Currently, CPF contributions to your Ordinary Account can be used to pay for your monthly mortgage payment of your flat. If you are taking the HDB concessionary loan, the interest rate of this loan is pegged at 0.1% above the interest rate in the CPF Ordinary Account. The current base interest rate of the CPF Ordinary Account stands at 2.5% thus the interest rate of the HDB concessionary loan is at 2.6%. However, do remember that the 1st $20,000 in your CPF Ordinary Account earns 3.5% and that is higher than the interest rate of the HDB concessionary loan. Given the higher interest rate for the CPF Ordinary Account as compared to the HDB Concessionary Loan, should you transfer your excess funds in your CPF Ordinary Account to reduce your HDB concessionary loan, especially if you are buying your first HDB flat ?Since the interest rate for the 1st $20,000 in your CPF Ordinary Account is higher than the interest of the HDB Concessionary Loan, it would not be prudent to transfer the funds from your CPF Ordinary Account to pay off part off your housing loan as the yield earned on the CPF Ordinary Account is higher than the interest expense of the housing loan. In the past, the interest rate of the CPF Ordinary Account was only 2.5% thus if you transfer the funds from your CPF Ordinary Account, you can save the difference in 0.1% since the interest of the HDB Concessionary Loan is at 2.6% although the difference is not that significant. With the special interest rate of 3.5% on your 1st $20,000 in your CPF Ordinary Account, this is no longer true.
Furthermore, there is one important benefit to leaving some funds behind in your CPF Ordinary Account and this benefit is an intangible one. The benefit is that the funds can be used as a buffer to pay your monthly mortgage payment if the contribution to your CPF is stopped due to any unfortunate circumstances such as retrenchment. For example, the contribution to your CPF Ordinary Account is just enough to pay off your monthly mortgage payment. Unfortunately, you have been retrenched due to the downsizing of your company thus the contributions to your CPF accounts will be stopped. As such, you will have to fork out cash to pay for your monthly mortgage payment and the last thing you will want to do is to fork out more cash to pay for this as you have lost your source of employment income. Thus it will be beneficial to leave excess funds in your CPF Ordinary Account.
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Since 1st 20k in CPF-OA earns 3.5% interest which is more than the HDB loan interest of 2.6%, I don't see the advantages of making a lump sum payment from the CPF-OA.
ReplyDeleteYour reasoning that the monthly payment is less is due to the fact that the principal loan is less.
But do note you will pay more principal+interest in the end if you make the lump sum payment. Hence it is unadvisable.
Cheers
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ReplyDeleteUpon further thinking, I realize that this issue is not that simple due to the fact that one will have to pay back CPF plus the accumulated interest that one drew out for the mortgage payments upon the sale of the HDB flat. I guess I will need to do a elaborate spreadsheet to account for this.
ReplyDeleteOtherwise, I think that the reasoning of my post is flawed thus I have rewrote the post and made some changes.
Kay,
ReplyDeleteI think it is wise to use your CPF to pay your monthly mortgage loan. It's like borrowing money from CPF. Instead of using your salary to pay your monthly mortgage, use your CPF to do this. That way, you can use your salary to invest for diversification. You'll only give back money to CPF (plus interest) upon selling your hdb. Am I right? If yes, can use the same strategy in private property? Thanks.
Hi Kay
ReplyDeleteI feel your original recommendation of not to pay is correct. Regardless of how much interest is paid back to CPF upon sale of the flat, the interest is paid into our pockets and NOT to HDB.
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ReplyDeleteHi Chloe,
ReplyDeleteYou are right in saying that you should use your CPF instead of your salary to pay your monthly mortgage. I'm referring more to the scenario that your CPF contributions are more than enough to pay for your monthly mortgage and should one use the excess to reduce your housing loan ? For this case, it's not wise to pay back due to the difference in the interest rate. Having excess funds in your CPF ensures that you have a buffer should any situation happens such that your CPF contributions are stopped.
Yes, you will only have to refund back to CPF the funds which you took out to purchase your property plus the accrued interest.
Hi Singlish,
ReplyDeleteTo add on, the 1st $20,000 will earn 3.5% if you place your funds in your CPF Ordinary Account. But if you use this fund to reduce your housing loan, the accrued interest rate for the funds that were drawn out since you will have to pay back the fund plus the accrued interest is only 2.5%. This is what the CPF board told me after I enquired with them.
Tks Kay for the info!
ReplyDeleteJust to confirm the maths,
1, If OA balance <20,000; and
2, Rate for item 1 is greater than
HDB concessionary loan rate.
It is always better not to pay back HDB principal sum.
Hi Singlish,
ReplyDeleteI took the following off the CPF board. In addition, an extra 1% of interest will be paid on the first $60,000 of a member's combined balances, with up to $20,000 from the OA.
Kay
if you have extra funds in your cpf above 20K, i think it is wise to pay down your hdb loan. the principal amount is not the same. say if my existing loan is 100k, and my cpf balances is only 30k, wouldnt it be wiser to pay off more of the loan?
ReplyDeleteHi,
ReplyDeleteThe main principle that I am suggesting is that you should transfer your funds to whichever loan or account that is having a higher interest rate. However, do remember to set aside an amount in your CPF as a buffer to tide over periods when there is no CPF contributions to your account but the mortgage loan still needs to be serviced.
Kay