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Housing Loan: CPF or Cash to repay our Mortgage?

We explore some factors to consider when deciding whether to use CPF monies for our mortgage repayment. 

A popular question always asked by Singaporeans is how they should repay their home mortgage, by CPF or with cash. For those of us just starting our career and getting our 1st HDB flat, this seemingly straightforward decision could actually make a significant impact for our financial planning in the future.

Most Singaporeans do not pay much attention to this (we are just as guilty of this as “most Singaporeans”), preferring to brush it off in favour of spending more time and energy on the truly important matters in their lives such as cost of renovating their dream home or their next exotic and equally expensive vacation or whether to get a car just so we escape the rat race (of managing to squeeze onto the public trains and buses).

We decided an article to explore this question will do the decision justice, and encourage more people to give it more thoughts.

The Scenario

Purchasing your first flat would usually require financing in the form of a home loan. In Singapore, you can decide between getting the loan from a bank or from HDB. You can read more about the process of buying a HDB if you are unsure about this.

Regardless of the type of loan taken, the option to service your monthly repayment remains the same.  Homebuyers can use a portion of their monthly income (which is what people in other countries do), or utilise their CPF for the repayment (which is what most people in Singapore do, judging by fact that the majority of Singaporeans cannot meet the CPF Minimum Sum required at the age of 55).

The stark reality is that most of us upon getting the keys to our first flat would be burdened by other large ticket items such as renovation and furniture expenses. Adding an additional $1500 per month for repayment expenses is not the thrill most of us look forward to after taking the plunge, and we often find ourselves choosing the convenient way out – by allocating that cost to our CPF account.

How To Approach This Decision

Always bear in mind that money from your CPF account is meant for your retirement. Using the money today would simply mean having less for retirement tomorrow. Also do consider that CPF monies generate an interest of 2.5% (Ordinary Account) and 4% (Special Account) respectively.

One approach to this decision is to ask ourselves what we will be doing with the additional $1500 that we have on hand. What we intend to use the money for will determine whether it is a good or bad decision.

4 Bad Reasons To Be Using Your CPF Monies:

“I am using my CPF contributions to repay my mortgage so that I would have more money on hand to…”

1. Buy a car.

2. Go to more expensive places for holidays, more frequently.

3. Maintain a lifestyle that I otherwise cannot afford.

4. Gamble Invest (or rather attempt to time) the stock market…badly, and without a real strategy.

Don’t get us wrong, we are not saying that you shouldn’t get an overpriced car, treat yourself to luxury holidays or spend crazy money on the finer things in life. What we are saying is that these things should not come at the expense of bankruptcy, hunger and homelessness in the later part of your life.

4 Good Reasons To Be Using Your CPF Monies:

“I am using my CPF contributions to repay my mortgage so that I would have more money on hand to…”

1. Invest in the stock market with a proper long-term strategy (average return of 5% – 10% depending on when you enter, and portfolio allocation).

2. Build up a liquidity buffer of about 6 to 9 months of expenses.

3. Ensure family has sufficient health and life insurance coverage in place.

4. Buy and stay committed to investment plans (For those who cannot, or are not willing, to implement point 1).

We like to highlight the fact our CPF account does give between 2.5% – 5%. Interest. This means if you are not confident of getting an expected return above what CPF offers, you should logically leave your CPF monies untouched.

Do note that CPF monies are “lock-in” and you cannot touch it until you are 55, and have met the Minimum Sum required.

Other Considerations:

Always remember that each person have their own unique needs and aspirations. Some households may be extremely cash-tight due to circumstances beyond their control (taking care of elderly parents, special needs siblings to look after).

Others may prefer saving up as they intend to use the money to start their own business in the future. Some may intend to plough their savings into a family-run business facing short-term cashflow difficulty. There is no right answer to copy so you really have to decide for yourself.

We hope this has been useful and do continue to follow us on Facebook and let us know if you have any comments on this.


Original photo by Benjamin Lim. Used with permission.


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