Taking A HDB Housing Loan: Should You Keep More Than $20,000 Or Let Your CPF OA Be Wiped Out

HDB flat buyers in Singapore have two choices in how they intend to finance their flat purchases. The first option is to take up a bank loan and the second option is to take up the HDB housing loan. Both options have their distinct characteristics in terms of the amount of the loan-to-value (LTV) limit, interest rate, loan tenure, required downpayment size, and usage of CPF funds.

Since the introduction of the Public Housing Scheme in 1968, Singaporeans have been allowed to use their CPF Ordinary Account (OA) savings to finance their mortgages for HDB flats. However, the amount of CPF funds that must be used differs depending on whether you intend to take a private bank loan or an HDB housing loan.

For those taking a bank loan, you need to pay a downpayment of 25% of the property’s valuation. Of this, 5% has to be in cash, while the remaining 20% can be either in CPF OA and/or cash – with no requirement to use any or even all your CPF OA savings.

Before August 2018, those who took an HDB housing loan, regardless of whether they were able to pay the downpayment in cash or get a larger loan, had to use all their OA savings. This meant that flat buyers on HDB loans, particularly young buyers, may not able to earn the extra 1% interest on their combined CPF savings for the first $60,000 (capped at $20,000 in OA).

To allow more CPF members to earn this higher interest on their CPF savings, flat buyers who took an HDB housing loan since August 2018 have been given the option to retain up to $20,000 in their OA. This may also lead some to perform a CPF Shielding Hack for their OA balances when buying an HDB flat.

This leads us to question the options that flat buyers could consider when deciding whether to retain or not to retain that $20,000 in their OA when taking up a HDB housing loan.

Read Also: Step-By-Step Guide On How To Apply For The CPF Housing Scheme To Use CPF To Pay For Our Housing Loan

What Are Your Options If You Were To Take An HDB Housing Loan?  

Should you decide to take up the HDB loan at the concessionary rate, you are eligible for a maximum loan-to-value (LTV) limit of 80% for the purchase of either a new or resale HDB flat for a maximum loan tenure of 25 years.

You can use a combination of cash and CPF savings to pay for your 20% downpayment. However, you can only retain up to $20,000 in your CPF OA and have to use your remaining OA savings for the purchase of the flat before you are granted a housing loan from HDB.

In consideration of the first $20,000, you have the following three options.

Option 1: Wipe Out Entire CPF Savings 

The first option involves using your entire CPF Ordinary Account (OA) savings towards the financing of your HDB home loan, which includes the downpayment, stamp fee, registration fees, and legal fees.

First of all, this may not even be an option if you are unable to finance the initial 20% downpayment without using your entire CPF OA funds. For example, if you purchase an HDB flat for $300,000, the minimum downpayment required is $60,000. Assuming you have $30,000 in cash and $30,000 in your CPFOA, then it would be difficult for you to retain $20,000 in your OA since you would need it to meet the minimum downpayment required.

Second, you could decide to use the extra $20,000 downpayment in CPF savings to get a more expensive flat and a larger loan size than what you can afford without utilising your entire CPF savings. Assuming you have $100,000 in your OA and use $80,000 for the 20% downpayment, this will allow you to afford an HDB flat of $400,000 (given the LTV Limit of 20%). You can get an HDB Housing Loan for the remaining $320,000. However, if you use the full $100,000 for your downpayment, you will be able to afford a HDB flat of $500,000 (with the same LTV Limit of 20%). In this scenario, you can get an HDB Housing Loan for the remaining $400,000.

Third, you could also use your entire CPF OA savings if you wish to reduce the loan amount that you shoulder. For example, on a $250,000 loan at 2.6% interest for a 25-year period, you would have to pay a total of $340,500 over the 25 years, of which $90,500 would be for interest payments. But if you took a smaller loan size of $200,000 on the same loan conditions (ie. loan tenure and interest rate), you would only need to pay a total of $272,400 over 25 years, of which $72,400 would be for interest payments. This results in an interest savings of $18,100 as shown in the graphics below. Hence, this could be another reason why you may choose to use your entire CPF savings when taking up your HDB loan.

