When selling our house, why do we have to return the interest "we would have earned" as if the money was in our OA? - Seedly
 

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CPF

Asked by Kok Swee Tay

Asked on 05 Jun 2019

When selling our house, why do we have to return the interest "we would have earned" as if the money was in our OA?

Everyone, if not all, uses our OA monies to pay for our houses. We are already paying 2.6% interest rate p.a. to HDB for our housing loan. Upon selling the house, we would have to put back what we have utilised from our OA to pay for the housing loan PLUS 2.5% p.a. as if the money was in our OA over the years we were paying the loan. Albeit the money is still ours, but we won't be able to touch them until earliest at age 55. Why do we need to put back the 2.5% interest?

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Siow Nan
Siow Nan
Level 6. Master
Updated on 11 Jun 2019

CPF does have strict rules on its usage, with OA allowable for housing payments.

In this regard, we are allowed to utilize our OA for home purchase. Having the "accrued interest" component helps us to think deeper when we want to utilize our OA for housing purchase, so that we can manage our finances better.

Rather than thinking about why we need to pay back the accrued interest into our OA, we can look back into the purpose in selling our house. This accrued interest would not be a problem if we are not selling our house.

This accrued interest would not be a problem if we are selling our house with the intention to purchase another house. As the "returned accrued interest" can be utilized for the next house.

It would be not an issue If we hit our FRS and sell the house after 55 years old as we can withdraw the excess over FRS.

Hence in most cases, we should not be worrying over the "accrued interest". It serves mainly to remind us those interest would be given to us had we not use it for housing loan repayments with CPF, but had used our cash instead.

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Siow Nan Wong
Siow Nan Wong

11 Jun 2019

That depends on your perspective on your views on cpf and its purpose. As mentioned one of the intents (I believe) is for forming part of your retirement portfolio and encourages one to have a home as a safeguard in our retirement years as well. However, if one believes that cpf is a sinkhole where we will never see our monies again, then we should be worrying more about the 20% employee and 17% employer contribution than the 2.5% accrued interest. Coming back, the 2.6% interest is pretty much straightforward. We take a loan, the 2.6% interest is charged on our outstanding loan, not on the cpf amount that we have used. You can choose to go to any bank for loan as well, and under current low interest environment, we tend to get a better rate under private bank loans. But these rates may not persist forever. Regarding the accrued interest on the cpf amounts used, as I mentioned, it would not be a problem if you used it for housing needs. Personally I have sold my house, paid the accrued interest back, generated extra compound interest on the returned principal and accrued interest, and used them for my next home without any issues. So yes, it all boils down to individual perspective and experience on our views and usage of cpf.
Siow Nan Wong
Siow Nan Wong

11 Jun 2019

To add, if the accrued interest is really worrisome to you, you can choose instead to pay up the monthly loan fully by cash. You will gain an extra 2.5% interest on the unused OA even! Free money from cpf and no one ever questions why this is given free.
Yixiong Chang
Yixiong Chang
Level 7. Grand Master
Updated on 07 Jun 2019

The primary purpose of the money (CPF) is for a basic level of retirement fund. Money taken out means it is not earning interest, and thus its real value will not be maintain in the future when it is paidout (in CPF Life).

If someone had sold off his property (for a profit) after decades of using CPF monies to pay for it, And only returns the principle, and somehow mismanages his money and spent most of it away (before he even reaches retirement). His retirement CPF money is now of significant lower real value to depend on in future.

2.5% accrued interest over decades can be very significant, and that is the purpose to protect (at the very basic level) your retirement funds. Think of that same example, but he had to return principle plus accrued interest, and he will have less available cash on hand to spend. The CPF money is protected will continue to earn guaranteed interest. Albeit, we still can use the OA again to purchase another property.

Bear in mind, if your property sold is not enough to return the full amount (principle + accrued interest), you will not need to pay any additional cash. It is a basic policy to safeguard your basic retirement funds. Not everyone will be able to manage their money well.

Paying the mortgage interest is a separate issue as you are borrowing money you do not have. You could also choose to borrow from bank at a potential lower rate.

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Kok Swee Tay

05 Jun 2019

Thanks to all for your answers. Agree that CPF monies primary function is to ensure one has enough money to last through their golden years. However, what if we are not required to return the accrued interest over the years, and use this sum of money to make your own investment and beat that 2.5%. I know many will reply saying that not everyone is investment savvy enough or "mismanages his money and spent most of it away". Just thought that it'll be good if we are given an option...
Chris Chin
Chris Chin, Senior Supply Chain at Mnc
Level 5. Genius
Answered on 10 Jun 2019

Don't see why we are charged 2.6%pa by CPF Board when we are taking 脸from our own CPF Account. When we are taking a loan from our own personal cpf account, we should be paying the 2.6%pa to our own CPF account, instead of the CPF Board. This will make it unnecessary to pay extra 2.5%pa to our CPF Account that resulted in a total 5.1%pa cpf loan.

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That’s the rules, no choice. if no accrued interest, everyone will cash out this way and some of not most will squander it away.

some people will want to sell their bigger flats to buy smaller apartments to ’cash out’ their flat.

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CPF is a retirement fund that the govt forces on everybody. To ensure its people age well, the basic thing the govt can do is to help us have enough money by then. You wanna use the money, you follow its terms and conditions.

If you can pay w cash instead of CPF then you pay less when it comes to the 2.5% lor. Call this a paternalistic state or whatever, but not everybody is financially savvy enough for the govt to allow much flexibility. If you're good enough at investing then go earn more than 2.5% so that you have no worries repaying.

If you borrow from a bank, you need to pay interest. That is why you pay hdb the 2.6% interest. If you use your CPF money, you are sacrificing the interest it otherwise earns. So it makes sense that when you return the money, you include the interest. Because that makes up your retirement funds anyway. Borrowing money from your future self means you need to pay your future self the interest he/she deserves.

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CPF is intended to be used for our own retirement. So if you sold off your property and funds will be returned to CPF OA plus whatever accrued interest that we should earn during that period. This is to ensure that you have sufficient funds for retirement later on.

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BL
Brian Lee
Level 4. Prodigy
Answered on 05 Jun 2019

Because CPF OA and SA is actually meant for our retirement. That's why OA + SA = RA when we reach 55. If we have SA= RA, then as you have said, at 55, the "accrued interest" is yours to withdraw because you already met the required retirement amount.

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