CPF- Thinking out loud on using CPF for HDB and its opportunity costs...

In Singapore, it is really common to use our CPF-OA funds to pay for our house, both down payment and monthly installment whether bank or HDB loan. 

In fact, when taking up a HDB loan in the past, buyers would have to wipe out their CPF-OA balances to pay for their flat before they can take up the HDB loan. This changed August this year when government announced that buyers who are taking HDB loans, could keep up to $20,000 in their CPF-OA and get the HDB loan. I personally feel this added flexibility is good thing for flat buyers. 

I believe many of us (typical young couples) take on this mindset when deciding to use CPF-OA for our housing loans: "Since i cannot touch my CPF funds, at least not until 55/65 years old which is a good 30-40 years away, I might as well spend it on the biggest house i can get. Besides, monthly installments can also be serviced using CPF, so its akin to zero cash outlay, so why not?" I admit that was also my mindset back then. 

However, when I recently started to take the time to understand the CPF scheme more, I started to question my decision taken 4-5 years ago, because using our CPF monies for HDB will affect our retirement funds. 

Our CPF-OA earns us 2.5-3.5% interest while our CPF-SA earns us 4-5% interest and because we are young when we buy our flat, the runway for compounding is really really long at that point in time. 

Assuming after the recent change that allow us to keep $20,000 in our OA, this $20,000, if left in OA for the next 30 years will double to about $42,000 and that is us not lifting a finger, no additional top ups, zero effort on our part. 

If we are confident enough that we really will not need to use this $20,000 in our OA, we can transfer it to our SA which will earn us at least 4% (5% on the first $40,000, which is likely the case given young adults SA is unlikely to have that large an amount in SA), we will have quadrupled our $20,000 to about $85,000, which is simply WHOA to me. Likewise, this is zero effort on our part, all we need to do is to transfer this $20,000 from our OA to our SA. Granted, this $20,000 is effectively "useless" to us for the next 30 years because SA funds is primarily for our retirement and cannot be used to do much except do certain investments before we turn 55. 

Besides not compounding in our own OA, one more drawback from using our CPF-OA for our housing is the accrued interest incurred which we need to refund to CPF when we sell our HDB. When I log into my CPF account, I am able to see that I have about $5000 accrued interest incurred to date which means that I will need to refund this $5000 into my CPF when I sell my HDB, in addition to the principal which I borrowed from my own CPF. 

Source: CPF

It seem like a double whammy to me. When I use my CPF to buy my HDB, besides forgoing the 2.5-3.5% interest rate, I am now required to earn more on my own (whether from selling the house in future or otherwise) to pay back to my CPF in future when i sell my HDB. 

As I had only used about $50,000 back then, the accrued interest does seem manageable for now. However, if you had used a large portion of our CPF, e.g. $500,000 OA to pay off your HDB flat. You will need to refund the accrued interest of about $140,000 into your CPF if you sell your place after just 10 years. This accrued interest will only increase the further down the road you go as it compounds (against you!). So if the above scenario couple had plans to sell their HDB to unlock some value in their home by selling it, the cash they could get back is greatly reduced from the accrued interest. 

Notwithstanding, I note many of us (me included) would not have been able to afford the HDB down payment without touching our CPF. However, I feel that for our monthly installments, we should try, to the best of our ability, to pay in cash. Unless, we are confident that we can use the cash to earn us more than 2.5-3.5% consistently through the years, in the long run (which is actually not an easy thing to do), it would good for us to be prudent when using our CPF for our housing. 

When we are in a financially comfortable enough position (saved a little after perhaps 5-6 years in the work force), we could consider doing a voluntary refund of the housing amount withdrawn. So we can actually pay back CPF on our HDB loan even if we do not sell our HDB. By doing so, we will stop the compounding against us, and for it to work for us instead! 

Frugal Singa