Should you keep more than $20,000 or let your CPF OA be wiped out

HDB apartment buyers in Singapore have two choices as to how they intend to finance their apartment purchase. The first option is to take out a bank loan and the second option is to take out the HDB home loan. Both options have their own distinctions in terms of loan-to-value limit amount, interest rate, loan term, down payment required, and use of CPF funds.

Since the introduction of the Public Housing Scheme in 1968, Singaporeans have been permitted to use their CPF Ordinary Account (OA) savings to fund their mortgages for HDB flats. However, the amount of CPF funds that must be used differs depending on whether you plan to take out a private bank loan or an HDB housing loan.

For a bank loan, you will have to pay a deposit of 25% of the valuation of the property. Of which 5% must be in cash and the remaining 20% ​​can be either CPF OA and/or cash. However, if you were to take out an HDB home loan before August 2018, whether or not you were able to pay the down payment in cash, you would need to use all of your OA savings. This meant that apartment buyers with an HDB loan, especially younger buyers, were unable to earn the additional 1% interest on their combined CPF savings for the first $60,000 (capped at $20,000 in OA).

To allow more CPF members to earn this higher interest on their CPF savings, apartment buyers who have taken out an HDB home loan since August 2018 have had the option of keeping up to $20,000 in their OA. .

This makes us wonder what options apartment buyers might consider when deciding whether or not to keep that $20,000 in their OA when taking out an HDB home loan.

Also read: Step by step guide on how to apply for the CPF housing program to use the CPF to pay our housing loan

What are your options if you were to take out an HDB home loan?

If you decide to take out the HDB loan at the prime rate, you can take a maximum loan-to-value (LTV) limit of 85% for the purchase of a new or resale HDB apartment for a maximum loan term of 25 years.

You can use a combination of cash and CPF savings to pay your 15% deposit. However, you can keep up to $20,000 in your OA CPF and must use your remaining OA savings towards the purchase of the apartment before getting a home loan from HDB.

Considering the first $20,000, you have the following three options.

Option 1: Clear all CPF savings

The first option is to use all of the savings in your CPF Ordinary Account (OA) to fund your HDB home loan, which includes the down payment, stamp fees, registration fees and legal fees. .

First, this may not even be an option if you are unable to fund the initial 15% down payment without using all of your CPF OA funds.

Second, you can decide to use the additional $20,000 down payment in CPF savings if you want a larger loan than you can afford without using all of your CPF savings.

Third, you can also use all of your CPF OA savings if you want to reduce the loan amount you take out with HDB. For example, on a $250,000 loan at 2.6% interest over 25 years, you would pay a total of $340,500 over 25 years, including $90,500 for interest payments. But if you took out a smaller loan of $200,000 on the same loan terms (i.e. loan term and interest rate), you would only have to pay a total of 272 $400 over 25 years, of which $72,400 would be for interest payments. This translates to an interest savings of $18,100, as shown in the graphs below. Therefore, this could be another reason why you may choose to use all of your CPF savings when taking out your HDB loan.

Source: HDB

Finally, if you were to have a combined CPF balance of at least $60,000 in your Special Account (SA) and Medisave Account (MA), then you could receive the additional 1% interest that the government pays to increase your pension saving. . Therefore, you would not lose the additional 1% interest, which was intended to allow you to keep your first $20,000 in your OA.

This option of using all of your OA savings may be viable if you want to pay off your loan quickly and expect your income to exceed the monthly payment to increase your OA savings over time.

Read also : 4 Reasons to Make a Voluntary Housing Reimbursement for CPF Funds Used for Your Home Down Payment and Your Monthly Mortgage

Option 2: Stay within the $20,000 allowed

The second option, especially if you don’t have at least $60,000 in combined savings, is to consider keeping up to $20,000 in your OA savings.

The flexibility to allow apartment buyers to keep up to $20,000 each in their OA was first announced in August 2018. Previously, apartment buyers taking out the HDB home loan had to use all of their savings OA before HDB determines the loan amount. This was done to allow CPF members to earn an additional 1% interest on their first combined savings of $60,000 (capped at $20,000 for OA). The extra interest goes to your Special Account (SA) or Retirement Account (RA) to enhance your retirement savings. This is especially beneficial for younger homebuyers who may not have enough CPF savings in their SA and MA to qualify for the higher interest.

Therefore, by choosing to stay within the limit allowed in your OA, you can maximize the interest earned on your CPF savings. You could earn up to 3.5% on your OA savings, which is higher than the concessional home loan rate of 2.6%. You can also choose to keep any amount (up to $20,000) so you can reach the combined savings of $60,000 to earn the highest interest.

The second benefit is that the amount withheld, which could be considered emergency savings to pay your monthly housing payments, would earn high interest. Instead of putting your emergency savings in a bank savings account or fixed deposit account, you can keep your funds in your OA and earn the prevailing interest rate of at least 2.5%. Interest earned is much higher compared to current bank rates. There are also no fees for using your OA savings whenever you need them, unlike banks, which may charge prepayment fees when you redeem your funds during the lock-in period.

Additionally, being able to keep up to $20,000 each or $40,000 as a combined couple would give apartment buyers a buffer period during times of difficulty making monthly payments. For example, suppose a couple keeps the maximum of $40,000 in their OA savings and takes out an HDB loan of $450,000 over a 25-year period. Their $40,000 in OA savings would allow them to pay monthly payments of $2,041.51 for 19 months. Therefore, the greater the amount of OA savings you keep, the greater the buffer you will have in the future.

Read also : Why you should not rush to repay your mortgage with your CPF savings

Option 3: Keep more than $20,000 in OA

The third option, if you want to grow your CPF savings even faster, is to consider keeping more than $20,000 in your OA.

This option may be more suitable for apartment buyers who have enough money for the down payment and who have accumulated significant CPF savings or who consider their CPF savings to be an essential part of their retirement planning.

By keeping more than $20,000 in your OA savings, you can initially create a larger buffer than just maintaining the $20,000 limit allowed. Depending on the terms of your loan, more OA savings creates a larger buffer, allowing you to use your savings for a longer period to fund your monthly mortgage payments in times of difficulty.

Second, you can maximize returns from more of your savings, as your money in CPF is up to 5% per annum compared to returns from cash savings accounts offered by banks.

You can choose to keep more of your OA savings by transferring them to your SA. This will allow you to earn 4% interest compared to the 2.5% on OA savings. However, note that the transfer is irreversible. This could be an option if you want to follow the 1M65 movement by maximizing your retirement savings, supplementing your total retirement sum limit (FRS) in your SA.

Alternatively, you can also take advantage of the CPF Investment Program (CPFIS) to invest any amount beyond the first $20,000 in your OA and $40,000 in your SA. Additionally, through your CPFIS-OA, you can invest up to 35% and 10% of your investable savings in stocks and gold, respectively. You can also invest your OA savings in CPFIS-approved funds that are available from Endowus and MoneyOwl to earn a higher rate of return over the long term.

Read also : Here’s how the interest CPF accrues on your home affects your retirement planning

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