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Why You Should Top Up Your CPF Special and MediSave Accounts Rather Than Pay Down Your Home Loan?

It doesn’t just have to be a choice between “invest or pay down home loan”.


In Singapore, it’s safe to assume that most people are servicing home loans.

There are two reasons why this is a safe assumption: 1) the home ownership rate in Singapore is over 90% and 2) property prices here are quite expensive (3rd more expensive in the world according to the CBRE Global Living Report 2020).

Hence, it is natural that many are also thinking of ways to reduce their home loans, especially when we have some extra funds and a low level of risk tolerance.

Why You Should Only Think About Paying Down Your Home Loan If You Have A Low Level Of Risk Tolerance

One main reason why we should not need to rush to pay down our home loan early is because it will deliver relatively poor returns. Don’t get us wrong, we see both pros and cons – and have also written about advantages we enjoy when clearing our home loans early. But, in this article, we’re focusing on why we should choose other options instead.

Think about it – a home loan in Singapore charges 2.6% per annum (HDB home loan) or around 1.4% per annum (bank home loan). On the other hand, investing into Singapore’s SPDR Straits Times Index (STI) ETF will give us a return of over 6% since its inception in 2002, while investing into the SPDR S&P 500 ETF will give us an even larger return of about 10.0% since its inception in 1993.

If we can afford to service our home loan but are just unsure about where to park our spare funds, investing is a good option.

Read Also: Here’s Why It Doesn’t Make Financial Sense To Repay Your HDB Flat Home Loan Early

What If You Don’t Want To Invest, And Are Extremely Risk Averse?

If we don’t want to take on any risk with an investment, we can still put our funds to better use. Again, the premise here is that we are capable of servicing the monthly home loan (and even perhaps pay off our home loan entirely).

In this situation, we would be better off pouring our funds into our CPF Special Account (SA) and MediSave Account (MA), instead of repaying our home loan. It’s simple math:

4.0% – [1.4% or 2.6%] = [2.6% or 1.4%]

Our Special Account and MediSave Account pays us 4.0% returns on our CPF funds, while we only save about 1.4% to 2.6% in interest (depending on whether we are using a bank home loan or HDB home loan). This means we can be up to 2.6% better off (each and every year) without taking on any additional risk.

It Gets Even Better – You Also Get Stress-Free Home Loan Repayment Each Month

Even if your primary concern in wanting to pay down your home loan was so you do not have the stress of having to pay down your home loan each month, topping up your Special Account and MediSave Account may also offer an ideal outcome.

It’s best to describe how this works with an imaginary scenario:

  • We’re living in an HDB flat worth $600,000 (purchased with our spouse)
  • Our remaining home loan is $370,000 (after servicing it for about 5 years)
  • We are using a bank home loan (paying about 1.4% interest per annum)
  • We are 35 years old in 2021, and will continue working (or even want to take on a less stressful/more meaningful job that pays lower)
  • We have the ability to pay off the home loan in full

Top-Up Your CPF Special Account And MediSave Account Up To The Maximum

We can top up our Special Account (SA) up to the Full Retirement Sum (FRS), which is $186,000 in 2021. We’re going to make another assumption here, that someone at 35 will already have about $30,000 in their Special Account. This means the person can make a Retirement Sum Topping-Up (RSTU) Scheme top-up of $156,000 (FRS minus the existing $30,000) to their Special Account.

We cannot top up more than the Full Retirement Sum into our Special Account until we turn 55. Then, we can make top-ups till the Enhanced Retirement Sum (ERS) – which is 1.5x the Full Retirement Sum (FRS).

Read Also: Here’s How Much Your Full Retirement Sum Will Look Like When You’re 55

We can also top up our MediSave Account (MA) up to the Basic Healthcare Sum (BHS). The current Basic Healthcare Sum is $63,000 in 2021. Another assumption here is that a 35-year-old will also have about $30,000 in their MediSave Account. This means the person can make a MediSave top-up of $33,000 (BHS minus $30,000) before they hit the Basic Healthcare Sum.

Read Also: CPF MediSave: Here’s How Your Basic Healthcare Sum Will Look Like When You’re 65

Taking both schemes into consideration, we can top-up our Special Account and MediSave Account up to their respective maximum allowed $189,000 (not exactly the full home loan amount, but a big chunk of it) – to hit the Full Retirement Sum (FRS) in our Special Account and Basic Healthcare Sum (BHS) in our MediSave Account.

If our spouse does the same thing, the total top-up into our CPF accounts will be $378,000 (very close to the full remaining home loan we have).

Effectively, CPF Contributions From MediSave Account Flows Into Our Ordinary Account + Interest Rate On Our MediSave Balances

If we continue to work thereafter, any amounts that would have gone into our MediSave Account will now flow into our Ordinary Account. This means up to 30% of our CPF contributions potentially go to our Ordinary Account.

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

Subsequently, this amount can then be fully used to service our home loan – which gives us much less stress in needing to service our home loan.

Going back to the example, with a remaining home loan of $370,000, we have to pay approximately $1,800 a month or $21,600 a year to the bank to service our home loan. This means, as long as we and our spouse earn $3,000 each per month ($6000 in total), we will be able to service the home loan entirely out of our Ordinary Account contributions from work.

This is a possible scenario as a salary of $3,000 is below the median salary in 2020, which the Ministry of Manpower (MOM) reports to be $4,534.

Additionally, as we have already fulfilled Basic Healthcare Sum in 2021, any spillover interest earned beyond the Basic Healthcare Sum in 2022 will flow into our Ordinary Account, adding to the CPF monies available for servicing our home loan.

Read Also: How CPF LIFE Can Give You A Passive Monthly Income Worth The Median Salary – $3,000 – When You Retire In Singapore

While our imaginary scenario may be unrealistic for most Singaporeans who do not have the ability to pay off our home loans entirely, we can still benefit from topping our CPF accounts on a monthly basis and earning the additional (up to 2.6%) interest.

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