There are many misconceptions around the use of CPF for deposits and mortgage payments. In this article we will explain why many arguments against using CPF for mortgage are incomplete, what is CPF accrued interest and why the accrued interest is a happy problem to have.

Why many property investors give a one-sided argument on the CPF mortgage payment debate

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 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 used your CPF to fund your mortgage, the less cash proceeds you will get when you finally sell your property

What is CPF Accrued interest in the first place?

CPF accrued interest is the interest you would have earned in your CPF Ordinary Account (CPF OA) if it had not been withdrawn for your housing or mortgage payment purposes.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 The dollar amount that you have withdrawn from CPF to fund your housing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%1 , due to the additional 1% interest that you may earn from your OA for the first $30,000 of your CPF balance.

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.

1 Compound interest of 3.5% subject to CPF additional interest limits

The compounding effect of CPF withdrawn and accrued interest

CPF OA compounds at 2.5% per annum; and depending on the length of time and the CPF OA monies that you withdrew to pay for your property, that impact can be significant. For example, if your HDB flat has a valuation of $500,000, you could have withdrawn around $12,000 for legal fees, stamp duties and home insurance from your CPF.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 CPF OA monies ($100,000)

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

Property payments which can be funded by CPF is in green, and minimum to be funded by cash is in blue

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 withdrawn and also 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 $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 $201,800 from your CPF OA account and would have to refund $222,400 when you sell your property.

*Figures rounded to the nearest hundreds

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

However, if you were to sell your property on Year 20, you would have to pay back a whopping $648,300 into your CPF 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 $177,300. This comes from the compounding of the CPF OA withdrawn and the CPF OA interest that you should have earned for yourself.

Is it truly additional profit though?

The opportunity cost of using cash for property payment

If we do not use cash for paying our property, 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 property payment, 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 CPF OA rates of 2.5% over a short period of 1 year. On average, over a one year period, the MSCI ACWI has historically only done better than the CPF OA 67% of the time.

However, over a longer period of time, the success rate of performing better than the interest rates of the CPF OA increases. Over any 20 year period historically, you have a 100% certainty of beating CPF OA rates if you invest in either Barclays US Aggregate Bond Index, MSCI All Country World Index, the S&P 500, or a balanced portfolio.

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 diversified portfolio.

Repayment of CPF Accrued Interest

At an older age (>50 years old) you may prefer to hold most of your wealth in your CPF OA account, where you can get a high interest rate, rather than holding on to riskier investments and letting your accrued interest compound.

In that case you can choose to partially pay back their housing mortgage and CPF accrued interest via a cash refund. This can be easily done online.

Why using CPF for property payment and mortgage gives you more options

A bird in the hand is worth more than 2 in the bushes. Similarly cash that we can use freely and without limitations is worth more than CPF monies that can only be withdrawn at 55 years old. While those who are wealthier may choose to maximise the risk-free rates of CPF accounts, it will be more prudent for young Singaporeans to have more liquid assets at hand.

For many, it is better to be Cash rich and CPF poor, than to be Cash poor and CPF rich

Young parents can use the additional cash at hand to pay for household expenses when they are facing unemployment issues. The cash at hand can also be used to invest in yourself through further education.

Most importantly, at any point of time if you have too much cash at hand, you are free to do a voluntary refund back to your CPF for the amount withdrawn.

If you choose to pay your home using cash - there is no way you can get the cash back unless you sell your property.

If you choose to pay your home using CPF - you have cash at hand to plan for rainy days, invest for your retirement, or even refund back to your CPF.

CPF accrued interest is not a liability, but an option that we can maximise. Paying your property using CPF is the better choice for most people who can take charge of their finances.