Home Loans

CPF Savings vs Cash: Which Would Be Better To Use To Pay For Your Home?

Looking to purchase a home? CPF and cash are both common ways that many in Singapore pay for this expense. Read on to see the advantages and disadvantages we found from both, so you can weigh out the best option for yourself and your home loan budget.

Purchasing a home in Singapore is a rite of passage for many Singaporeans. Due to its hefty price, many will require a housing loan to foot this expense. These home loans can come as an HDB Housing Loan or mortgage loan from banks and licensed moneylenders.

Payment for these home loans is usually done via funds in our Central Provident Fund (CPF) or cash, depending on one’s preference. For payment from CPF Savings, only CPF monies from the CPF Ordinary Account will be used to pay your Housing Loan.

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What Type of Housing Is Applicable For HDB Loans?

All HDB housing is applicable for HDB loans. This includes all new BTO flats and resale flats in mature and non-mature estates across Singapore. The loan-to-value (LTV) limit for the respective HDB flats can be seen below:

Type of HDB FlatsHDB Housing Loan Loan-To-Value Limit
New/Built-To-Order FlatsUp to 85% of the purchase price
Resale FlatsUp to 85% of the lower of the resale price or value of the flat

About 800,000 Homeowners Use Their CPF Savings To Pay Off Their Home Loans

According to CPF, about 800,000 homeowners use CPF to pay off their home loan instalments each year.

When homeowners pay their housing loans with CPF, they are able to keep a larger proportion of their salaries for other purposes.

Pie charts of take-home salary
Image Source: Vera / ValueChampion Singapore

Assuming that the monthly repayment for your home loan is 20% of your monthly salary, paying with CPF Savings means that the 20% needed to foot your home loan does not come from your take-home salary. This leaves you with more cash-on-hand to save or pay for expenses apart from your mortgage loan.

Paying your home loan with cash conversely will affect your regular salary, leaving you with less money to spend.

However, is your monthly purchasing power the only reason why you should use your CPF monies for home loan instalments? Maybe not.

ValueChampion has listed down all the advantages and disadvantages of paying with cash or CPF Savings for your home loans so that when it’s time for you to make a decision, you’ll be able to make a better choice.

The Advantages And Disadvantages Of Using Your CPF Monies For Mortgage Loan Instalments

HDB flats in Singapore
Image Source: Unsplash

Advantage 1: Homeowners Keep a Larger Portion of Their Salary

The first and biggest benefit is, of course, the fact that you have more cash on hand.

By using CPF to pay for their home loans, the salary of homeowners will be left untouched. This allows homeowners more money to save for household expenses, including shopping for necessities, setting aside rainy day funds or emergency funds, and more.

Furthermore, with rising inflation, having more liquid savings will help with the immediate rising cost of living.

With more salary on hand, homeowners also have more spending power to attain their financial goals. Some of these may come in big-ticket items like luxuries or cars. Others might be to pay off loans, such as renovation loans or university loans.

Advantage 2: Homeowners Can Estimate Their Home Expense Regardless Of The Economic Market With The Fixed HDB Loan Interest Rate

Pegged at 0.10% above the prevailing CPF Ordinary Account (OA) interest rate, the HDB loan concessionary interest rate is fixed at 2.60%.

This rate has been consistent for the past few years, and will likely remain the same moving forward. This is unlike alternatives like banks who also offer fixed interest rates, but these rates often deviate year-on-year based on the Singapore Overnight Rate Average (SORA) Interest Rate benchmark. This benchback varies depending on the economic market. The chart below shows the fluctuation in SORA Interest Rate over the past 5 years.

Graph showing the average Singapore Overnight Rate Average (SORA) interest rates over the past 5 years
Image Source: ValueChampion Singapore

With the The US Federal Reserve raising rates by 25 basis points in the past few weeks, it is expected that the closely tied SORA interest rates in Singapore will increase alongside it. Mortgage Broker Redbrick Associate Director Mr Clive Chng also foresees that the SORA interest rates will increase even more, potentially hitting back rates around 2.88 per cent. This rate was last attained mid-2019, prior to the Covid-19 pandemic.

