Should I Use CPF To Pay My Mortgage?

This was originally posted on Planner Bee.

Buying your own home is probably one of the moments where you value the contributions made to your Central Provident Fund account most, since part of that amount can be utilised for property purchases. After all, the idea of paying a mortgage and CPF are almost synonymous in Singapore – most homeowners use their CPF funds to pay off their loans. There’s no doubt that CPF is a pillar of financial security for Singaporeans, offering a range of benefits and options.

However, the question remains: Is it the wisest option to utilise CPF for mortgage repayment? In this article, we’ll delve into the considerations surrounding this decision, examining the pros and cons, and exploring strategies to maximise your CPF funds for your property purchase.

Understanding CPF and its utility

Some have the misconception that their CPF monies can only be used for housing needs. The fact is, CPF funds are versatile and serve multiple purposes beyond retirement savings. The CPF Ordinary Account (OA) allows for various uses, including CPF LIFE, insurance, housing, education and training, and CPF Investment Scheme (CPFIS).

• CPF LIFE: CPF members can use their CPF savings to join CPF LIFE, providing a monthly payout for life upon reaching the payout eligibility age.
• Insurance: Funds in your OA can be utilised to purchase various insurance policies, providing coverage for critical illness, disability, and death. One example is the Dependants’ Protection Scheme (DPS), a term life insurance plan crafted to provide safeguarding against unforeseen events such as premature death, terminal illness, or complete permanent disability for CPF members and their loved ones. Offering coverage of S$70,000 until the age of 65, this insurance allows you to utilise funds from either your OA or Special Account (SA) to cover the premiums for DPS. This initiative serves as a crucial financial buffer during difficult times, offering peace of mind amid adversity.
• Housing: Funds in your OA can also be used to finance the purchase of a home, including the down payment, legal fees and stamp duty, monthly mortgage payments, and other related costs.
• Education and training: OA funds can be used to finance education and training expenses for oneself or family members. CPF offers an Education Loan Scheme that allows eligible individuals to enrol in an approved course. Once approved, the funds will be disbursed from your CPF OA to cover your tuition fees.
• CPF Investment Scheme (CPFIS): CPF members can invest their CPF OA and SA savings in various instruments under CPFIS, aiming for higher returns.

Pros of using CPF for mortgage payments

• Cash flow management: Using CPF for mortgage payments can free up cash flow, allowing homeowners to allocate their cash resources to other needs or investments.
• Capital appreciation: Property values tend to appreciate over time, potentially offsetting the opportunity cost of using CPF for mortgage payments.

Cons of using CPF for mortgage payments

• Reduced retirement funds: Utilising CPF for mortgage payments can deplete retirement savings, potentially impacting one’s financial security in retirement.
• Opportunity cost: The funds used for mortgage payments could have been invested elsewhere for potentially higher returns, representing an opportunity cost.
• Accumulated interest upon sale of property: Should you plan to sell your property down the line, it’s important to bear in mind that besides settling your remaining home loan balance, you’re also obligated to reimburse the CPF funds withdrawn for your property purchase. This repayment includes the principal sum along with the accumulated interest on the amount withdrawn from your OA over the years, as well as any housing grants received.This can reduce the proceeds from the property sale.

How to maximise CPF for property purchase

1. Pay mortgage with cash

The down payment required for a property purchase typically constitutes a substantial sum, making it prudent to utilise a portion of your CPF funds for financing. However, opting to cover your monthly loan repayments with cash instead of CPF may prove viable and more effective in resource management.

By leaving your CPF savings in your OA, you can benefit from the compounding effect of interest, thereby bolstering your retirement funds. Additionally, you can enhance your retirement savings by transferring some of your CPF OA funds to your SA to capitalise on higher interest rates. While the OA provides an annual interest rate of 2.5%, the SA offers a higher rate of 4%. This additional 1.5% can yield a substantial impact as interest compounds over time.

2. Shield CPF OA savings

Homeowners have the option to retain up to S$20,000 each in their CPF when opting for a HDB loan. Beyond this amount, the remaining balance of available CPF-OA funds must be utilised for the flat purchase prior to securing a HDB loan.

Maintaining this reserve in your CPF OA serves as a safety net, enabling homeowners with constrained income streams to meet monthly HDB payments in the event of unforeseen circumstances such as job loss.

For those confident in surpassing the CPF OA’s 2.5% interest rate in the long run, there’s the opportunity to invest excess OA funds (beyond $20,000) through the CPFIS before embarking on a property purchase. This approach minimises the depletion of CPF OA savings for the home acquisition.

To use CPF, or not to use CPF for a mortgage?

The decision to use CPF for mortgage payments requires careful consideration of the trade-offs involved. Homeowners should weigh the pros and cons based on individual financial circumstances and goals.

Leveraging your CPF funds for home financing can be convenient and advantageous, but involves opportunity costs. Opting for a blend of cash and CPF funds could be more optimal for financing your home acquisition. Keep in mind that the CPF’s primary objective is to bolster your retirement savings, and that makes it essential to exercise caution when structuring your home budget.

Maximising your CPF for property purchase involves thoughtful planning and strategic use of resources. By exploring alternatives to using your CPF for mortgage payments and prioritising long-term financial security, you can make informed decisions that align with your objectives.

Ultimately, whether to use CPF for mortgage payments depends on a combination of factors including personal preferences, risk tolerance, and future financial outlook.

Read more: Single and Not Yet 35? Here Are 5 Ways To Use Your CPF Savings