Your Central Provident Fund (CPF) comes in handy when purchasing your new home but how much money should one tap on CPF? Should you deplete your CPF savings? What is a safe amount of money to be retained in CPF? Fret not, let us give you a better idea on home loan financing.
When purchasing a new home, there are generally 2 common scenarios:
Scenario 1: If purchasing a HDB, take up a HDB housing loan. You can choose to retain up to $20,000 in CPF Ordinary Account, with the remainder used to finance the housing loan payment.
Scenario 2: Take up a bank loan and can choose to retain any amount in CPF Ordinary Account
For both scenarios, it is recommended by CPF to maintain at least $20,000 in your CPF Ordinary Account.
Do take note that for Scenario 1 (taking a HDB housing loan), you will need to decide how much savings (up to $20,000) to retain your CPF Ordinary Account at the point of purchase. The remainder of your Ordinary Account savings will be utilized to pay off your HDB flat down payment before HDB disburses your housing loan.
In contrast, if you are taking a bank loan, you have the flexibility to manage the use of your Ordinary Account savings for the down payment and home loan financing at any time.
Reasons to maintain $20k in your CPF Ordinary Account
Reason 1: Attractive risk-free interest rate of your CPF Ordinary Account savings
You do not want to miss out the attractive interest rate of your CPF Ordinary Account savings, which is much higher than putting cash in your bank savings account. Indeed, CPF Ordinary Account savings earn a risk-free interest rate of 2.5% annually. Also, an additional 1% interest is paid on the first $60,000 across all CPF accounts, which is capped at $20,000 for Ordinary Account. It will first be credited to the Retirement Account or Special Account.
With the higher risk-free interest rates, retaining money in your Ordinary Account will allow you to earn more funds for future housing or retirement needs.
Reason 2: Building a strong financial safety net for your peace of mind
By maintaining at least $20,000 in your CPF Ordinary Account, these funds will provide a safety net for you to pay off your monthly housing installments during unfortunate events such as temporary loss of job and income streams.
These funds will come in handy to at least tide you through a few months of monthly housing installments, ensuring that you have a strong financial safety net to overcome any unforeseen events.
Reason 3: Forward planning with more retirement funds
Ultimately, your Ordinary Account savings will be used to build up your Retirement Account or Special Account. Moreover, Retirement Account and Savings Account can earn up to 6% interest, which builds up even more money for you to enjoy your future retirement life.
Hence, it is paramount to balance your use of CPF Ordinary Account savings with cash when purchasing your new home. This will empower you to be in a better financial position in the long run, with sufficient CPF Savings for your future retirement needs.
To have a better picture of your home loan financing, you can use the Mortgage Calculator to compute your monthly instalment. The payment can be a combination of cash and CPF savings.
Applying to finance your new home with your CPF Savings
For a new HDB flat, you will need to complete and sign the CPF withdrawal form at the HDB office. For a HDB resale flat, you are able to submit this form online.
If you are purchasing a private property, you will have to engage a lawyer to submit the application to use your CPF to finance the property on your behalf. Your CPF Savings will only be released to buy the property after:
- All legal documentation is in order
- Payment of option fees
- Payment of the required cash down payment of at least 5% of the lower of the purchase price or the valuation price of the property at the time of purchase
- Payment of any balance purchase price which is the cash-over-valuation, after taking into consideration of the CPF lump sum and the housing loan payment
Making a voluntary housing refund to your CPF Ordinary Account
When CPF savings is used to finance your housing payment, your retirement savings is reduced. Thus, it is mandatory to refund the CPF savings amount plus the interest accrued on this amount when you sell your property.
To refund less when you sell your property, you can choose to make a voluntary housing refund to your CPF Ordinary Account. This can be done when you are not selling your property. When you make the voluntary housing refund early, the less you will need to refund upon the sale or transfer of your property. In addition, you will be able to take advantage of CPF’s attractive risk-free interest rates when you top up your CPF accounts. You will also be able to re-use the refunded CPF savings for the various CPF approved schemes (if needed) to help you with your retirement or healthcare needs.
Lastly, you may receive more cash proceeds when selling your property in future as a lesser refund to your CPF account is needed.