As this value varies over the years, it makes the HDB Loan ideal for individuals who intend to plan their housing expenditure in advance. With the HDB Loan hypothetically being more stable, home purchasers can calculate using a consistent interest rate, regardless of the volatility of current market conditions.

However, do take note that this interest rate is subject to changes if there are future revisions to the CPF interest rate.

Advantage 3: Homeowners Can Continue to Use Their CPF to Pay For Their House During Their Retirement Years instead of Cash

Upon reaching the age of 55, the legal age to begin receiving your CPF payouts, you can choose to continue paying for your housing loan using CPF. That way, you need not pay out of your personal savings.

Your CPF payouts will come primarily from your CPF Retirement Account, which is made up of the funds in your CPF Special Account, followed by the CPF Ordinary Account until you hit the basic retirement sum.

Charts demonstrating the different CPF accounts before and after 55 years
Image Source: Vera / ValueChampion Singapore

The remaining amount in your CPF Ordinary Account can be used to pay your home loan instalments. You can also use cash to pay for your HDB loan after 55 years old.

Of course, if you are still working full-time after age 55, your CPF contribution will still flow into your Ordinary Account (OA), Special Account (SA) and Medisave account.

Read Also: Average Cost of Housing in Singapore 2021

Disadvantage 1: Negative Cash Increments to Homeowners’ CPF Savings

With the usual CPF interest rate at 2.5% and HDB Housing Loan interest rate at 2.6%, homeowners might find the monthly HDB loan payments eating into the interest earned for monies not used to pay for the housing loan. While slight, this will still affect your future CPF retirement savings and payouts.

Moreover, with Singapore’s basic retirement sum increasing year on year by 3.5%, some CPF members might find it harder to achieve the needed sum of money. Below are the current and predicted basic retirement sum for the next 5 years.

YearBasic Retirement Sum
2022 (Current)S$96,000

Consumers who are using CPF monies to pay for their home loans might want to think of ways to build a nest egg for retirement instead of waiting for a lump-sum payout from their CPF Savings.

Some methods could include investing in stocks, ETFs and bonds, putting their money in Fixed-Deposit accounts with a satisfactory interest rate return, ILPs and more.

Just take note that all these options have risks. Ensure you have done up your research before putting money into any of them.

Read Also: Best Online Brokerages in Singapore in 2022 You Need To Know

Disadvantage 2: If You Sell Your House That Was Paid via CPF Savings, You Will Need to Return the Sum to Your CPF Savings, Including the Interest.

To illustrate, Michael sells his house at S$500,000 at age 56, which he previously took a grant of S$40,000 from his CPF Savings to pay the downpayment. Below, you can find a summary of Michael’s situation that will help us determine the amount of his sales proceeds.

Things to Consider When A Sale Takes PlaceMichael’s Situation
Home Type4-Room
Purchase PriceS$375,000
Sale PriceS$500,000
Downpayment10% from CPF Ordinary Account
Loan25-Year HDB Housing Loan
Remaining Home Loan Amount (After 5 Years)S$270,000

Upon selling his house, Michael will first need to repay any remaining outstanding housing loans. Assuming he obtained an HDB Loan and the remaining sum he needs to pay is S$270,000, he will be left with S$230,000.

Paying off Outstanding Home LoanS$500,000 - S$270,000
= S$230,000

After, he will need to return the following sums listed below to his CPF Ordinary Account, including interest. This ensures that you do not shortchange your own retirement savings.

  • Downpayment
  • Monthly Loan Repayment
  • HDB Housing Grant

Downpayment will consist of the initial downpayment of S$37,500 (10% of the purchase price) with interest, totalling up to around S$42,600.

Monthly loan repayments, which is paid part-cash and part-CPF savings, will cost around S$1,700 monthly with interest, amassing up to around S$110,000.

