4 Key Reasons Not to Use CPF to Buy a Condo or HDB Flat in Singapore

·12-min read

Typing "Can I use CPF to buy condo" or "How much CPF can I use for condo" into Google Search throws up tons of articles weighing the pros and cons of financing your home with CPF. Even if you are someone buying your first BTO, you might have taken a quick peek at these articles.

Given you can only used the monies in your CPF accounts in limited ways, many consider their CPF savings as money they can’t utilise while in the prime of their life. That motivates many Singapore citizens to use their CPF savings as much as possible, in whatever ways they can, especially when buying a condo or HDB flat.

While there is nothing wrong with using monies from your CPF Ordinary Account (OA) to make a downpayment for your home, there are several strong arguments why you should use cash and not wholly rely on your OA to fund your home purchase. Here are 4 main reasons why it might not be the best idea to use CPF to buy a condo or an HDB flat.

What Can You Pay for Using CPF

In case you didn't know, the funds in your CPF OA can be used to pay for residential properties and fund the education of your children, as well as to subscribe to government-approved insurance and investment schemes. In particular, Singaporeans can use the money saved in the OA to fully or partly finance the downpayment for their residential property.

Apart from the initial downpayment, Singaporeans have the option of having their monthly housing loan repayments deducted from their OA. This option is available for mortgages obtained from HDB or a commercial bank.

Moreover, the OA can be tapped to pay other related fees incurred when buying a residential property, such as stamp duty on Option to Purchase (OTP), stamp duty on mortgage, Additional Buyer’s Stamp Duty (ABSD), conveyancing legal fees, caveat registration fees, title search fees and the Home Protection Scheme (HPS) insurance.

Paying HDB Home Loan with CPF

When you take an HDB loan to buy an HDB flat, you need to pay a 10% downpayment based on the home’s purchase price, while up to 90% can be borrowed from HDB.

Since mid-May 2019, new rules have been implemented for HDB housing loans. If a property can cover the youngest buyer until less than 95 years of age, the loan-to-value (LTV) limit of 90% will be pro-rated according to the extent that the remaining lease can cover the youngest buyer to age 95.

If the property can cover the youngest buyer until he or she is 95 years old or older, the LTV limit of 90% will apply. Regardless of which category you fall under, if you’re using an HDB housing loan, your loan tenure will be the shortest of the following:

  • 25 years

  • 65 years minus the average age of the buyers

  • The remaining lease at the point of purchase minus 20 years

Paying Bank Home Loan with CPF

But when buying private housing or taking out a mortgage loan from a commercial, financial institution (not HDB), the LTV only amounts to 75% of the home’s selling price. As such, the remaining 20% should be paid with a combination of savings in your OA and cash. You also have the option of paying the remaining 20% in cold, hard cash.

4 Reasons Why You Shouldn’t Use Your CPF Monies to Pay for a Property

1. Using CPF to Buy a Home Means Lower Savings in the Future

One key reason you may pass up on using your CPF to buy a condo or HDB flat is that you lose out on having a larger retirement fund in the future. Instead of partly paying for a house, you can maximise your retirement funds by voluntarily diverting money from your OA to your Special Account (SA).

While your SA can only be used in old age and investing in retirement-related financial products, it benefits from a higher interest rate. This is because the Singapore government pays extra interest on the first $60,000 of your combined balances (capped at $20,000 for OA).

Age

​Extra interest

​Below 55 years old

​1% per annum on the first $60,000

55 years old and above​

2% per annum on the first $30,000, 1% per annum on the next $30,000

Say you took this route and shifted monies in your OA to SA, it’s possible to get a hefty retirement fund of at least $1 million when you reach 65 years old or even 45 years old. This potential huge windfall is thanks to the compound annual growth rate (CAGR), especially if you consistently maximised the mandatory and voluntary contributions of $37,740 per annum.

But if you choose to shift nearly all your money from your OA to SA, you will need to fund your property purchase mainly in cash when paying the down payment and servicing the monthly mortgage instalments.

How to Pay Off Home with Cash

While this appears hard, it’s not an impossible feat, especially if you’re buying a build-to-order (BTO) flat. You just need to prudently manage your finances and only spend on what’s essential. For instance, under the Housing Development Board’s BTO sales exercise in November 2018, a three-room flat in the mature town of Tampines near an MRT station costs from $220,000, inclusive of grants.

Assuming you borrowed $198,000 to avail of the 90% loan-to-value of an HDB Concessionary Loan and you intend to repay that in 25 years at an interest rate of 2.6%, the monthly instalment is just $900. Assuming that a husband and wife equally share this amount, each will only need to repay around $450 per month.

2. Hitting Withdrawal Limit for Using CPF to Buy Condo

Another reason why you shouldn’t use your CPF savings to buy a private condo is that you can deplete your OA to the point of hitting the CPF withdrawal limit. A possible risk for automatically repaying the monthly housing loan instalment via CPF OA is that the home buyer may neglect to check how much money remains in their OA.

In this situation, you don’t want to get mail from the Central Provident Fund informing you that you can no longer use your OA for hitting the cap. And to make matters worse, you then realise you barely have enough leftover cash on hand to service your next monthly mortgage instalment. This could lead to late payments, which in turn will result in penalties, or worse, your home might get foreclosed if you default on repaying your housing loan.

Housing Withdrawal Limit Difference When Using CPF to Buy a Condo, Resale HDB and BTO Flat

If you bought a BTO flat, the withdrawal cap doesn’t apply to you. You can use your OA to pay for your property purchase and monthly housing loan instalments until the money in the OA runs out. After that, you need to pay in cash.

