We all know the story. Boy meets girl. Boy and girl falls in love.
Soon, boy pops the golden question to girl: Should we pay for our house using CPF or Cash?
Buying a home will be one of the largest financial commitment you will ever undertake as a couple.
One of the most common questions we get from our private clients as financial consultants is: should you pay housing loans using CPF or Cash?
It is BETTER to use CPF than cash to pay for housing loans.
There are many articles debating this, while most are leaning towards using cash instead of CPF. I beg to differ, and I am going to list down various points, and there will also be some numbers to illustrate the points.
You lose out quite a bit if you use Cash instead. Read to the end for 2 BONUS CONSIDERATIONS!!
But first... What about accrued interest TO BE RETURNED IN FUTURE if you use CPF to pay today?
It is true that when you sell your house, accrued interest will have to be calculated and added to the principal amount you have used from CPF.
This accrued interest needs to be refunded to your CPF when you sell your house!
But if you don't sell your house THIS CONCEPT DOESN"T MATTER.
Maybe you intend to stay there for life or buy a second property without selling this house and giving this set of keys up!
Alternatively, if you sell your house and the accrued interest pulls back sales proceeds to your CPF then you can still use that CPF to buy your "replacement house".
It's not a loss to you. It just means LESS cash proceeds IN FUTURE from your home sale if you sell.
But if you take our suggestion today to pay mortgage with CPFOA, you already have more cash TODAY.
Which is better? Let's start with the 5 reasons now...
1st Reason NOT to pay your housing loan with cash: You Can Do More With Cash
You can do so much more with cold hard cash as oppose to CPF monies.
In terms of time horizon, for younger couples, there is still a long way to 65 years old.
This means there are many variables in play. One or both of the spouse may have to endure prolonged unemployment or unforeseened circumstances so having a sizeable emergency funds and liquidity to deal with these situations beats being a millionaire in CPF.
The monies in your CPF should evolve with you, serving different functions at different stages in life. By hording huge amounts of monies in your OA or transferring to SA to build your nest egg, you may not be fully maximising your financial resources at hand when you are younger.
There is a difference between being asset rich and cash rich.
For Singaporeans under 55 years old, most of their CPF monies can be considered as illiquid assets as it cannot be spent, except for investing, medical needs, and buying houses.
The younger you are the more illiquid your OA/SA money will be because you are further to your withdrawal age. As the saying goes, CASH IS KING.
For more of our thoughts on how you can maximise your CPF money, do check out an entire category we allocated for CPF Matters.
2nd Reason NOT to pay your housing loan with cash: Renovation and furniture needs cannot be paid by CPF!
If cash is being used to pay mortgage loans, you'd be reducing your own cash flow and because you paid for your mortgage and down payment using cash, you may have wiped out huge chunks of your savings.
Then to solve it, personal loans are taken up to fund the other costly aspects of starting a family like having kid(s) or home ownership like renovation, personal loans to buy furniture, etc…and these things needs to be funded by cash most of the time.
Screenshot from OCBC's webpage
One of the worse things you can do is to take up personal loans to pay for furniture or renovations where nominal interest rates run between 2.8% flat rate (similar to auto loans) or 4.4% monthly rest (similar to mortgage loans)!
Screenshot from Courts' webpage
Personally, I find home renovation and furniture loans to be an "evil product" to avoid at all costs!
3rd Reason NOT to pay your housing loan with cash: Is Your Overall Portfolio Too Conservative When you keep CPFOA?
In attempts to grow their retirement nest egg, one of the common things people do is to transfer monies from OA to SA so that their money grow at a higher rate.
For now, the Special Account is giving 4% interests which is great.
BUT too much weightage in CPF as "fixed income instruments" is not fully optimising your OVERALL portfolio.
If you consider the monies in your CPF as bonds in your entire portfolio, all the more you should utilise your OA to fund your mortgage instead of cash. This holds true especially for younger couples.
It is to reduce your "fixed income" allocation
One simple, yet effective method of asset allocation is to base it on age, essentially how HardWareZone Money Mind Guru Joshua Giersch A.K.A. Shiny Things puts it: allocate “110 minus your age” in equities.
Of course you can amend this weightage according to your individual risk appetite.
