Whenever you plan to buy a new house, it requires large financial planning as well. Most people consider owning a property as expensive. In Singapore, people can use their CPF account savings to buy a house of their own. However, there’s so much more than just knowing about its utilization.
Owning a house with a CPF balance comes with opportunity costs. Therefore you must have all the essential details of utilizing a CPF account for purchasing a property.
Click here to read “How does a home loan work in Singapore?”
Things to know about CPF when buying a house
1. How much CPF can you use to get a home loan from HDB and banks?
When you obtain an HDB concessionary loan, 85% can be borrowed of the property’s value or price, whichever is lower. Rest 15% can be paid using CPF ordinary account balance.
Whereas in the case of a home loan from a bank or a financial institution, only 75% of lower of the property’s value or price can be borrowed. 15% can be paid using the CPF balance. However, 5% of the value has to be mandatorily paid via cash only.
2. How much can you reserve in your CPF ordinary account when buying a home?
You can now reserve up to $20,000 in your CPF account when purchasing a house of your own. You don’t have to exhaust the balance of your CPF OA and can aside a minimum amount of $$20,000. The reserve works as a safety net when things could go wrong. You can utilize the reserve to repay your home loan if you get retrenched, fall ill, are not able to work, etc. Click here to read What can you use your OA savings for when buying a home?
3. What is the withdrawal limit of the CPF account that can be used for a home loan?
The cap of CPF withdrawal depends upon the Valuation Limit of the house you are buying. The valuation limit (VL) is the lower of the property’s value or price. For example, if the house is priced at $500,000 while the valuation is $480,000, then the VL is $480,000.
The general withdrawal limit of the CPF account is 120% of the valuation limit. In this above example, the withdrawal limit is $480,000 X 120% = $576,000. Any amount beyond the VL has to be compulsorily paid in cash.
4. Can you use your CPF account balance to buy public/private property?
Irrespective of the type of property you are buying, you can always use your CPF ordinary account to pay the value. However, the withdrawal limits are still applied regardless of the type of property.
5. Can legal fees and stamp fees be paid using the CPF account balance?
In Singapore, Buyer’s Stamp Duty (BSD) has to be paid to the authority. You can utilize the CPF account money to do so. Even if you are buying a second or subsequent house property, additional BSD is applicable. This can also be paid from the CPF account balance subject to some restrictions as prescribed by the CPF authority.
You have to first use the money in your CPF OA to pay legal duties. In case you are buying a well-furnished (fully constructed) house, stamp duties must be mandatorily paid. The amount can be reclaimed from your CPF account later. You can contact the CPF Board of Singapore for more details.
The stamp duties must be paid within 14 days of completion of the property purchase procedure. CPF account can also cover conveyancing fees.
In case you are buying a second or subsequent property, you are required to set aside your Basic Retirement Sum before using any money from CPF OA. To check details about Basic Retirement Sum, visit the official site of CPF.
Let’s understand it with an example, suppose you have a Basic Retirement Sum of $181,000 and you have a total sum of $300,000 in your CPF ordinary account. In this case, you can use up to $119,000 from your CPF account to pay the required value/price of the property.
6. Repayment of home loan in cash leads to higher pay-outs at the time of retirement
You should note that it’s not compulsory to pay your home loan using your CPF account. You can pay the entire home loan in cash if you are very disciplined and can transfer your OA monies into CPF special account (CPF SA). This practice leads to higher retirement payouts. The CPF SA accounts grow at 4% per annum while the CPF OA only grows at 2.5% per annum. You must consult a qualified financial planner before taking up any decision.
7. You need to return the CPF monies used in the home loan in case of selling the property
If you sell your house which was purchased using your CPF account balance then the money used has to be returned along with any grants received and accrued interest on your CPF OA (2.5% per annum). However, if you are selling the house at loss (even if it is valued at market price), you don’t need to pay the difference. It is to be noted that CPF money can still be used to buy a house again.
8. The HDB loan interest is directly linked with your CPF OA interest rate
The HDB concessionary interest is always 0.1% above the prevailing CPF OA interest rate. Since the current CPF OA interest rate is 2.5%, the HDB loan interest rate will come out at 2.6%. This means that in the future, CPF interest rise will lead to a rise in the HDB loan interest rate as well.
9. CPF money helps in the payment of your Home Protection Scheme
In the event of death, terminal illness, or permanent disability, the Home Protection Scheme (HPS) pays off the remaining loan. So if you pay for your HDB flat using your CPF ordinary account, you need to take insurance of this scheme.
However, if you own a house that is subjected to an Executive Condominium or is a private property, you cannot get coverage of the HPS scheme. In the case of private property, the owners can get a similar insurance called an MRTS (Mortgage Reducing Term Insurance). It’s totally up to the homeowner if he/she wants it or not.
What are the questions to ask yourself when buying a house with CPF money?
A. What is the opportunity cost of paying CPF money for a home loan?
CPF OA has several uses that one must be aware of. The major use of the CPF is building the retirement bed. The more amount in your CPF account you utilize in paying the home loan, the lesser will be your retirement funds left in the end. The money you spent on a home loan could be used to save for retirement purposes as the Ordinary Account (OA) balance can be transferred to the Special Account (SA) of CPF. You could also earn an interest income of 2.5% and 4% respectively on the amount spent on the home loan. The interest income is the opportunity cost for using the funds to finance your home.
B. Do I have enough money in my CPF account to buy a house?
As mentioned above, you can use CPF account money for various purposes such as paying down payments, legal fees, and stamp duties and to service your monthly loan installments as well. In case you opt for automatic deduction of home loan repayment from your CPF account balance, your savings could be possibly significantly depleted. You must note that if you are above 55 years of age and still paying your mortgage, your CPF contribution rate will fall. This decrease in rate may affect the amount of installments you are paying on your home loan.
C. How can I optimize my CPF account to buy a property?
As we have mentioned, there are opportunity costs that are involved while funding your property with CPF. Hence, it becomes important to utilize the CPF account in a smarter way to minimize these costs. Some of the ways are:
- Pay your installments in cash– The down payment is generally the highest sum you need to pay in your entire home loan. Most people are likely to pay this money via CPF which is probably not a smart decision. You should use cash instead of a CPF account to optimize the resources. It will help in creating a larger sum for retirement.
- Create enough reserve to protect yourself– The general limit of the reserve is $20,000 as discussed above. However, you should create a larger sum for the reserve to pay in extraordinary circumstances.
- Refund the CPF money to earn more interest– If you have spare cash with you earned over the last few years, you should return it to your CPF account to compensate for the earlier amount that was used to buy the property. By this, you can earn compound interest on your CPF OA. Must note that cash returns are irrevocable until you reach the age of 55. Terms and conditions may apply.