Source: HDB

Lastly, if you were to have a combined CPF balance of at least $60,000 in your Special Account (SA) and Medisave Account (MA), then you would be able to fully enjoy the extra 1% interest that the Government pays to boost your retirement savings. Therefore, you would not lose out on the extra 1% interest, which was the intent of allowing you to keep your first $20,000 in your OA.

This option of using your entire OA savings might be viable if you wish to clear your loan quickly and believe that your earnings would outpace the monthly payment to grow your OA savings over time.

Read Also: 4 Reasons To Make Voluntary Housing Refund For CPF Monies Used For Your Home Downpayment And Monthly Mortgage

Option 2: Keep Up To The Allowed $20,000

The second option, especially if you do not have at least $60,000 in combined savings in your Special Account and MediSave Account, is to consider keeping up to $20,000 in your OA savings.

The flexibility of allowing flat buyers to retain up to $20,000 each in their OA, was first announced in August 2018. Before that, flat buyers taking up the HDB housing loan had to use their entire OA savings before HDB determines the loan amount. This was done to allow CPF members to take advantage of the extra 1% interest paid on their first $60,000 combined CPF savings (capped at $20,000 for OA). The additional interest goes towards your Special Account (SA) or Retirement Account (RA) to enhance your retirement savings. This is especially beneficial for young home buyers who may not have sufficient CPF savings in their SA and MA to benefit from the higher interest.

Hence, by choosing to keep up to the allowed limit in your OA, you can maximise the interest earned on your CPF savings. You would be able to earn up to 3.5% on your OA savings, which is higher than the 2.6% concessionary housing loan rate. You can also choose to keep any amount (up to $20,000) so that you can meet the combined savings of $60,000 to earn the higher interest.

The second benefit is that the retained amount could be set aside as an emergency savings to pay for your housing instalments in the event you lose your job. At the same time, you can enjoy earning a relatively high interest. Instead of parking your emergency savings in a bank cash savings or fixed deposit account you could keep your funds in your OA and get the prevailing OA interest rate of at least 2.5% and up to 3.5%. For those who have taken an HDB Housing Loan, there are also no charges for using your OA savings whenever you want to pay down your home loan.

Additionally, being able to retain up to $20,000 each or $40,000 as a combined couple would give flat buyers a buffer period during times of difficulty in making the monthly instalments. For example, assume a couple keeps a maximum of $40,000 in their OA savings and has an HDB Housing Loan of $450,000 on a 25-year period. Their $40,000 of OA savings enables them to pay the $2,041.51 monthly instalments for 19 months. Hence, the larger the amount of OA savings that you retain, the bigger the buffer that you will have in the future.

Read Also: Why You Should Not Be Rushing To Pay Back Your Housing Loan Using Your CPF Savings

Option 3: Keep More Than $20,000 In OA

The third option, if you are keen on growing your CPF savings even faster, is to consider keeping more than $20,000 in your OA.

This option may be more suitable for flat buyers who have enough cash for the downpayment and who have either accumulated sizable CPF savings or see their CPF savings as a critical component of their retirement planning.

By keeping more than $20,000 in your OA savings, you will first be able to create a bigger buffer than just keeping the allowed limit of $20,000. Depending on your loan terms, more OA savings create a bigger buffer, allowing you to use your savings for a longer period to finance your monthly mortgage payments in times of difficulty.

Second, you can maximise the returns on a bigger portion of your savings as your monies in CPF compounds up to 5% per annum compared to the returns from cash savings accounts offered by banks.

You can choose to retain more of your OA savings by transferring them to your SA. This will allow you to earn 4% interest compared to the 2.5% on OA savings. However, do note that the transfer is irreversible. It could be an option if you wish to follow the 1M65Movement in maximising your retirement savings, by topping up your Full Retirement Sum (FRS) limit in your SA.

Alternatively, you could also take advantage of the CPF Investment Scheme (CPFIS) to invest any amount beyond the first $20,000 in your OA (and $40,000 in your SA). Additionally, through your CPFIS-OA, you can invest up to 35% and 10% of your investible savings in stocks and gold, respectively. You can also invest your OA savings in CPFIS-approved funds that are available from Endowus to achieve a higher rate of return in the long run. Doing this effectively “shields” the pot of money from your HDB flat purchase.

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

The article was first published on 7 July 2022 and has been updated with the latest information

Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.