Should You Pay your BTO with Cash or CPF?

by Laura Lim

Buying a home is one of the largest financial expenses one can expect to make in your lifetime. It is no wonder first-time homeowners take the time to research and figure out what are the best financing options! In this article, we’ll be tackling one of the most common dilemma new homeowners face: “Should I pay my HDB home mortgage with CPF or cash?” Interested to learn more? Read on.

Understanding HDB Home Mortgage Loans

Let us start with the basics. An average 5-room HDB BTO flat costs approximately $350,000 (excluding grants). Most first time homeowners would not be able to pay for the full sum outright, and so they will choose to take a home mortgage loan (simply put, a loan that you borrow to purchase your home).

There are typically two types of loans homeowners can go for – a HDB Loan (borrowing directly from HDB) or a bank loan (borrowing from the banks). How are they different?

  • HDB loan (10% Down Payment, 90% Borrowed)
  • Bank loan (25% Down Payment, 75% Borrowed)

Using the example of $350,000 5 room HDB flat,

HDB Home Mortgage Loan

Bank Loan
Down payment: $35,000

HDB Loan: $315,000

Down payment: $87,500

Bank Loan: $262,500

Repaying Your HDB Home Mortgage Loans: CPF or Cash?

Now, regardless of which route you choose to go with – HDB or bank loan, you will need to repay them. This can be over the course of the next 25 (HDB cap) or 30 (bank cap) years, on a monthly basis.

Assuming a maximum loan period of 25 years, and an interest rate 2.6 % (1 July 2020 – Sep 2020), estimated loan repayment is approximately $1,430 monthly over 25 years.

Interested to find out what your estimated monthly instalment would be like? Check out HDB’s Monthly Instalment Calculator to figure it out.

Pros of Paying with CPF

Many proponents of the CPF option would suggest that the CPF savings would have extremely limited uses if not for purchasing your home. Repaying your home loans with CPF would allow you to not draw down on your cash savings – which you can use for other immediate needs like your wedding, renovations etc. This option makes people feel better about their finances because they do not see the monthly repayment being drawn down from their bank accounts. However, do note it is still being drawn down from your CPF savings.

Another benefit would be for the investment-savvy. Using CPF OA savings to repay home loans will free up existing cash to be diverted to other forms of investments with higher interest rates (> CPF’s 2.5% OA interest rate). However, statistics should that 1 in 3 Singaporeans do not even invest, so how are they making up for the loss in 2.5% interest?

Cons of Paying with CPF

For the financially savvy, there are clear downsides to this option. Remember the purpose of CPF? It is meant to save up money for your retirement pay-outs. So, if you draw down on it to pay for your home now, you will end up having lesser to compound and grow for your “nest egg”. The more you use up for your home, the less you have for retirement. It is as simple as that. Unless you have other means of accumulating your wealth for retirement at higher than CPF interest rates, it is better to not touch your CPF stash.

Remember, that the CPF monies will need to be returned to your CPF account (with interest) when you sell the house. So, it’s not like you take it out of your CPF for good.

Do also note there is a limit to which you can use your CPF savings to repay your home loan. Check what is the limit with the official CPF Housing Usage Calculator here.

Pros of Paying with Cash

It is not that bad if you think about it. Even at $1,430 a month, if shared between two homeowners, that would work out to about $700+ each a month. Plus, if you can refinance your loans when the interest rates drop, so your overall payments could reduce over time.

So, if you do have the ability to pay cash, trust us and do so. Here are 3 simple reasons why. First and foremost, it allows you to continue to grow your savings in your CPF at the guaranteed interest rate of 2.5% p.a. for retirement. For non-investors, where else are you going to find such good interest rates? For comparison, current saving accounts are at measly 0.05%, and even the best fixed deposits are only around 1%.

Secondly, if you choose to pay with cash, you will be able to transfer your unused CPF OA savings into the Special Account, for even higher interest rates (5%). Imagine how much more your retirement stash can grow over time?

Lastly, paying in cash helps to prevent negative cash sales in the future. Remember what was discussed earlier about returning the money used to buy the house? There are common situations when sellers end up having to refund all the sale proceeds into CPF and end up without cash on hand for the next purchase’s deposit.

Cons of Paying with Cash

Most young homeowners would freak out, faced with the stone-cold reality that they need to pay a bill of $1,430 every month for the next 25 years. That is no mean feat. It is a large enough recurring expense that would worry even someone with a stable job. And the truth is that not everyone has the ability to set aside that much cash after other expenses every month.

Our Recommendation: CPF or Cash?

Pay with cash where you can. If you really cannot fork out the monthly installments in cash – there is nothing to think about – just pay with CPF. However, when you start to earn more on the job, accumulate more savings, consider switching to pay with cash instead. Did you know there is an option to pay partially with CPF and cash? Try that if you cannot pay fully in cash.

At its crux, paying with CPF has an opportunity cost to it– one that we will not see the impact of until a few decades later. If you have the option to choose, only touch your CPF if you have the ability to make better returns with your freed-up cash.

Hope you’ve a better idea of which route you will be choosing for your HDB home mortgage repayments after reading this article.

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