For most people, as the OA is being allocated 23% of your wages for a better part of your life, it also means at an early stage, your portfolio will typically be overweight in fixed income via your CPF monies (including OA and SA).
You will have more liberties to spend your own cash if you used your CPF OA to fund your mortgage, thereby achieving a better balance in your own portfolio.
4th Reason NOT to pay your housing loan with cash : It's NOT DIFFICULT To Invest your cash To Get Better Than 4%p.a returns
This is even if you do not understand investments well.
An approach would be to invest into diversified funds such as First State Bridge Fund which invests into large cap equities and high quality bonds. Hence, this reduces volatility in any investor who bought it.
Since the fund’s inception in 2003, the fund has annualised returns of 7.3%p.a.
If you're keen to read more on First State Bridge Fund, check on our analysis here
The suggestion of this fund is to only illustrate that investing well is not difficult. There are certain other worthy investment alternatives.
5th Reason NOT to pay your housing loan with cash: Numbers Will Tell
This article is for boy and girl looking to make their first flat purchase.
The Financial Situation
Age between 25 to 32 years old. Both making about $3,000 before CPF.
And prior to applying for the flat, they have each spent 3 years in the work force.
Here’s a simple CPF allocation, including employers contribution into Ordinary Account (OA), Special Account (SA), and Medisave Account (MA).After 3 years, with CPF accrued interest of 2.5-3.5%, there should be roughly $28,900 in OA each (3.5% till the first $20,000). So combined they will have $57,800 in the OA by the end of these 3 years.
For later discussions, let’s assume they have saved up to $60,000 in cash as well.
The House
Being prudent, the couple didn’t want to make a huge purchase on their first home and gun for half mil BTOs.
Being devoted westies, they decide to apply Tengah BTO. The pricing for a 4 room flat is $309,000 to $357,000 which is quite indicative of typical 4-room BTO pricing.
If downpayments were made using cash:
This is assuming the couple spend very little on renovation. There have been many articles of couples spending above $50,000 on renovations alone!
Left with $46,000, the couple have to plan for other aspects of starting a household/family:
- wedding banquet and honeymoon
- stocking the house with groceries/utensils
- paying for utilities
- planning for a little one
- having pets
- car ownership if necessary
Not to mention, they have to pay for their monthly mortgage in cash. This slows down rate of cash savings or accumulation of emergency funds.
On the other hand, by using CPF OA to make payments whenever possible, the couple has an additional $40,000. Bumping up their savings to be about $86,000!
For the monthly mortgage, the couple each have to service $640 out of their OA a month.
Their current salary of $3,000 contributes $690 into OA monthly which is $50 more a month than their mortgage liabilities, and on top of that, they have $8,000 each in their OA as buffer.
This surely relieves a lot of financial pressure on the couple.
Should they ever require more funds, they can even perform voluntary top ups to their CPF and have some tax relief at the same time.
Bonus consideration 1 on why NOT to pay your housing loan with cash: You can start-up business with CASH ONLY
Along with popular social sentiments, millenials today have a stronger desire to start their own business.
A recent survey revealed that nearly three quarters of millennials surveyed in Singapore plan to be entrepreneurs within the next 10 years, and more than 30 per cent started their current business while in school.
Do you also dream of starting a business?
If you do financial capital is needed, keeping cash on hand for that dream can be priceless! Hence, do not use cash to pay for housing loans.
Bonus Consideration 2 on why NOT to pay your housing loan with cash: Control your retire planning better with CASH investments!
One of the biggest limitations in banking (no puns intended) on CPF for retirement is that you cannot control the age which you retire.
Briefly, at 55 years old, you can make a withdrawal from your CPF if there is excess. And at 65/70 years old you will start receiving your monthly payouts from either Retirement Sum Scheme or CPF Life Scheme.
What if you want cashflow earlier, say at age 50 or age 60?
Cash retirement planning can get you there, and with enough time frame, decent yields above 3% can be easily achieved.
Conclusions on why NOT to pay your housing loan with cash!
This is why we believe you should use CPF for financing your flat. It is prudent, cash can have more applications, and CPF monies is considered illiquid especially when you are at a young age.
Retirement goals can also be funded using cash, it need not be relied mostly using CPF that is limited by legislation.
Less we forget CPF's main goal is as a social security system.
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Last updated on April 16th, 2020 at 05:33 pm