CPF Accrued Interest: 4 Scenarios of How It Can Affect Property Owners

CPF Accrued Interest: 4 Scenarios of How It Can Affect Property Owners
CPF Accrued Interest: 4 Scenarios of How It Can Affect Property Owners

CPF accrued interest is something you need to think about if you’re thinking of selling your first home. Many first-time home sellers are at a loss when they learn that their net profits from their sale are nowhere near what they initially financed due to CPF accrued interest.

If you never sell your home, you will not need to pay back your accrued interest and this is not a matter of concern for you. However, you can choose to top up your CPF if you are concerned about the drain on your CPF funds. 

In this article, we’ll walk you through some possible scenarios involving CPF accrued interest and how they may impact your earnings if you sell your home. Also, we’ll answer questions such as “When does CPF accrued interest stop” and “Should I pay back CPF accrued interest”. Ready to sell your property?

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What Is CPF Accrued Interest?

Accrued interest is the amount of interest that you would have earned if your CPF savings had not been withdrawn for financing your home. This includes all the funds used from the CPF Ordinary Account (OA) for the initial downpayment and monthly instalments of your home. 

Since the goal of CPF is to ensure that Singaporeans and PRs save for retirement, the amount has to be paid back when someone sells their first home. These funds will then be returned to your CPF fund and returned to you upon retirement.

If you’re wondering “When does CPF accrued interest stop?” it’s when you sell your house.

How Do I Calculate My CPF Accrued Interest?

Since the accrued interest is the interest you would have earned if the funds stayed in the CPF OA, it is calculated at 2.5% per annum. If you withdraw $100,000 and sell your flat after the Minimum Occupation Period (MOP) of five years, the total amount of accrued interest you have to pay back is: 

$100,000 x 2.5% x 5 years = $12,500

This means the total amount you need to pay back to CPF is $112,500. You don’t need to calculate this yourself though – you can find the accrued interest on my CPF Online Services portal under ‘My Statement’. 

Why Am I Required to Refund My CPF Savings?

The CPF rules state if you withdraw your savings to buy property, it has to be returned to restore your Retirement Account. This account was created to provide a lifelong monthly income for your living expenses in old age. If you choose not to sell your home, you will not have to refund your CPF accrued interest.

Hence, the answer to “Should I pay back CPF accrued interest” is a resounding yes. To better illustrate the answer to “When does CPF accrued interest stop?” and what happens in various scenarios, we’ll use the example of Mr and Mrs Lim.

The couple were both 35 years old when they became first-time homeowners and bought a BTO flat. Let’s go through how much corresponding HDB accrued interest they will incur if they decide to sell their property in the following situations.

Case Study 1: Selling Your Home to Upgrade While Still Under 55 Years Old 

Mr and Mrs Lim used their CPF to fund their first home and pay off the monthly down payments toward their first property. They are still below the age of 55 and have decided to sell their BTO flat to upgrade to a bigger property. 

When advised, they discovered the earnings from their property would not cover their CPF principal amount used (downpayment + HDB accrued interest). So, they will make zero earnings from the sale of their first property. 

Having HDB accrued interest involved will mean your cash earnings from a sale might not be the amount you expected. In Mr and Mrs Lim’s case, that added interest negated their earnings from selling their first flat.

However, if they had split the loan into cash and CPF payouts, the HDB accrued interest would have been less. And they might have had a balance from the sales proceeds of their flat, which they would have received in cash.

If you paid for your first flat with your CPF OA savings only, the accrued interest will be added to your home loan for your next property should you decide to sell. However, if they had split the loan into cash payouts and CPF payouts, they may have been able to retain some earnings. This is because the HDB accrued interest would be less.

If the sales proceeds of their flat had been lower than the amount to be refunded, they would not need to refund the shortfall so long the flat was sold at or above market value.

However, do note you (the seller) may need to refund option money. Any option money (i.e. option fee or option exercise fee) received in cash from the buyer is considered part of the selling price. This amount has to be refunded to your CPF account before the transaction can be completed.

Case Study 2: Selling Your Home to Upgrade When You Are Over 55 Years Old

Mr and Mrs Lim decided to hold onto their flat due to the poor earnings they would receive if they chose to sell. During this time, Mr Lim has also educated himself to take up a Law degree and is now holding a Partner position at a reputable Law Firm. His earnings have doubled by this time. Now past 55, they browsed property for sale listings, found their dream home, and finally decided again to sell their flat.

Once you turn 55, you must have a minimum Basic Retirement Sum in your CPF. This amount increases each year as it accounts for the cost of living, inflation and so on. If the total amount in your CPF Retirement Fund does not meet the Basic Retirement Sum (set at $102,900 for those who turn 55 in 2024), the earnings from your first home will automatically be credited to your Retirement Account. 

