In Singapore, most homeowners or property investors use CPF Ordinary Account (CPF-OA) funds to pay for some or all of the downpayment and monthly housing loan instalments. It is important for you to understand how CPF works.
Understanding The Basics of CPF Accounts
A CPF member will have three CPF accounts until age 55, whereupon a fourth account is automatically created.
- Ordinary Account (OA): Use for housing, insurance, investment, and education
- Special Account (SA): For old age and investment in retirement-related financial products
- Medisave Account (MA): For hospitalization expenses and approved medical insurance
- Retirement Account (RA): For retirement needs, automatically created on your 55th birthday by merging your OA and SA monies
John is 30 years old and is earning a gross salary of $6,500 per month. Since he is aged under 35, his CPF contribution rates are as follows:
Gross Income: $6,500
As CPF contributions only apply up to a monthly gross wage of $6,000, this means anything more will be added to net income, so in John’s case.
Take home, Net Income:
80% x $6,000 = $4,800
$6,500 – $6,000 = $500
Total = $4,800 + $500 = $5,300
CPF contribution: 20% x $6,000 = $1,200
Employer’s CPF contribution: 17% x $6,000 = $1,020
Total contribution CPF: $2,220
On top of the gross salary, the employer’s additional contribution is 17% to your CPF.
Hence, this means which of the CPF Account will get:
- Ordinary Account (OA): $1,380 (23% x $,6000)
- Special Account (SA): $360 (6% x $6,000)
- Medisave Account (MA): $480 (8% x $6,000)
This means every month, $1,380 will be added to John’s CPF-OA, which can be used to repay the housing loan.
IMPORTANT: The CPF Annual Limit is the maximum amount of mandatory and voluntary contributions* to all three CPF Accounts that a CPF member can receive in a calendar year. The current CPF Annual limit is $37,740.
Can Your CPF Pay for Your Property in Full?
You may use your CPF-OA to pay for part of your home’s purchase price and to repay the housing loan. However, you should set aside $20,000 in your CPF-OA fund. This amount is to provide you a “safety buffer” if you get retrenched or fall sick in which you can work. You can use this money to pay your home loan.
Nevertheless, the CPF withdrawal limit on the total CPF-OA funds you can use to pay for your property. It is 120% of the valuation limit (or market value at the time of sale). If you hit the limit, you will NOT be able to service your house with the CPF-OA fund. You and your co-owner may have to pay the remaining of your monthly loan instalments in cash.
Whether you are buying a new HDB flat, resale flat, or private property, the Valuation Limit or the Withdrawal Limit may apply.
- Valuation Limit is the lower of the purchase price or valuation at the time of purchase.
- Withdrawal Limit is the maximum amount of CPF you can use for your home, currently capped at 120% of the Valuation Limit.
If the purchase price of an apartment is $500,000, and its valuation is $510,000, the Valuation Limit will be $500,000, and the Withdrawal Limit is $600,000.
|Loan From||Type of Home||CPF-OA Eligible for Loan Repayment|
No limit if you set aside Basic Retirement Sum (BRS). Up to Valuation limit if you are unable to set aside the BRS
|Bank||New HDB Flat/Resale HDB Flat/Private Property||Up to Withdrawal Limit if you set aside Basic Retirement Sum (BRS). Up to Valuation limit if you are unable to set aside the BRS|
It would help if you took note:-
- However, for those turning 55, you may continue to use CPF-OA to pay your housing loan. However, you have to apply to reserve your CPF-OA before your 55th birthday, so the reserved amount will not be transferred to your CPF-RA.
- For both HDB/Bank loans, once the lease for the property is less than 30 years, use of the CPF-OA will not be allowed. Lease with 30 to 59 years, the remaining lease has to cover the buyer up to the age of at least 80 (for HDB, restriction on loan tenure will apply).
- If you want to buy a private residential property for less than 60 years using the CPF Private Properties Scheme, you can use the free CPF Calculator or speak to mortgage consultants/bankers to find out the amount you can use for such properties.
How Compound Interest Works and How to Calculate It
Compounding is a process of growing, and we can call it the “snowball effect,” in which you already know how something can build upon itself. Compound interest is interest earned on money that was previously earned as interest. This cycle leads to increasing interest and principal amount at an increasing rate, sometimes known as exponential growth.
For example, if you deposit $100 and earn a 5% annual interest, you will gain $5 next year, and your total amount for next year will be $105. Therefore, the following interest you will earn will be 5% of $105, which is $5.25, and this will mean your balance will interest to $110.25. Even though you do not make any more deposits, your earnings will accelerate due to compounding interest.
Hence, before you rush or decide to use your CPF-OA to fully service your home loan, you need to understand that you will stop earning the 2.5% interest in whatever CPF monies you took out to repay your home loan. This could be a hefty amount, and you could end up losing more than you know if you are not keeping track and/or you do not have other means of investment.
As CPF is a saving scheme that serves to meet your retirement, housing, and healthcare needs, you need to be aware of the right mode of payment you can use so to allow you to save more and plan for your retirement.
In the next few sections, we will discuss more in-depth on: