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Pros And Cons of Using CPF Or Cash To Pay For Your Home Loan

Using CPF to pay for your home loan can affect your retirement plans.


Buying a home is possibly one of the largest purchases you would make in your life. Likewise, paying for a mortgage is possibly one of the longest loan repayments you will undertake. A typical home loan in Singapore would stretch from 25 to 30 years, over the span of your working life.

While most homebuyers will likely use a combination of cash and CPF to pay for their home loans, it is worth investigating the pros and cons of using either option, CPF or cash for your home loan repayment.

This article discusses the pros and cons from the perspective of using CPF. For the reverse perspective of using cash, the advantage for using CPF can be seen as a disadvantage for using cash and the disadvantage for using CPF can be seen as an advantage of using cash.

#1 Pro Of Using CPF: More Cash In Your Pocket For Other Expenses

Most people would choose to maximise the amount of CPF they can use to pay for their home loan, as it leaves them more cash in the pocket. Being able to use the 20% CPF contribution from your salary for housing repayment means that you still have 80% of your salary for other expenses. If you choose to pay cash and your home loan monthly repayment is 20% of your salary, you would still have to contribute 20% of your salary to CPF on top of your home loan repayment, leaving you only 60% for all your other expenses.

Additionally, the usage of CPF funds is intentionally more restricted as the funds are meant for retirement. Using CPF for home loans is the main way that Singaporeans can tap on their CPF before the age of 55. By not spending a single cent on your home loan, you have more flexibility to spend your cash in any manner including expenses such as renovation, nicer furnishings, staycations/ vacations, groceries, and investments.

Read Also: Complete Guide To Your CPF Contributions In Singapore: Salary Caps, Contribution Rates And Allocation Rates

#2 Pro Of Using CPF: More Cash For Greater Variety Of Investment Opportunities

Having the additional cash flow from using CPF for home loans can also mean having more cash to invest in a greater variety of investment instruments and opportunities. While you can use CPF to invest through the CPF Investment Scheme, the options to invest using CPF are limited compared to the options available to you if you invest using cash.

More importantly, cash allows you the flexibility to invest not just in investment instruments that may give you higher potential returns, such as robo-advisories, it also allows you to invest in alternative opportunities. For example, if you have an opportunity to buy into a startup, join a partnership or set up a business of your own, you cannot use CPF to fund these opportunities.

Read Also: Beginners’ Guide To Start Investing Using The CPF Investment Scheme (CPFIS)

#3 Con Of Using CPF: Less CPF For Your Retirement

Using CPF for home loans may seem to be a no-brainer, yet there are also staunch supporters of using cash. If you are using only CPF to fund your retirement or a believer of 1M65, using cash is an attractive option because CPF is a powerful way to save for retirement and using it for housing depletes the compounding power of your CPF funds.

CPF’s greatest strength is the guaranteed risk-free interest of 2.5% per annum on our Ordinary Account (OA), 4.0% per annum on our Special Account (SA) and 4.0% per annum on our Medisave Account. We also earn an additional interest of 1.0% per annum on the first $60,000 of our CPF account balances. This makes CPF a safe and stable way to save for retirement, guaranteed by the government.

Read Also: Why CPF Needs To Review Interest Rates For Our Ordinary, Special, MediSave And Retirement Account

In the current low interest rate environment, it is difficult to find a comparable risk-free investment that yields higher than CPF OA’s 2.5% per annum. Finding an investment that yields higher than CPF SA’s 4% per annum without a significant increase in risk is almost impossible.

Read Also: Here’s What You Need To Know About Pledging Your Property To Meet The CPF Full Retirement Sum (FRS)

#4 Con Of Using CPF: You Need To Refund CPF Accrued Interest Upon Sale

One less-mentioned fact about using CPF to pay your home loan is the need to return CPF monies back to CPF with accrued interest upon the sale of your property. Accrued interest is the interest that your CPF monies would have earned if they were held in your CPF account. This is the way CPF safeguards your retirement by ensuring that CPF monies that would have been compounding in your CPF account are returned and set aside for your retirement.

Read Also: What Happens To Your Money After You Sell Your Flat In Singapore

This would mean that your property would have to sell for a much higher price to be profitable after accounting for the CPF refund. For example, over a 25-year loan tenure, the accrued interest of 2.5% can compound to a hefty amount of over $180,000 for the CPF withdrawn to pay a $400,000 loan.

