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

CPF- Yay or Nay?

This would be the first of many CPF-related posts, simply because i think CPF is an important and prominent part of a Singaporean working adult life (whether we like it a not). At the ripe old age of 32, I have only recently started to realise that CPF is not such a bad deal for Singaporeans after all. The following is my personal opinion. I am happy to hear alternative views as well. 😀 

As a young adult, many of the things we learn about, we learnt though social media. And social media thrives on controversies. Controversies are called controversies for a reason, because they stir up emotions and bring out strong opinions. Many times, the loudest (not necessarily the correct- correct in my opinion at least) get heard and people can get convinced or confused accordingly.

In June 2014, it was reported about 2,000 people gathered at Hong Lim Park to hear speakers talk about CPF and demanded the government return CPF monies to citizens. That event certainly generated a lot of publicity / spotlight on CPF and talks if it was being misused. I personally gave it some thought but finally personally decided that my CPF funds are in good hands. Or rather put it in another way, would you know if there are better hands out there whom we should hand our CPF monies to? 

Four years ago, I was even more ignorant about CPF than I am today, but thankfully, I have learnt a bit more about our CPF systems along the way and have also grown to trust it more.  

It is sometimes thought that many people (especially our parents' generation) did not have the luxury of being financial trained and are hence not financial-savvy, given a huge amount of money at 55 years old, would they know how to deal with it? For those who are more risk adverse may choose to put the funds into banks saving accounts which pays out peanuts compared to CPF interest rates which could be =>6% for those older than 55, which bank would be able to pay such high interest rates? 

People say that "Its their money, let them deal with it themselves." which is fine in itself, but if after their money runs out, who would these people turn to? I am not saying they would definitely turn to the government but there is a high chance they would look to the government for handouts. If their children do not support them as well, then who would these people turn to? Though it seems like a rather pessimistic point of view to take, I would rather be pessimistic and be proven wrong then optimistic and proven wrong, cos then, there would be a much higher price to pay for both government and citizens. 

Singapore is not quite a welfare state as compared to the Scandinavian countries (which comes with high tax rates correspondingly). I am not saying which is the better systems but they are fundamentally different systems which different governments have adopted.

My views on CPF:

• Yes, 20% of our monthly wages is not a small sum, but your employer also needs to contribute another 17% to your CPF as well. So it is like bonus of 17% each month. So effectively, if your salary is X (for cases where X=<$6,000), you are effectively getting 1.17X monthly, just that you do not get them all in cash in hand. Putting in 20% for an extra 17%, I think it is still alright for me personally. I feel I should be able to survive on 80% of my salary, basing on a fresh graduate (normal local uni degree) starting salary.
• The returns on our CPF monies is (nearly) risk-free with government's backing. Should something major detrimental happen to Singapore government / economy, I personally think there will be bigger issues for us to worry about than our CPF returns. Granted, CPF is still very important to all of us and in no way I hope to see anything unfortunate happen to it. 
• Interest rates are quite decent ranging from 2.5% to 5% (<55 yrs old) and 6% (>55 yrs old). No banks / insurance company out there can provide this guaranteed risk free high interest rate.
• The minimum interest rate of 2.5% for OA and has been there since the beginning of CPF, I am pretty assured it should continue for the foreseeable future.
• Assuming one starts to work at about 23 (for females) or 25 (for males), one is able to make use of CPF's favorable interest rates (compounded) to their advantage for a good 30 plus years. Assuming you contribute just $500 to your SA which pays you 4% interest, at the end of 30 years, you would have almost $350,000. From your investment of $500*12 months*30 years= 180,000, you would have almost doubled your money. [This is a conservative estimate since you would earn an additional 1% on your first 40,000 of your SA funds.]

• If you are able to double the contribution to $1000/ month, you would end up with $700,000! That is more than half a million!  Granted this is provided you do not use your CPF to buy your house, which many of us in Singapore do, me included. Regardless, these figures made me pause and forced me to re-assess my then decision to pay for my home using CPF back then, though that is another post for another time.

Therefore, at the age of 32, with a tinge of regret, I did not realise the eighth wonder of the world earlier (in my 20s). I am now trying to make it work for me to the best of my abilities by transferring my OA to SA and am also considering if i should make Early repayment of my HDB loan to inject some spare cash on hand into my SA. Some might say it is a drastic move, but missing out on the 4% interest compounded over many many years is also pretty drastic as well.

A neat tip for those who have just started working. If you do not have need to use your CPF for housing, you could starve your OA, and stuff your SA for additional interest. 

E.g if you had 20k in OA (earning 3.5%) and 40k in your SA (earning 5%). But if you starve your OA by transferring your 20k in OA to SA (20+40K=60k) you will have 60k in your SA earning you 5% instead of part 3.5% and part 5%. Do bear in mind that by doing so, you "lose" the usage of the 20k for your housing and can possibly only touch it at 55.

I will touch on CPF for housing in my next post. Do stay tuned. 

Frugal Singa