The majority of us will have to tap on our CPF Ordinary Account (OA) funds to pay for the downpayment and related charges, including stamp duty and survey fees, when purchasing an HDB or private property in Singapore.
Over the course of living in our home, many of us will continue to pay for our home loan with our CPF OA funds, from our monthly salary. This, with accrued interest, will also be “owed” to our CPF OA.
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, we will “owe” to our CPF OA. We can check the amount that we owe by logging into our CPF portal, under the header Net Amount Used & Amount Available. This amount only needs to be refunded to our CPF OA after we sell our property.
We also need to be mindful that the amount we “owe” our CPF OA will compound at 2.5% per annum. 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 on it, that we use for our home purchase. Any part of the housing grants we do not use for our downpayment continues to remain in our CPF OA.
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 very different from clearing our home loan, and will not affect how much we owe the bank or have to continue paying for our HDB or private property monthly home loan. In fact, we can finish repaying our home loan and 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 do not have to make refunds in cash, and 3) we can use the bulk of the refunded amount for our next home purchase.
However, there are also good reasons to consider making refunds beforehand and we look at some of these reasons.
#1 More Certainty Of Cash In Hand For Downpayment And Renovation Funds For Your Next Property Purchase
By refunding our CPF OA, we are reducing the amount we “owe” our CPF OA, as well as decelerating the growth of accrued interest. If we are able to pay off a significant part of this amount, we will have more certainty of getting cash in hand or knowing we won’t get cash in hand when deciding to sell our home.
This greatly reduces the mistake of earmarking cash proceeds for a downpayment on the new home, to pay for any cash over valuation or shortfall in the amount of bank loan we can take on our new home purchase, stamp duty, or for renovation purposes, only to find out we don’t have sufficient cash proceeds. This can put our entire plan 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 utilising it in different ways, including starting a business or investing.
If we are over 55, there is even more stress as our CPF refunds may become locked, after being channelled into our Retirement Account (RA) to set aside the Basic Retirement Sum (BRS) – if we intend to buy and pledge another property – for our retirement. Again, this can put our entire plan and family in jeopardy as there may be a chance we cannot afford another home after locking away $181,000 – comprised on the Basic Retirement Sum for both husband and wife – in our RA.
#3 Earn a relatively good interest rate on funds earmarked for your next home purchase
Another reason to refund our CPF OA earlier than necessary is to be able to set aside a pot meant for our next home purchase, while compounding our funds at 2.5% per annum.
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 who have already hit the Full Retirement Sum (FRS), and thus unable to tap on the Retirement Sum Topping Up (RSTU) Scheme, we can always refund our CPF OA to pour more funds into CPF to earn the very stable 2.5% return per annum.
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.
Plan Your Home-Buying Decisions In Advanced To Avoid Stress And Uncertainties
With good planning, we can make use of CPF refunds 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.
Making CPF refunds is also not the only decision we need to make when deciding to make use of 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.
DollarsAndSense.sg aims to provide interesting, bite-sized and relevant financial articles.
Learn together with like-minded Singaporeans at the Personal Finance Discussion SG Facebook Group by discussing a range of personal finance topics.
If you have not done so, subscribe to our free e-newsletter to receive exclusive content not available anywhere else.