Should I use cash or CPF to service housing loan?
As I’m expecting to get a BTO flat in the next few years. I have been diligently reading up on housing related topics the past few weeks. A HDB loan would probably be the most suitable option because of my financial situation. I would not go into the details of why i have decided to go with a HDB loan but you can check out a few of these pages (here, here and here) that have provided useful insights to help you make your choice. Once you have selected your poison, you will need to decide if you want to service your loan with cash or from your CPF-OA. There are pros and cons to either options. Currently, I prefer cash over CPF.
1) CPF is for retirement
It is a fact that life expectancy is increasing, with more and more people living past 90 years old. Assuming that we retire at age 65, that is 25 years without income PLUS increasing health care expenses as we get older. To keep up with inflation, the basic retirement sum needs to be raised every year. According to CPF’s website, a Basic Retirement Sum (BRS) of $83,000 would enable you to receive an annuity of $700 per month. An annuity guarantees you a monthly payout till death. All you need to do is survive till 75 to “break even” as you would have received $84,000 in total payouts. In my opinion, $700 is only sufficient if you have other streams of passive income or live a very basic lifestyle. Another premium option is the Full Retirement Sum of $166,000 (2x BRS) to get an annuity of $1,280 instead.
**Note that you need to hit the BRS at age 55, while annuity payments only starts later at age 65
Based on past history, the basic retirement sum increases by roughly 3% each year. So I generated a forecasted BRS up to the year 2050, where i would have hopefully retired.
|Year||Basic Retirement Sum|
To be honest, hitting the BRS is not that difficult if you have a stable job since CPF’s interest rates of 2.5%-5.0% can greatly accelerate the process. You can use this calculator to test if you are able to hit the BRS. Wiping out your CPF to pay for your mortgage loan could potentially delay your retirement because your CPF accounts have less time to accumulate. If you are self-employed, some voluntary contributions to your CPF-SA early on can really make a difference in the long run.
2) Lost Opportunity cost
Upon selling your HDB home, you will need to return every penny you took from your CPF out to pay for your mortgage loan including accrued interest. Accrued Interest is what you would have earned in your CPF if you did not take the money out of your CPF account. This means that you would get very little cash from selling your home especially after changes to the Cash-Over-Valuation (COV) of resale flats. Furthermore, because the accrued interest component accumulates over time through compounding, the accrued interest is ever snowballing. The difference is that you are now the person responsible for funding the growth of your retirement funds instead of the government.
Some positives to using CPF to pay for mortgage loan?
The counter argument is that you could use the cash to get a better return than 2.5%-5% in the stocks market. However, that it is not a fair comparison because the interest from CPF is “almost” risk free while the stocks market carries a higher risk. It is not a fair apple to apple comparison. But if you are truly confident, then paying through CPF would indeed be the wiser choice.
Having said all that, there are some merits to using the CPF to pay for your home. Singaporeans get to own a home without having to use much cash. This is especially important to families that are struggling with cash flows on a month to month basis. Of course, there is always a risk that the CPF is a giant ponzi scheme by the government and Singaporeans would lose everything, haha ;). You can never predict the next 40 years.
*One of my reader also mentioned that you can also do voluntary contribution to CPF, up to $7,000 with cash to receive some tax rebate. This would be useful if the rebate helps you to drop to a lower income tax bracket.
The main goal of the CPF is to make sure we have enough for our retirement. We should ideally use the CPF for this objective. It is generous in some ways by offering up to 5% interest on the first $60,00 in our S.A. This $60,000 is already more than sufficient to grow into the BRS after 30 years ($250,000), anything extra we can simply withdraw at age 55 if needed. People also tend to think that they can consistently generate returns higher than 2.5%-5.0% from the stocks market. Personally, I would rather have some form of retirement security blanket before i go on to take on more risks or attempt to beat the market.
Are my arguments invalid? or perhaps you have another view? Share it with me in the comment section below.