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Reduce home loan with CPF OA or do OA to SA transfer?

Monday, September 11, 2017

I have an existing HDB loan of 270k over 30 years with my spouse and we are deciding whether we should try to reduce the loan amount with our CPF OA or transfer some to CPF SA.

Objective is to pay the housing loan - debt free and to have a good retirement amount at 65 (hopefully to hit at least 500k in CPF).

We are 35 this year and we have around 80k in our CPF OA each with around 30k in CPF SA.

Hope to get your kind advice on this!

When we use our CPF-OA savings to pay for our home, we stop earning interest from the government. Instead, we have to pay ourselves interest if we should sell our home.

Once we realise this, it becomes pretty obvious that in an environment of prolonged low interest rates, it would probably be a better idea to pay for our home using cash if we can afford to do so. Don't use our CPF-OA savings.

Central to the idea is to receive more interest income for our CPF savings with an eye on achieving a higher level of risk free and volatility free retirement funding.

Before doing any OA to SA transfer, I would keep enough in the CPF-OA to service at least 24 months of mortgage payments. Bad things do happen unexpectedly.

Savings in our CPF-SA receive a base interest rate of 4% per annum.

If you use your OA savings to pay your HDB loan, you are saving 2.6% in interest payment but you will be losing 2.5% in interest income. So, you have a net saving of 0.1%...

Thank you so much for the prompt reply and words of wisdom.

I will keep in mind your kind advice and work out a long term plan.

It has been very kind of you to share your knowledge and wisdom especially for many of us who are caught at a junction, not sure what is the best way to move forward and yet we would want to maximise the returns for our efforts/assets/decision. Sometimes, there is really no right/wrong way to make a decision.

Once again, thank you so much for sharing your knowledge selflessly!

Interested in making good use of the CPF to help achieve retirement adequacy? See related post #2.

Related posts:
1. Average HDB household and $1M.
2. 4 ways to boost our CPF savings.


WTK said...

Hi AK,

The option to use cash to pay for the home purchase is a good one. I think that ppl tend to forget that the purpose of CPF is to save for retirement and not for the home purchase.


AK71 said...

Hi Ben,

I know many people think of their CPF savings as money they will never get to see. It has to do with a lack of trust in the system. What's there to forget if there isn't anything that is worth remembering? Unfortunate but I know many people who are like that.

Spur said...

Wouldn't have this problem if govt hadn't liberalized CPF for property purchases in the late-1980s.

Would have cut off a lot of the property speculation from 1988 till today, and the average joe would be in much better position for retirement.

Frankly, if the govt is serious about retirement adequacy it should start reducing the amount of CPF that can be used for property. Have a 10-year plan that goes down to zero CPF property usage at the end of 10 years.

If they are too scared that it will implode banks, property developers & the economy (which was the main reason they liberalized CPF in the 1st place) then implement it over 20 years. But at least get it going.

laurence said...

And to look back in awe that $270k was sum of my new 1st flat plus resale 2nd flat. How time flew and money flies as well.

AK71 said...

Hi Laurence,

I can still remember my family selling our 3 room HDB flat for only $70K in the late 80s. :)

AK71 said...

Hi Spur,

Yes, I agree. Allowing more and more ways which the CPF money can be used has not been helpful to its mission as a cornerstone of retirement adequacy. Sometimes, it can also be harmful.

"Mr. Chia said that whenever the CPF Board liberalised rules to allow members to use their CPF funds for investments, it would be the insurance companies and banks who got very excited. Their motivation is to make money from fees, after all."
IPS Forum on the CPF.

ymerej said...

correct me if im wrong, but if you were to sell the hdb eventually, you will have to pay back the interest on the CPF that you have used right? following this train of thought, again not using cpf (or a shorter loan tenure) is better?

AK71 said...

Hi ymerej,

For most young people, it might be a tall order not to use any of their CPF money for home purchase but there is always the option to do voluntary refunds to their CPF accounts later on. :)

How to stop accrued interest from growing?

AK71 said...

Reader says...
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?

AK says...
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.

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.

AK71 said...

Reader says...

Hi AK, can i ask for your opinion. Currently , i have $56K in the OA account.

I took a bank loan for my HDB and i am 30 yrs old. Is it a good idea that i put $25k In my OA account as buffer/ rainy day.

The rest of the $31k to be transferred to the SA account.

AK says...

Sounds like a plan to me 😉

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