Buying a home is a topic close to all our hearts in Singapore. In fact, many of you may already know that Singapore has one of the highest home-ownership rates in the world – 90% of residents here own their own homes.
Another thing we all know about buying a property in Singapore is that it can be very expensive. This is why majority of us use our CPF Ordinary Account (CPF-OA) balances to pay for the downpayment and monthly instalments on our homes.
While this decision is sound when we purchase our homes, many times, we may not know the implications of it years down the road. This is because of the Accrued Interest we build up, Property Charge we are liable for and that we can make a Property Pledge to reduce our retirement sum.
If you have no idea what these three property-related terms mean, then continue reading below as we explain it.
# 1 Accrued Interest
This should not be confused with the interest that we are paying the bank for our HDB loan or bank loan. Instead, Accrued Interest is the interest we have to pay back to our own CPF Accounts, because we have used it to fund our home purchase.
Accrued Interest accumulates when we use our CPF funds for the following reasons:
- to pay for the downpayment on our HDB BTO, resale flat or private residential property;
- to pay for the monthly instalments on our HDB or bank loan; and/or
- take Housing grants to buy our HDB BTO or resale flat
This might sound strange to many, as we have to fork out an interest rate to use our own CPF funds. The thing we have to remember is that our CPF funds are primarily meant for our retirement. When we use it to buy our home, we are essentially “borrowing” from our retirement nest egg. Hence, we have to pay it back when we sell the property.
This interest return is the Accrued Interest, and is the interest that we would have earned if we didn’t use our CPF Ordinary Account funds to pay for our home. It is typically compounded at a rate of 2.5% per annum because we use our CPF Ordinary Account balances. This figure can rise to 3.5% per annum if we do not have sufficient CPF balances to earn the extra 1% of interest that CPF pays on our first $60,000 of balances.
Further, if we receive more than $30,000 of housing grants, part of it may be for contributions to our Special Account and Medisave Account when we sell the property – which means the accrued interest is compounded at 4.0% per annum, or higher.
Lastly, we should also note that while we have to refund this amount to our CPF accounts, we can still use majority of the funds to purchase our next home.
Our Property Charge is the total amount that we owe our CPF accounts, including both the accrued interest (discussed above) and the principal amount that we may have used for the downpayment, monthly instalment and housing grants.
When we sell our property, this is the entire amount we need to refund to our CPF account. Similar to the discussion on accrued interest above, we can continue to use this amount for our next home purchase.
At this juncture, you would realise that some people may be in a bind at the age of 55. This is because if we sell our property after turning 55, we have to maintain the Full Retirement Sum (FRS), $176,000 as of January 2019, in our newly created Retirement Account. This is meant for our CPF LIFE monthly payouts that we can start receiving from 65.
These funds would be locked up, and we cannot use it to pay for our next home purchase. However, at this juncture, we can choose to only save the Basic Retirement Sum (BRS), $88,000 as of January 2019.
If we do so, as long as our property charge is able to cover the remaining $88,000 shortfall between the Basic Retirement Sum and Full Retirement Sum, we can withdraw anything above the Basic Retirement Sum. Of course, if we are planning to go on the Full Retirement Sum or Enhanced Retirement Sum (ERS), the property charge does not really matter.
This is because we have to refund the property charge when we sell our property, and this acts as a guarantee that our Retirement Account will topped up to the Full Retirement Sum.
Our property pledge is only important if we want to go on the Full Retirement Sum, but do not have a sufficient property charge to make up the shortfall between the Basic Retirement Sum and the Full Retirement Sum.
In this case, we can pledge our property and still be able to withdraw anything above our Basic Retirement Sum from our Retirement Account. By pledging our property, we are not changing our ownership status in any way. Instead, it simply provides a guarantee that our Retirement Account will be topped up to the Full Retirement Sum when we sell our property.
Again, if we wish to be on the Basic Retirement Sum or Enhanced Retirement Sum, the property pledge will not matter.
Our CPF Is Meant For Our Retirement
One simple way to look at CPF is as a police officer trying to protect our retirement savings. While we have the flexibility to do many things with our CPF balances, at the end of the day, this police officer is always trying to protect our retirement by ensuring we have sufficient balances.
If we have used our CPF funds to pay for our home, this police officer will demand that our retirement funds are properly compensated – for both the principal amount and interest. If we want to withdraw more from our Retirement Account at 55, under the Basic Retirement Sum, this police officer will ensure we have sufficient funds to refund the account when we sell our property.
Instead of looking at our CPF as the enemy, we should work with it to grow our retirement nest egg. We can also top up our and our loved ones CPF accounts, via the Retirement Sum Topping Up scheme, to ensure we compound our balances, at an attractive risk-free rate, while also reducing our tax liabilities, for our retirement in years to come.
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