CPF is something that Singaporeans care about. After all, we contribute 20% of our take-home salary to our CPF accounts every month if we are aged 55 and below. In recent times, CPF has also garnered more interest from Singaporeans who are making more voluntary top-ups to their accounts, to the tune of $3.5 billion in the first 3 quarters of 2022.
The high risk-free base interest rate that our CPF accounts earn is one key attraction: 2.5% p.a. for our Ordinary Account (OA) and 4.0% p.a. for our Special Account (SA), MediSave Account (MA) and Retirement Account (RA – that is only opened when we hit 55).
In the current increasing interest rate environment, where the risk-free interest rate of 6-Month T-bill issuance reached a yield of 3.77% (BS22120E), we may wonder if CPF interest rates will follow suit.
Yet, is it really a good thing for the average Singaporean if CPF interest rates increase?
Most Singaporeans Are Using Our Ordinary Account (OA) For Housing
Most Singaporeans use our CPF monies to pay for our housing loan instalments. About 800,000 homeowners use their CPF to pay for their housing loan instalments in 2021.
This means that most of our OA savings are not actually earning the 2.5% base interest but are actually channelled to our housing needs. For those of us who have not wiped out our OA savings for housing, we would also be earning the extra 1% p.a. interest on our first $60,000 of our combined CPF balances (with up to $20,000 coming from our OA).
If we have a lesser OA balance, we will likely not benefit significantly from an increase in OA interest rate.
HDB Concessionary Housing Loan Is Tied To CPF Interest Rate
Not only will we not benefit from an increase in CPF OA interest rate, but we will also likely be penalised by the higher rate. This is because the HDB concessionary loan interest rate is pegged at 0.1% above the prevailing CPF Ordinary Account interest rate.
For new HDB buyers, this may affect their home aspirations as their borrowing ability will be limited. For existing borrowers, the monthly repayments will become more expensive.
While interest rates on bank home loans are not tied to the CPF interest rate, these borrowers will also be likely affected. This is because the OA interest rate formula is derived from 3-month average of major local banks’ interest rates. An increase in OA interest would mean that bank interest rates have risen, which in turn, means that borrowers on HDB bank loans are on the same increasing interest rate boat.
Most Singaporean Homeowners Have Outstanding CPF Accrued Interest
Even if we are HDB flat owners who have already paid off our loans or are private property owners, we are still at mercy of CPF interest rates. This is because most of us would still owe accrued interest on the CPF monies used for our housing.
Unless we have refunded the amount withdrawn fully through voluntary housing refund, most of us would have outstanding accrued interest. This outstanding amount would continue to accrue at the prevailing CPF OA interest rates. If CPF OA interest rates increase, the accrued interest will also increase which means that we would have to refund an even heftier amount if or when we sell our property.
Those With High OA Savings Have Alternative Options For Higher Interest Rates
If you are lucky enough to have a substantial amount of OA savings (maybe you are saving towards a housing purchase or you have already paid off one), there are options for you to earn higher interest rates besides waiting for CPF interest rates to increase.
The most straightforward one would to be transfer our OA savings to SA for a higher base interest rate of 4% instead of 2.5%.
However, if we are intending to set aside our OA savings for future housing use, we may wish to consider achieving a higher rate of return by investing under the CPF Investment Scheme (CPFIS)-OA. After setting aside $20,000, we can invest in a wide range of investment products that are approved under the CPFIS. Additionally, we can invest up to 35% and 10% of our investible savings in stocks and gold. This includes the T-bills issued by the Singapore Government that have a yield of 3.77% in its latest 6-month issuance (BS22120E)
How Likely Are CPF Interest Rates Going To Increase?
CPF interest rates are “pegged to risk-free market instruments of comparable duration” and there is an interest rate formula to compute the derived CPF interest rate.
In periods of low interest rates, our CPF interest rates have been set at the floor interest rate of 2.5% and 4.0% respectively for our OA, and SA, MA and RA.
|CPF Accounts||Interest Rate Formula||Floor Interest Rate||Review Frequency|
|Ordinary Account (OA)||80% : 20% fixed deposit to savings rate of preceding 3-month average of major local banks’ interest rates||2.5% per annum||Quarterly|
|Special Account (SA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Quarterly|
|MediSave Account (MA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Quarterly|
|Retirement Account (RA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Annually|
The current 3-month average of major local banks’ interest rates is 0.09% for the period from May 2022 to July 2022. There is still some way before we can expect OA interest rates to rise.
Likewise, the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1% is 3.06% for the period from August 2021 to July 2022. Thus, the interest rate for our SA, MA and RA savings will remain at the 4.0% floor interest rate.
Given what we have discussed above, it may be a blessing that we are not facing an immediate change in CPF interest rates, especially for OA.
Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.