Year Opening Loan Balance Interest Rate For Year Monthly Installment Payment CPF Withdrawn For Year Cumulative CPF Withdrawn Accrued Interest For Year Cumulative CPF And Accrued Interest
1 400,000.00 1.2 1,543.98  18,527.76 18,527.76 463.19 18,990.95
2 386,196.49 1.2 1,543.98  18,527.76 37,518.71 937.97 38,456.68
3 372,226.42 1.2 1,543.98  18,527.76 56,984.44 1,424.61 58,409.05
4 358,087.78 1.2 1,543.98  18,527.76 76,936.81 1,923.42 78,860.23
5 343,778.54 1.2 1,543.98  18,527.76 97,387.99 2,434.70 99,822.69
6 329,296.65 1.2 1,543.98  18,527.76 118,350.45 2,958.76 121,309.21
7 314,640.01 1.2 1,543.98  18,527.76 139,836.97 3,495.92 143,332.90
8 299,806.52 1.2 1,543.98  18,527.76 161,860.66 4,046.52 165,907.18
9 284,794.05 1.2 1,543.98  18,527.76 184,434.94 4,610.87 189,045.81
10 269,600.44 1.2 1,543.98  18,527.76 207,573.57 5,189.34 212,762.91
11 254,223.49 1.2 1,543.98  18,527.76 231,290.67 5,782.27 237,072.93
12 238,661.01 1.2 1,543.98  18,527.76 255,600.69 6,390.02 261,990.71
13 222,910.74 1.2 1,543.98  18,527.76 280,518.47 7,012.96 287,531.43
14 206,970.43 1.2 1,543.98  18,527.76 306,059.19 7,651.48 313,710.67
15 190,837.78 1.2 1,543.98  18,527.76 332,238.43 8,305.96 340,544.39
16 174,510.47 1.2 1,543.98  18,527.76 359,072.15 8,976.80 368,048.96
17 157,986.15 1.2 1,543.98  18,527.76 386,576.72 9,664.42 396,241.14
18 141,262.44 1.2 1,543.98  18,527.76 414,768.90 10,369.22 425,138.12
19 124,336.94 1.2 1,543.98  18,527.76 443,665.88 11,091.65 454,757.53
20 107,207.22 1.2 1,543.98  18,527.76 473,285.29 11,832.13 485,117.42
21 89,870.80 1.2 1,543.98  18,527.76 503,645.18 12,591.13 516,236.31
22 72,325.20 1.2 1,543.98  18,527.76 534,764.07 13,369.10 548,133.17
23 54,567.89 1.2 1,543.98  18,527.76 566,660.93 14,166.52 580,827.45
24 36,596.31 1.2 1,543.98  18,527.76 599,355.21 14,983.88 614,339.09
25 18,407.89 1.2 1,543.98  18,527.76 632,866.85 15,821.67 648,688.52
Total accrued interest: 185,494.52

Note: the above computation is an illustration of the amount of accrued interest that can compound over a 25-year loan tenure based on current home loan interest rates of 1.2% per annum. Actual computation of accrued interest will differ depending on your home loan interest rates and actual CPF amounts withdrawn.

Additionally, it is possible to end up in a situation where the sale of the property does not cover all the debts owed, including the refund to CPF. If you sell below the valuation of a property, you have to top-up the shortfall in the CPF refund of principal and accrued interest in cash, even when you are making a loss on the sale.

Read Also: What Happens When You Buy A Property Above or Below Valuation?

Using CPF To Pay For Home Loan Can Affect Your Retirement

In the end, if you use all your CPF for housing, there would be little left for your retirement unless you consciously use the extra cash flow to save and invest for your retirement.

If you are actively investing and planning for your retirement outside of CPF, the choice of using CPF or cash for home loan may depend on whether you can achieve an investment return higher than CPF’s guaranteed risk-free rates of 2.5% and 4% at a risk level that is acceptable to you.

However, if you don’t have alternative retirement plans, using cash to pay your home loan may be an option worth considering as CPF is a mandatory retirement savings plan that cannot be touched until the withdrawal age of 55.

Read Also: 5 Ways We’re Already Planning For Our Retirement (Without Realising It)

You Can Use Both Cash And CPF And Vary The Amounts Easily

While most discussion on using CPF or cash to pay your home loan tends to support one or the other – either you use all CPF or all cash, life doesn’t have to be so binary.

For example, you may want to use more CPF early on when you need more cash flow or need to keep more emergency funds because your job situation is uncertain. Conversely, you may want to use more cash later as your income increases, and you have additional cash that you can channel to repaying your home loan.

The amount of CPF you use to pay your home loan can be easily adjusted, by making an online submission on CPF’s website for HDB flats or private property financed using bank loan, or making a form submission at any HDB Branch Office for flats financed using HDB housing loan.

Read Also: Here Are 4 Advantages You Enjoy When You Clear Your HDB Loan Early