CPF Vs Bank Loan Vs HDB Loan. If you are buying a property, which should you use more of and why?

Updated: Sep 6, 2020

CPF vs Bank Loan vs HDB Loan Benefits Differences

When we buy a private property or HDB in Singapore, we have a choice between using Cash, CPF and Banks/HDB loans.

Since time unknown, there has been debates between different camps about whether it is financially wiser to take a higher bank loan, HDB loan or to maximise CPF usage when buying a property.

I would like to provide clarity on this through a step by step guide on the correct thought process you should use.

Before we start, let’s establish the required information to understand the rest of this article.

1. CPF pays you 2.5% per annum for funds in your Ordinary Account. (Amount compounds if you don't touch the funds)

2. When you use your CPF to finance a property, you stop earning interest on the sum used.

3. Bank loan rates today are below 2% per annum. (At the time of writing, it is 1.5%)

4. HDB loan rates today are at 2.6% per annum.

The key point to note is this.

Which funding method is the lowest cost to you?

As can seen from the above, bank loans today cost you less than 2%. Ignoring speculation about the impending rise in interest rates in the next few years, it is still the cheapest cost of funds for financing a property.

If you draw on your CPF, you stop earning 2.5% interest (Plus the compounding effect). Hence it means your cost of funds is at least 2.5%. Obviously higher than the cost of a bank loan today.

For a HDB buyer, taking a HDB loan, it is little bit more complicated so try to follow. The cost of a HDB loan is 2.6%. 

It may, on the surface, seem higher than the cost of funds of using your CPF but let's take a look at it further.

Imagine using $100K CPF for 10 years. The interest you have lost is actually $28K. Taking a $100K HDB Loan on the other hand, would have cost you only $26K in interest.

The difference is due to the effects of compounding interest on your CPF funds if the $100K had stayed in your account for that period.

Now, for an illustration of the above in a (hopefully.. my best doodling) easier to digest form, see below.

CPF vs Bank Loan vs HDB Loan Benefits Differences

Assuming CPF rates remain constant at 2.5%, Bank loan rates at 1.5% and HDB loan rates are at 2.6%, the above shows us the interest costs she would make for choosing each different funding method.

By choosing to use her CPF, she would have 'paid' $28,000 by the 10th year due to interest losses that she could have earned.

By choosing to take a bank loan, she would have paid $15,000 in interest.

By taking a HDB loan, she would have paid $26,000 in interest.

As you can see by now, in this current market, the financially smarter choice and priority in funding method for your property should be in this order – Maximise your bank loan/HDB before using your CPF funds.

In the event, where bank interest rates were to rise above 2.5%, it will be wise to use more of your CPF to pay down the bank loan.