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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