Thinking of upgrading from your first property? Many others are too. However, the real-world scenario of accrued interest can severely affect your earnings from your starter home.
If you choose not to ever sell your home, it is a cut-and-dry scenario. You will not need to pay back your accrued interest and this is not a matter for concern for you. Though, you can choose to top up your CPF on your own if you are concerned about the drain taken on your CPF funds.
However, many first-time home sellers are at a loss when they learn that their net profits from the sale is nowhere near what they initially financed for due to accrued interest from CPF. In this article, we'll walk you through some possible scenarios involving accrued CPF interest and how they may impact your earnings if you decide to sell your home.
Related article: Should You Use CPF to Pay Off Your Home Loan?
What is Accrued Interest in CPF?
Accrued interest is the amount of interest that you would have earned if your CPF savings had not been withdrawn for housing. 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.
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 calculated at 2.5% per annum. If you withdraw $100,000 and sell your flat after the minimum occupancy period 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 the my CPF Online Services portal under ‘my statement’.
Why am I required to refund my CPF Savings?
The rules of CPF state that if at any point you withdraw your savings to buy property, it has to be returned to restore your Retirement Account. This account was created for the sole purpose of providing 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 accrued interest.
Taking the example of Mr and Mrs Lim who are both 35 years old, first-time homeowners, let us go through how much corresponding CPF accrued interest they will have to 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 flat to upgrade to a bigger property.
When advised, they discovered the earnings from their property will not cover their CPF principal amount used (down payment + accrued interest). So, they will essentially make zero earnings from the sale of their first property.
How Accrued Interest affects this scenario:
If you only used CPF to pay for your first flat, the accrued interest will be added to your home loan for your next property should you decide to sell.
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 payouts and CPF payouts, they may have been able to retain some earnings which would be returned to them in cash. This is because the accrued interest from CPF will be smaller and thus not impact their earnings from the sale as much. However, regardless, having CPF accrued interest involved will mean your cash earnings from a sale might not be the amount you expected.
Therefore, when you are in such a situation, it is important to calculate the actual accrued interest beforehand, and be realistic about the earnings from your starter home--and taking accrued interest into account may even affect whether or not you ultimately decide to sell at this time or not!
Note also that depending on the circumstances of the sale, you (as the seller) may also need to refund option monies. If the sales proceeds (after excluding the equivalent of option monies) is enough to make the full CPF refund, then you don’t need to refund the option monies. However, if you do not have enough, then it depends on whether the property was sold at/ above market value. If yes, you need to refund the option monies to your CPF, but not the shortfall of the CPF refund that the sales proceeds didn’t cover. If no, you will need to refund the option monies and top up the shortfall.
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. In 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 finally decide again to sell their flat.
How Accrued Interest affects this scenario:
Once you turn 55 years old, there is a minimum Basic Retirement Sum that you are expected to have in your CPF. This amount increases each year as it accounts for cost of living, inflation and so on. If the total amount in your CPF Retirement Fund does not meet the minimum amount (set at $93,000 for 2021), 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 in cash the amount you earned from the sale of the first property. These are the common pitfalls of paying for your property using CPF. As the rules might not be known to all first-time home owners, 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, despite the fact that they financed their home with CPF, they will also be in a position to refinance to a shorter tenure with Mr Lim’s added income. Even though he will also 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, and, as they were unable to come to an arrangement on how to split their assets in general, are awaiting the court's decision on how to split their assets.
How Accrued Interest affects this scenario:
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 that the court also takes into consideration.
As Mr and Mrs Lim were unable to come to an arrangement on how to split the returns on their own, it is up to the courts to decide. They will take into account the financial contributions of both parties, whether there are children involved, the length of 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 own property due to the divorce, and is planning how to finance and pay for his first house.
How Accrued Interest affects this scenario:
In this scenario you are looking to see how much of your CPF to 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 take into consideration paying back toward your CPF at some point.
However, if you are looking to sell your home at some point, consider this. The funds that remain in your CPF can earn up to 5% per annum currently (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 at a later date. 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 accrued interest payable when you sell.
What If You Decide to Buy a Second Property Instead?
This is a popular scenario. Most people think that earning money from their starter home is a good idea while they upgrade to private property or a bigger HDB flat. Many think this is a good way to get out of the dreaded CPF accrued interest too. However, there are two main issues that occur with purchasing a second property while retaining your first.
Additional Buyer Stamp Duty (ABSD)
The ABSD of 12% for Singaporeans and 15% for PRs 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 TDSR and thus monthly payments on your new home loan.
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 the sale of your first property. Even with the rental earnings from the flat, the 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 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 also have to 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 for you to pay using cash first, if you are cash rich at the point of purchase. This will save you the pains of having to calculate your CPF and worry about 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’s Home Finance Advisors 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 when it comes to paying back CPF or figuring out when is the right time to sell. Before making any decisions, it would be ideal to know the situation you intend to enter and what the potential pains can be. Careful planning can help you make your first property sale count, and get the maximum bang for your buck when you do let your property go.
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