to continue doing VC with the ultimate aim to buy 2nd property using CPF (I’ve set aside the Basic Retirement Sum needed in SA)?

I’m confused on paying back CPF & accrued interests part when & if I were to sell the property

Am I worst off when compare those who bought using Cash???

Awaiting your enlightenment
Thank you J


 





AK:

Welcome to my blog. I am glad you enjoy my muttering and mumbling. ;)

With regards to the CPF, people must remember that it is really meant to help Singaporeans fund our retirement.


For people who do not have sufficient cash on hand or other means, they could use their CPF savings in the OA to help pay for their homes but that is not the primary purpose of the CPF.

However, for people with sufficient cash on hand or other means, especially in an environment of low interest rates, they don't really have to use their CPF savings to purchase their homes. 





They should look at their CPF savings as a back up only to be utilised in case they have to. Well, at least that is how I look at it.

There is an opportunity cost to using our CPF money meant for our retirement to purchase real estate whether for own stay or investment.

I would do VCs to my CPF account if I were self employed because I want some sense of financial security in retirement down the road and not really for anything else.




It is very often a matter of perspective.

How we look at something would determine the way we treat it.

Related posts:
1. Stop interest we owe (CPF) from growing?
2. Proposed changes to the CPF system.
3. Buy the biggest/most expensive home?

8 comments:

AK71 said...

On my FB wall:

Hi AK,

I am a regular reader of your blog and I would like to ask a question as finance and math is not my strong suit.

Should I take a HDB Loan to finance the purchase of a resale flat and make the payments via my CPF account. Does the interest work out to be 0.1% as the CPF paysout 2.5% of interest and HDB charges 2.6% of interest?

Or will the effective interest rate be higher? I am really confused as I have a friend who encouraged me to take the HDB loan based on the 0,1% logic? I though the effective interest rate should be higher than 2.6% if we were to draw from our CPF account?

Best regards,
C
---------------------

Hi C,

I would say that it depends on each person's circumstances and also beliefs. :)

For some, if they really need their own flat and if they have no other choice but to use their CPF savings, then, this topic becomes academic for them.

For those of us who have a choice and who believe in using the CPF as part of their retirement funding strategy, the choice is pretty clear to me.

If we need to take a loan for 20 or 30 years, a HDB Loan provides some comfort because it is 0.1% above the CPF-OA interest rate.

If we were to use our CPF-OA savings to pay the monthly mortgage, this is where the cost could end up higher.

Best wishes,
AK

AK71 said...

Like most CPF members, Mr Wong relies on his CPF savings to fund his home purchase, something that he now regrets as he believes he can grow his CPF funds faster by leaving them with the Board.

Source:
ST, 14 Aug 2016.

AK71 said...

Reader:
By the way, u mentioned transferring cpf is to sa to earn more retirement funds but said if I am looking to buy a new flat in the near future, is it still advisable?

AK:
Whatever we do, don't forget that the primary mission of the CPF is to help fund our retirement. :)

ker wen said...
This comment has been removed by the author.
ker wen said...

Hi AK,

I am new reader of your blog and really enjoy reading your posts. Would like to get your views on my situation here. I've just downgraded my hdb to a 3rm bto flat. With this, I've gained about 300k in proceeds and my cpf oa have about 245k now. My bto now has outstanding 240k on bank loan. Now, i hope to gather advice on whether to utilize cash or cpf to repay the loan or would it be better to use the cash to invest for high yield income stocks\reits. I am 41 this year and had about 100k vested in stocks\reits.
Could you please talk to yourself if you were in such circumstances?

AK71 said...

Hi ker wen,

This is dangerous territory here. -.-"

I am not allowed to give personalized advice.

However, there are some things which are pretty safe for me to say and you might be interested in this blog:
Reduce home loan with CPF-OA?

Remember that apart from opportunity costs, what you do should also depend on your risk appetite and your ability to suffer financial losses if they should happen.

ker wen said...

Hi AK,

Thanks no problem, will read the link :)

AK71 said...

Hi ker wen,

Peace of mind is priceless. :)

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