But if you bought a resale HDB flat or private property like a condo, there is a ceiling on the maximum amount you can take from the OA to fund your home purchase. This withdrawal limit also considers not just the principal amount of the mortgage but the interest you pay as well.

Nonetheless, you can be exempt from the limit when you meet the Basic Retirement Sum, currently at $96,000 (for those who turn 55 in 2022). However, please note that if you only set aside the Basic Retirement Sum, you will only be entitled to the lowest monthly lifelong payout when you retire. If you want to compute your withdrawal limit, please visit this link.

How the Valuation Limit Determines Your CPF Housing Withdrawal Limit

Since mid-May 2019, new rules have been put in place for both private and public housing. If the property can cover the youngest buyer to less than 95 years of age, the Valuation Limit will be pro-rated based on the extent that the remaining lease can cover the youngest buyer using CPF to age 95. This Valuation Limit basically determines what your CPF housing withdrawal limit will be.

If the property can cover the youngest buyer until he or she is 95 years or older, the use of CPF funds will be subject to the Valuation Limit or the applicable withdrawal limits if they are higher.

Regardless of which category you fall under, the use of CPF funds will be allowed only if the property’s remaining lease at the point of purchase is more than 20 years.

3. Automatic Housing Loan Repayment via CPF Can Lead to Missed Savings

Another potential danger of neglecting to keep track of your housing loan repayments is that you could miss on chances to lower your monthly mortgage instalments if you took a loan from a commercial bank instead of HDB.

This is because there are no housing loans in Singapore, wherein the interest rate doesn’t change over the entire tenure of the mortgage. Typically, housing loans offered by banks here only have a fixed coupon for the first three years or five years.

Thereafter, it shifts to a floating rate based on some financial benchmarks like the Singapore Interbank Offered Rate (SIBOR), Swap Offer Rate (SOR), Singapore Overnight Rate Average (SORA), Fixed Deposit Rates (FHR), and Mortgage Rate Plus (MRP). For the layperson, this means the interest rate of your housing loan can increase or fall over time depending on the local and global economic situation.

More importantly, please keep in mind that the interest rates of housing loans in Singapore usually increase sharply starting from the fourth year. Sometimes, financial institutions or mortgage brokers will suggest a housing loan package with a low coupon that eventually increases. These lenders are doing so on the assumption that you are financially literate enough to refinance your home loan when the interest rates start increasing significantly.

However, when you neglect to monitor your monthly loan instalments and the prevailing interest rates in the market due to being fully complacent on the automatic CPF deduction, you may forget to refinance when interest rates are on the uptrend.

Additionally, if you don’t frequently check how much is getting deducted from your CPF OA, then it’s possible that you could have been paying more than you ought to. This is a bad move for property investors, as the higher interest cost will slash your earnings when you resell your home after holding it for several years.

4. Using CPF to Buy Condo Can Result in Wasted Money

If you tap your CPF to buy a home instead of using cash, you are wasting money. This is because money stashed in your CPF accounts earn higher interest rates than banks, and comes with zero risks. According to the latest figures on the CPF website, the OA’s interest rate sits at 2.5% per annum, and 4.0% for the SA.

Paying your monthly instalments in cash prevents money wastage unless you have a business or venture that earns a larger Return on Investment (ROI). So unless you have a more lucrative use for your on-hand cash, it’s better to utilize it to pay for your home instead of utilising your savings in your CPF OA.

Oftentimes, we use cash to finance inessential luxuries, such as overseas trips and holidays, eating out frequently at fancy restaurants, jewellery or the latest gadgets and gizmos for your smart home. For the financially literate, these things are understood as unnecessary; it’s better to be live frugally now than lead a luxurious lifestyle you cannot afford and declare bankruptcy later on.

But if you are tapping your CPF savings because your cash on hand is used for business ventures or investments with stellar returns surpassing the CPF interest rate of 2.5% or 4.0%, then continue to do so.

So Should You Use Your CPF to Buy Private Property?

When the government established CPF, their aim was to provide a sufficient retirement nest egg for Singaporeans, as well as ensure citizens have enough savings for important stuff such as education, housing and healthcare. The CPF OA is intended to partly fund home purchases, so there’s really nothing wrong with using your CPF to buy a condo or an HDB flat.

However, having your monthly housing loan instalment deducted automatically from your CPF savings can lead to losses and missed opportunities to earn. Those who struggle to understand financial matters like budgeting, refinancing and investing are better off paying for their home in cash. By paying in cash, you will likely be paying more attention to your financial details and mortgage interest rates. Consequently, it is unlikely that you will hit the CPF withdrawal limit.

On the other hand, financial savvy types who fully comprehend the ramifications of using their CPF to buy a condo or HDB flat can tap into their OA without worry. Know that the consequences include sacrificing risk-free CPF interest rates and the need to return the accrued interest to your CPF account when you dispose of the property.

If you do decide to utilise most of your CPF monies to fund your property purchase, please ensure you have ample cash savings and have put in place adequate investment plans for your future.

Besides this article, you may also want to browse our resale HDB flats or private condos for sale or rent. If you want to know about future property hotspots in Singapore that will benefit from ambitious government plans, check our AreaInsider.

Other FAQ on Using CPF to Buy Condo

Can I Use CPF to Buy Condo?

Yes, you can. Learn more by referring to this document on financing your home with CPF.

Why You Should Not Pay for Your HDB with CPF?

The more of your CPF you use to fund your property purchase, the less you have for your retirement needs.

How Much Can We Use from CPF for Housing?

Use the CPF Housing Usage Calculator to see how much of your CPF savings you can use to purchase a property.

Can We Use CPF to Pay for Housing Loan?

Yes, you can use CPF to repay your monthly loan instalments.

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