As a significant portion of our salary is contributed to our CPF accounts each month, most of us will have to use our CPF Ordinary Account (OA) funds to pay for our homes. Whether we purchase an HDB flat or a private property in Singapore, we can use our OA funds to pay for the initial downpayment and our monthly home loan repayment. However, all of the OA funds that we use, along with accrued interest, will be “owed” to our CPF account.
We Need To Refund Any CPF OA Funds We Used For Our Home Downpayment And Monthly Home Loan
Any CPF OA amount we use for our home purchase and home loan, we will “owe” to our CPF OA. We can check the amount that we owe by logging into our CPF portal, under the Home Ownership Dashboard. Here, we can see the Total principal amount withdrawn (i.e. the actual amount that we have used) and the Total accrued interest (i.e. we also have to refund the interest we would have earned if we kept the principal amount in our CPF). This amount only needs to be refunded to our CPF OA after we sell our property.
The amount we “owe” our CPF OA is not a static figure. It will continue compounding at 2.5% per annum until we make the refund. This is usually referred to as the accrued interest on our funds used for our home purchase.
For those purchasing an HDB flat, we may receive housing grants. We need to remember that housing grants are paid into our CPF OA, forming our OA funds. We need to refund any part of the housing grant, as well as accrued interest, that we use for our home purchase.
As we likely have utilised a substantial amount of our CPF OA funds for our home purchase and monthly home loan repayment, we may be in for a surprise when we sell our home – to find out how much needs to be refunded to our CPF OA.
Note that this is entirely different from clearing our home loan, and does not affect how much we owe the bank or have to continue paying for our HDB or private property monthly home loan. In fact, even when we can finish repaying our home loan, we will still have an amount we “owe” our CPF OA.
Often, it does not matter how much we owe our CPF OA as: 1) we are only required to refund it if we sell our property, 2) if there is an insufficient amount after selling our property, we typically do not have to make refunds in cash, and 3) even after making the refund, we can use the bulk of the refunded amount for our next home purchase.
However, there are also good reasons to consider making a Voluntary Housing Refund (VHR) while still living in our home, and we look at four reasons below.
#1 More Certainty Of Cash In Hand For Downpayment And Renovation Funds For Your Next Property Purchase
By making a Voluntary Housing Refund to our CPF OA, we reduce the amount we “owe” our CPF OA. This decelerates the growth of our accrued interest. If we are able to pay off a significant part of this amount, we will have more cash in hand when we eventually sell our home.
This greatly reduces any miscalculation we may make on our future property purchase decision. For example, we could mistakenly earmark cash proceeds for a downpayment or cash over valuation (COV) on our new home only to find out we have a shortfall because of the amount we have to refund into our CPF account. We may also be left short on cash to pay for the stamp duty or for renovation. This can put our entire plan to move into our new home in jeopardy.
#2 Stress-Free When You Sell Your Property
When we sell our property, the proceeds are used to pay off our remaining home loan and our required CPF refund. This can create a lot of stress about how much cash in hand we will be left with, especially if we need the funds to buy a new home (as in the case of point #1) or if we are thinking of using it in different ways, including to pay off debt, start a business or invest.
If we are over 55, there is even more stress as our CPF refunds may be locked up. After going back into our OA, our funds may be contributed to our Retirement Account (RA) to set aside the Full Retirement Sum (FRS) or $198,800 (as of 2023). Even if we intend to pledge our property, we still need to keep the Basic Retirement Sum (BRS), or $99,400 (as of 2023), in our RA for our retirement.
Again, this can put our entire plan and family in jeopardy. The amount is also not insignificant as it is $198,800 (FRS) or $99,400 (BRS) for each spouse over 55 years old.
#3 Earn 2.5% Interest Rate On Funds Earmarked For Your Next Home Purchase
Another reason to make a Voluntary Housing Refund to our CPF OA earlier than necessary is to be able to grow a pot meant for our next home purchase. When we are saving up for our next home purchase, we still want to earn a decent interest return to grow it. Given the current low-interest-rate environment, utilising the CPF OA to earn 2.5% per annum can provide a much greater risk-free interest compared to savings accounts, fixed deposits or cash management accounts.
Since we already setting aside the funds for our next home purchase, being able to compound it at 2.5% becomes quite an attractive proposition.
Do note that once we are ready to purchase another home, we need to ensure that we have sufficient cash in hand as well to pay for a minimum of 5% of our downpayment in cash and any other property-related costs we may incur in cash.
#4 Benefit From The Relatively Good Interest Rate Beyond The Full Retirement Sum
This can be a rather niche scenario – for those of us who are under 55 and have already hit the Full Retirement Sum (FRS) within our Special Account. We would be unable to tap on the Retirement Sum Topping Up (RSTU) Scheme to top up our Special Account (SA).
However, we can always make use of the Voluntary Housing Refund to pour more funds into our CPF to earn a stable 2.5% return per annum. Of course, we can also make Voluntary Contributions (VC) each year, but this is capped at $37,740 inclusive of our CPF contributions from work.
For those above 55, of course, we should continue to tap on the RSTU to a maximum of the Enhanced Retirement Sum (ERS) instead. This will earn us 4.0% per annum as well as provide tax benefits. Also, for anyone above 55, any funds that we top-up to our CPF OA via Voluntary Housing Refund will first be used to meet our FRS within our Retirement Account. Only after we hit the FRS will our Voluntary Housing Refunds go into our OA.
Another unique situation will be for those who are about to turn 55. If you already have set aside the FRS in your Special Account, you can potentially convert your cash savings (currently earning a tiny amount of interest in your bank account) into Special Account funds – while still being able to withdraw from it like an ATM. By performing a Special Account Shielding Hack, your Voluntary Housing Refunds will be used to accumulate your FRS in your Retirement Account at 55. Once this is done, any remaining funds in your Special Account can be withdrawn on demand.
Use The CPF Voluntary Housing Refund To Help Your Home-Buying Decisions
With good planning, we can make use of the CPF Voluntary Housing Refund to strengthen our home purchase decisions or choose not to do so while remaining confident in the event we want to buy a new home.
As buying a home is costly and typically involves a lot of time and effort, we do not want to make a costly mistake or waste our energies only to realise we cannot afford to sell or buy a new home at the last minute. At the same time, we can make use of the CPF Voluntary Housing Refund scheme to grow our savings that we’ve already set aside for a home purchase to grow at a risk-free 2.5% within our CPF OA.
Even after making a Voluntary Housing Refund, we can choose to use our OA balances for the same property – in case we run into any financial difficulties and need to reduce our outstanding home loan. While this is free for HDB properties, we may incur legal costs for private properties.
Finally, making a CPF Voluntary Housing Refund is also not the only decision we need to make when deciding to optimise any extra funds we have. There is also a decision of whether we want to repay our home loan, which will lower our monthly financial commitments. We could also channel extra cash into investments.
This article was first written on 11 August 2020 and has been updated with additional information.
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