Many argue against using CPF for mortgages and misconceptions are many about the use of CPF for deposits and mortgage payments. 

In this article, we will explain why these arguments are incomplete, what CPF accrued interest is, and why accrued interest is a happy problem to have.

Why are property investors against using CPF for property and housing loans?

The answer is simple – for property investment returns to look better, property investors want to show a larger cash profit from their investments. They cannot do so if they had funded the purchase largely by CPF.

Funding your property purchase using cash or a mixture of CPF and cash will have an impact on how much cash you receive when you sell your property. All of the property sales proceeds first have to be used for:

1. Paying back any existing bank/HDB housing loan;
2. Paying back your own CPF after you sell your property, including accrued interest thereafter;

Then the remainder can be received in cash. Therefore, it is not surprising that:

1. The larger the amount funded by CPF, the lesser the cash proceeds you will receive when you sell your property
2. The longer you use your CPF to fund your mortgage, the less cash proceeds you will get when you finally sell your property

What is CPF accrued interest?

CPF accrued interest is the interest you would have earned in your CPF Ordinary Account (OA) if it had not been withdrawn for your housing or mortgage payment purposes. The accrued interest depends on the following:

1. The dollar amount that you have withdrawn from CPF to fund your housing
2. Interest rate that your CPF OA is entitled to

Depending on how much balance you have across your CPF accounts, your CPF accrued interest can be compounding at 2.5% or 3.5%, due to the additional 1% interest that you may earn from the first S$60,000 of your CPF balance (capped at S$20,000 for your OA).

While you can manually calculate your CPF accrued interest using a spreadsheet, it is faster to log in to your CPF Online Services and check under “My Statement” to check your total accrued interest.

Read more: A guide to CPF interest rates

The compounding effect of CPF withdrawn and accrued interest

OA account compounds at 2.5% per annum; and depending on the length of time and the OA monies that you withdraw to pay for your property, that impact can be significant. 

For example, if your HDB flat has a valuation of S$500,000, you could have withdrawn around S$12,000 for legal fees, stamp duties and home insurance from your CPF. You can also fund up to 20% of the property’s valuation using OA monies (S$100,000).

The below chart shows how a property valued at $500,000 can be financed by a bank housing loan, and how much of the property can be paid using CPF.

Recall that you will start incurring CPF accrued interest once you start using CPF monies for property purposes. The interest accrued will be based on the amount you have withdrawn and also the interest that you would have earned if you had kept the money in CPF.

Assuming that you use only CPF for mortgage payments (at around S$1,500 monthly for a 1.5% p.a. bank mortgage) and the initial 20% out of the 25% payment, at year 5, you would have withdrawn around S$201,800 from your OA account and would have to refund S$222,400 when you sell your property.

That does not seem like a big amount at first glance.

However, if you were to sell your property in Year 20, you would have to pay back a whopping S$648,300 into your OA account. 

If you were to fund your initial 25% payment and subsequent mortgage payments purely in cash, you would have made an “additional profit” of S$177,300. This comes from the compounding of the OA withdrawn and the OA interest that you should have earned for yourself.

Is it truly additional profit though?

The opportunity cost of using cash for property and housing loan

If we do not use cash to pay our housing loan, what would we do with it? If you are going to keep it in a savings account yielding next to nothing, then fund your property with cash as much as possible.

Rationally, since we are using CPF for our property, our cash will have to function as a substitute for CPF's retirement usage, barring personal and family emergencies. Not only that, we need to get a better return than 2.5% p.a. for our cash investments.

For stocks and bonds investments, it may be difficult to beat the OA rates of 2.5% over a short period of one year. On average, over a one year period, the MSCI ACWI has historically only done better than the OA 67% of the time.

However, the longer your investment horizon is, the probability of beating OA rates increases.

‍The long and short of it is that if you are thinking of buying a property largely using CPF, it is not a problem if you are growing your cash savings by investing it in a low-cost, globally diversified portfolio.

Should you use your CPF for property?

Using CPF to finance property purchases requires careful financial planning and risk assessment. Here are a few key considerations:

• CPF allocation to your OA declines as you age: After 35 years old, the allocation of your CPF contributions to your OA declines from the initial 23%. In considering how much you can afford for your house, remember that your current monthly OA savings may not stay at the same level in the future.
• Impact on retirement savings: Utilising your OA for property payments means that you have less for your retirement savings, which also translates to lower CPF LIFE payouts. Factor this in as you plan for your retirement.
• Balancing liquidity and risk-adjusted returns: Using your CPF for your property frees up liquid cash, but holding excessive cash actually subjects it to erosion by inflation. You should consider investing them in a diversified portfolio suited to your risk tolerance and time horizon. You may prefer to use cash for your property and invest your OA – here are a few things you should consider before investing your OA. 
• Your time horizon: At an older age (>50 years old) you may prefer to hold most of your wealth in your OA, where you can get a risk-free interest rate of 2.5% p.a., rather than holding on to riskier investments and letting your accrued interest compound. In that case, you can choose to partially pay back your housing mortgage and accrued interest via a cash refund. 
• Purchasing property as an investment? Real estate markets can be volatile. If you are purchasing a property in Singapore for investing, know that contrary to popular belief, it is not a guaranteed gain. Consider whether property ownership aligns with your overall investment goals.

It’s not wrong for people to have differing opinions on whether it’s better to use CPF or cash for property. These are perspectives that you can consider. Ultimately, your decision should be made after a comprehensive assessment of your personal circumstances, financial goals and investment preferences.

If you would like a second opinion to weigh the pros and cons of investing with cash or OA, feel free to schedule a call with our MAS-licensed client advisors.

Frequently asked questions (FAQs) 

Can I use CPF to pay for my housing bank loan?

The short answer is: yes, you can use your OA savings to pay for bank housing loans. 

However, the restrictions depend on whether you have any existing property that is financed with OA savings. If you have an existing property that is financed with OA savings, you have to set aside the Basic Retirement Sum (BRS). After which, the property can be financed with OA savings until the total OA usage by all owners reaches the lower of the purchase price or the valuation price of the property at the time of purchase.

If you don’t, you still need to set aside BRS, but the total amount all owners are allowed to use for your property will increase by 20% of the lower of the purchase price or the valuation price of the property at the time of purchase. 

The above applies when you buy a property with a remaining lease that can cover the youngest owner using OA savings to at least 95 years old, using a bank loan. For more information, please visit this CPF page.

How do I use CPF to pay for my housing loan?

You can use your CPF funds to pay for your housing loan by following these steps:

1. Log in to the CPF website using your Singpass.
2. Navigate to "Tools and services" and select "Forms and e-applications."
3. Under "Home ownership," click on "Manage CPF usage for your home" and select "Apply online."
4. Choose your property and select "Commence Monthly Instalment" or "Make Lump Sum Payment" as required.
5. Complete the application by entering the required details about your financier and repayment amounts, then submit.

For detailed steps, refer to the CPF website or your bank's guidelines. Make sure to review your repayment options regularly to adjust as needed.