Asked by Anonymous
Asked on 03 Apr 2019
Check out hdb website for more information.
For BTO, you are able to use cash and CPF to finance the purchase of your new home. Taking a hdb loan will allow you to loan up to 90%.
You can use your cpf to fund your installment and that’s what many Singaporeans are doing.
The pros of using cash is of course you save on the interest. The cons is that the opportunity cost is higher and there will be cash flow risk.
For cpf, if you use cpf, there will be accrued interest. Let’s say you take out 100k, with an interest rate of 2.5% a year, that is 2.5k worth of accrued interest. Please note that in the event that you sell off your property, you are required to return cpf the amount of cpf funds + accrued interest.
Hi OP, you can refer to the answer I have posted here: https://seedly.sg/questions/my-wife-and-i-currently-have-30k-each-in-our-ordinary-account-should-we-use-it-to-pay-off-our-hdb-loan
To add on, there is two school of thoughts. Are you conservative or aggressive?
The first school of thought is to pay off your housing loan as soon as possible, which is "Work for Money" as you dedicate a significant portion of your salary to the repayment of your mortgage loan, while leaving your CPF monies untouched. This, although painful, gives you purpose and you feel good as every month, as slowly but surely, the debt lessens as you work towards the freedom of not having the burden of housing debt weighing on your shoulders while you see the CPF amount accumulate in your account. This potent combination gives you the freedom to change jobs, take a sabbatical, start a business, retire early, etc, without having to worry about the thorny issue of paying off your mortgage loan and knowing that there is a sizeable nest egg-your very own pot of gold at the end of the road. The joy this duo brings cannot be underestimated, particularly when you're late in life and extremely tired of working. This is the traditional, conservative approach that a majority of Singaporeans are doing as they no idea how to better use their monies and that the government approves of wholeheartedly.
The second school of thought is to take as long as you can to pay off your mortgage and borrowing as much financing as you can get. Why, you ask? To "Make money work for you" as you deploy the savings from a much smaller monthly payment into investment and getting a potentially higher return relative to that of 2.6% p.a. This is the aggressive approach that a minority of people use as they, unlike the majority, believe they can better use their monies. The only problem is that investment returns are not guaranteed but mortgage interest is, and more importantly that most people who think themselves "above average" investors are actually not as good as they think - they have the tendency to follow the crowd in buying high and selling low. Investment is not about slamming fund into stocks or funds and expecting returns based on the hot tip your friend gave you- it means putting in the time and effort into doing your due diligence and homework, be it technical(Volume, trend reversals!) or fundamental (new product line, higher productivity!) -finding out WHY. And when your investments under perform below your expectations and are bleeding red in the markets, you will need lots of confidence - did you make the right trade or were you wrong all along from the start? Essentially, you find yourself in a bigger headache, compounded by a large looming mortgage over you which would mean many sleepless nights.
By utilising CPF for your monthly repayments, you are essentially, trading CPF for cash - Your CPF attracts at least 2.5% p.a. interest risk-free but your cash doesn't.
How can you make the best use of this situation? JFK put it succintly- In the Chinese language, the word "crisis" is composed of two characters, one representing danger and the other, opportunity.
A conservative person would view it as "danger" -yet another problem in adulthood- that they simply do not have the time and energy to think how to better use this cash. They would see the downsides, emphasis costs and be afraid of the unknowns. They would prefer the slow and steady approach.
An aggressive person views it as "opportunity" and see the upsides and emphasis the benefits, embrace the challenge by dedicating time and energy into exploring unknowns to find how they can better use this cash. They must be prepared for bumps along the way.
Are you an conservative or aggressive person? Do you want to take the road less travelled - spend time, effort and money in making mistakes that can be costly? At best, your investment surpasses your wildest dreams, and you can retire early to pursue your passion. At worst, you are sacrificing your retirement money and have doomed yourself to work into your golden ages. Or would you rather go the easy way out- the low effort, no brainer approach, in which you dedicate the time and energy into your job and hope for the best as a salaried worker.
Regardless of which school of thought, it all boils down to the identity of CPF- what do you view it as? Ultimately, CPF is meant for retirement. I personally feel that it would be better to use your cash to pay for your mortgage and reserve your CPF for retirement, as per its intended purpose.
Clear Mortage fast
Build up nest egg for CPF
"No Brainer" low effort
Need to work longer
CPF monies subjected to legislative changes
More money for investement
Potentially higher returns/faster time horizon
Retirement not affected by legislative changes to CPF
High effort with much time and energy needed
Potential to lose everything
Technincally you can use cash and CPF to buy house.
using cash means you have more money in CPF growing at the ordinary account ineterest rate risk free.
using CPF means you have more cash to invest in else where that can give higher returns if you know how.