If you are still employed after 55 years old, you will still be able to withdraw from your CPF to finance the home loan of your next property. However, you will not be able to get the amount you earned from the sale of the first property in cash.  These are the common pitfalls of paying for your property using CPF. As the rules might not be known to all first-time homeowners, you may find that they may affect your ability to get a bang for your buck. 

In Mr and Mrs Lim’s case, due to the increase in earnings, they will not be affected by the Basic Retirement Sum rule. At the same time, even though they financed their home with CPF, they can refinance to a shorter tenure with Mr Lim’s added income. Even though he will have to pay back a sizable amount to pay off the accrued interest, he is in a financial position to buy his next property comfortably. 

Case Study 3: Selling Your Home in a Divorce and Splitting the Earnings of the Home Equally

Mr and Mrs Lim have decided to get a divorce and sell their family home. Both Mr Lim and Mrs Lim had contributed to the purchase of the home by 50% each. However, they cannot agree on how to split their assets and are awaiting the court’s decision. 

Due to the Women’s Charter, the returns from the flat to both parties might not be equal as it depends on various other factors the court considers.

The court will take into account the financial contributions of both parties, whether there are children involved, the length of the marriage and so on. This could result in an unequal split of the earnings of the home, for example, 60-40 instead of 50-50. In this case, the CPF refunds will also be split 60-40, meaning that the accrued interest will not be evenly shared by both parties. 

Case Study 4: You Are in the Market for Your First Property

Mr and Mrs Lim have a son named Theodore. He is 26 years old and wants to buy his property due to the divorce, and he is planning how to finance and pay for his first house.

In this scenario, you want to see how much of your CPF you should put towards your first property. If you never intend to sell your home, it does not matter where your down payment comes from unless you are a poor saver and might struggle during retirement, then you should consider paying back toward your CPF at some point. 

However, if you want to sell your home at some point, consider this. The funds that remain in your CPF can currently earn up to 5% per annum (Special Account). The opportunity cost of instead using your CPF funds to pay for your home might not be worth the pain of paying back this accrued interest later. If you sell below property value, you will have to essentially pay out of pocket (essentially make a ‘loss’ from your property) to offset the opportunity cost of the interest you would have earned if the money had remained as part of your Retirement Fund. 

If you were in Theodore’s situation, one possible solution would be to split the monthly payments between cash and CPF to pay off your mortgage to reduce the HDB accrued interest payable when you sell. 

What If You Decide to Buy a Second Property Instead?

This is a popular scenario. Most people think earning money from their starter home is a good idea when they upgrade their property to private property or a bigger HDB flat. Many think this is a good way to escape the dreaded HDB accrued interest. However, two main issues occur when purchasing a second property while retaining your first. 

Consider Additional Buyer Stamp Duty (ABSD)

The ABSD rates of 20% for Singaporeans and 30% for PRs who are buying their second property can severely affect your net earnings from buying a second property in Singapore. Your financial planning should account for this additional amount, which can affect your Total Debt Servicing Ratio (TDSR) and, thus, monthly payments on your new home loan. 

Know Rental Properties Often Get Sold Eventually

Suppose you decide to keep your rental flat to earn income. It is doing well, but eventually, as with most property investments, the value of your HDB flat falls due to lack of renovation upkeep, or it becomes harder to find tenants due to location or other factors. After 35 years, you decide to sell.

Your CPF accrued interest is now compounded by 35 years and might wipe out your entire earnings from selling your first property. Even with the rental earnings from the flat, the HDB accrued interest might not be worth your investment in a rental property. 

How to Minimise the Impact of CPF Accrued Interest on Your Earnings

1. Make a Full/Partial Repayment to CPF 

You can easily lessen the burden of your HDB accrued interest by paying back and topping up your CPF whenever you can. The longer you hold out on not paying your CPF back, the more you will have to give back in the future. However, you must also balance that against the benefits of having cash in hand now and weigh how much you can afford to put back at the given time.

2. Use Cash When Possible

It might make sense to pay using cash first if you are cash-rich at the point of purchase. This will save you the pain of having to calculate your CPF and worry about CPF accrued interest in the future, which would also affect your savings in the long run. 

3. Seek a Professional to Help You Figure These Matters Out

Instead of struggling to understand the ins and outs of CPF, PropertyGuru Finance’s Mortgage Experts can advise you on the best situation for your current savings and home valuation, as well as how to find good and affordable mortgage alternatives to financing your home besides using your CPF. 

There is always wiggle room for paying back CPF or finding the right time to sell. Before making any financial decisions, it’s best to do as much homework as possible. Careful planning can help you make your first property sale count and get the maximum bang for your buck when you let your property go.

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