Is Paying Down Your Home Loan By Cash Or CPF A Better Option Today?

Cash or CPF? The perpetual debate between using both sources of financing for your housing loan

Hello there!

It's been awhile since I wrote as life became alot busier recently since Phase 2 of Circuit Breaker.

To begin, I hope you are happy with the overall election results regardless of which side you are on.

The last 2 weeks seemed to have distant our fellow countrymen quite a bit and it is time to set aside differences, let our nation's psyche heal and focus on getting through the storm together.

Even if we disagree with some of the policies of the ruling party today, we must now rally behind the very people who are working for Singapore's and consequently our future even if they are imperfect at times (Who isn't anyway?).

Majulah Singapura - I may complain about our country from time to time but I always count my lucky stars to be born here.

Aside from the elections hype, the month of June and 1st half of July has been incredible for my team as we had expected.

Property buyers returned en masse to resume their upgrading and investment plans while they have a window to do physical property viewings and inspections.

Sales volume has shot up to a monthly record high and hopefully helps grease the economic wheels of the entire real estate industry, where thousands of jobs are at stake.

Fingers crossed, we do not get into a second lock down which impacts our economy further and jeopardize many more livelihoods.

"Always hope for the best but plan for the worst"

What is interesting to note in the past month is that more buyers are interested in layouts with a study and are more willing to stretch their budgets for an additional bedroom if finances allow.

I guess this reflects the commonly agreed notion that the work from home culture is here to stay.

Now, on to our main topic..

Is Paying Down Your Home Loan By Cash Or CPF A Better Option Today?

One of the common questions I get recently from my readers whom I have helped with refinancing to lower interest rate packages (As low as 1.1%!), is this - Should i pay down my home loan installments with cash or CPF?

Whether you own a public or private property, you can opt to use your CPF Ordinary Account (OA) and/or cash to service your monthly loan installments.

Some of you might be wondering why home buyers would use cash instead of CPF to pay down their loans when we have all heard the saying - Cash in hand is king.

Let me explain why.

Benefits of paying your housing loan installments in cash

For those who are entertaining the thought of upgrading from an HDB flat or private property, paying down your mortgage in cash helps to prevent negative cash sale in the future.

This is a scenario where, upon selling your property, you are required to refund all your proceeds to CPF, leaving no cash in hand to foot the deposit for your next property.

For example:

Say you buy a flat for $350,000, using a bank loan.

You use $70,000 from your CPF for the initial down payment.

Over the next five years, you pay around $1,120 monthly for the home loan using your CPF.

In total, you would have used $137,200 from your CPF.

However, when you resell your flat after five years, you must refund this amount, plus the

interest it would have accrued (2.5 per cent per annum for OA), to your CPF; which comes up to roughly $155,200+.

Now say you sell during a downturn, and the sales proceeds are low.

After paying all your costs (e.g. outstanding home loan, misc fees, and so forth), you are left with just $150,000.

This entire amount will go back into your CPF (Including the cash deposit your received from the buyer), leaving you with no cash in hand. (Take note that this happens even to private property owners, not just HDB owners)

While some would argue that you can use the refunded CPF for your next home, there are people whom I have met who did not have sufficient cash savings and ended up not being able to proceed with their upgrading plans.

As such, some buyers prefer to service their loan in full cash to prevent a negative sale situation from affecting their upgrading budget later on.

*Recap: For a private property purchase, the first 5% must be paid in cash, and the next 20% can be covered by CPF. The combined 25% is the absolute minimum down payment on any purchase. Buyer stamp duties of 3-4% (depending on purchase price) would also have to be paid for in cash before it is refunded by CPF.

CPF Accrued Interest can snowball into a negative sales situation if left unchecked.

There is also the heightened risks that if you have used CPF and wait for too long to sell your HDB or private home, such as 10 or more years, the CPF accrued interest plus principle amount owed can snowball into a really impressive (Or depressing) figure.

*On a bright note, if your sales proceeds do not sufficiently cover the amount you owe to CPF, you can appeal through your lawyers to get the outstanding amount waived. 

Another reason for using full cash for the down payment and monthly installments is to fully capitalise on the risk-free returns that CPF pays us.

Very few investments in the world pay us a risk-free interest of 2.5% (or 3.5% on the 1st

$20K in OA) which compounds well over the long run to help us hedge against inflation.

We can even transfer all our Ordinary Account funds to our Special Account to enjoy at least 4% risk-free returns on our money. Where else can you find such returns?

Although the popular belief is that "cash is king", cash in the wrong hands can make a pauper.

And I tell you this from witnessing my mum's experience with her CPF funds which became the catalyst for my entrance into real estate to solve our financial difficulties.

Whether this method works for you depends on several factors and everyone has their preferred approach to retirement savings. But it is a sound and defensive strategy that some home owners apply; even if it means more financial discipline.

Having ample cash savings can mean access to new doorways of opportunities

Usually though, it is not advisable to pay all your installments in cash as it is equally crucial to set aside rainy day funds or an opportunity fund to take advantage of investment opportunities.

If you have nothing in the bank, that can mean turning to personal loans or lines of

credit, which incur a costly interest of 6-9% per annum. This defeats the purpose of trying to grow your CPF, and can derail your upgrading plans.

Additionally, having more cash on hand allows you to invest in subsequent properties earlier in your lifetime, which typically delivers superior long term returns on equity than CPF does. Read: ROE vs ROI – An Important Factor that Property Investors Overlook

To summarise, paying your home loan in cash can be rewarding for certain home owners;

such as those who use CPF as a cornerstone for their retirement, or those who prefer being extra cautious / disciplined in the five-year period before they upgrade.

For anyone else, it’s best to consult with a Property Wealth Planner, and see if the opportunity costs are worth the trade offs.

Need an opinion on your property investment plans, the best buys available or help marketing your properties?

Get a 1-time free 30 min Property Wealth Planning consultation. Schedule one right now.

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- Has your property stagnated in price? What options do you have?

Stuart Chng, Senior Associate Executive Director of OrangeTee & Tie, is a renowned leader and personality in the real estate industry.

He adores music and can play a few instruments decently without upsetting his neighbours. When not doing so, he enjoys pillow fighting with his son and coming up with silly puns which barely amuses his wife.

Professionally, he is a licensed real estate agent, investor, team leader, speaker and columnist for several property newsletters and blogs and is often quoted in media interviews on 938FM, Channel 8, PropertyReport, PropertyGuru and other publications. Throughout his career, he has helped many clients grow their wealth through selecting great property investments and managing their portfolios actively. Read his clients' reviews here.

Stuart has also coached many top million dollar producing agents from different real estate agencies in Singapore. Read his agents' reviews here.

Related readings:

- Time Tested Strategies To Profit From Real Estate In A Crisis

- Methods to Beat ABSD and Own Multiple Properties in 2020

- 4 Important Entry Signals That Will Greatly Improve Your Property Investment Returns


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