Repayment of the HDB Housing Grant will be the S$40,000 borrowed with accrued interest. In total, this amount should be approximately S$45,500.

Calculating all these costs, Micheal will receive back S$31,900 in cash. Below is a breakdown of the end amount that Michael receives.

End cost that Michael receivesS$230,000 (sum after outstanding home loan)
- S$42,600 (Downpayment with interest)
- S$110,000 (Monthly Loan repayment with interest)
- S$45,500 (HDB Housing Grant with interest)
= S$31,900

The above illustration was adapted from basic retirement sum increasing year on year by 3.5% and rewritten for greater clarity.

In the event that your house is paid by CPF Savings from your CPF Ordinary Account, and you are unable to meet the Full Retirement Sum, your house is automatically pledged to make up your basic retirement sum. Upon selling your house, you will also need to refund that amount to your CPF Savings. This is important as it ensures that you will have sufficient funds in your CPF Savings to receive CPF payouts when you reach between the age of 65 to 70 years old.

For CPF members who have met the Full Retirement Sum and would like to opt for a higher payout, you have the option to do a property pledge to make up the basic retirement sum.

The Advantages and Disadvantages of Using Cash to Pay For Home Loans

Blue and white HDB Block next to the blue sky
Image Source: Unsplash

Advantage 1: Homeowners Will Remain With Increasing Cash Increments for Their CPF Savings

As their CPF Savings remains untouched when homeowners choose to pay using cash, the amount of money in their CPF Savings will continue to compound at a rate of 2.5%. This interest rate is one of the highest consistent rates in the market for relatively risk-free investments.

Removing money from CPF Savings for HDB Housing Loans will result in lesser retirement funds. Thus new homeowners with low amounts of cash in their CPF Savings should consider paying their housing using hard cash.

Advantage 2: Homeowners Will Be Able to Keep Their Earnings When Selling Their Properties

With CPF Savings untouched when purchasing your property, there is no need to pay any amount back into CPF Savings. That means that all profits earned from selling your property are yours to keep and save, providing more cash flexibility for you to spend.

Disadvantage 1: Money Used to Pay Will Be Taken From Homeowners’ Savings

As CPF monies were not used to fund the housing loan, all money will inevitably be from the homeowners savings. This would limit their spending power as less money is kept with them and CPF Savings are mostly inaccessible (until the between 65 to 70 years old). CPF members who hit the age of 55 years old will only be able to withdraw the first S$5,000 of your CPF savings if you are unable to meet the Full Retirement Sum.

In the scenario that homeowners do have other important financial commitments, the lack of liquid capital could diminish one’s spending power. This will require homeowners to be more frugal with their spending in the initial years after purchasing their new flat.

Best Home Loans in Singapore

Unlike HDB Housing Loans that have a high fixed interest rate of 2.6%, bank and licensed moneylenders provide lower and more competitive interest rates. Compare more here using our home mortgage loan calculator.

Couple calculating cost using calculator

They also have options for homeowners to pick a fixed or floating interest rate for their home loans.

Fixed-Rate Housing Loans vs Floating Rate Home Loans

Fixed-rate housing loans

Fixed-rate housing loans are the most ideal when the Singapore Overnight Rate Average (SORA) interest rate is expected to rise. That way, homeowners can have peace of mind amidst the fluctuating market and pay an affordable consistent interest rate. This rate however tends to be more pricey than floating rate mortgage loans in a usual economic market.

Floating rate home loans

Floating rate home loans are generally good when the SORA interest rates are declining. As these floating rates are pegged against SORA, the decline will reduce the cost of these floating rates. Often, floating rates are more affordable than fixed rates, but borrowers need to be ready for the financial fluctuations that may come their way.

Interest rates for bank and licensed moneylender home loans also differ between HDB flats and private properties. HDB flats tend to have lower interest rates for mortgage loans, while condominiums and private properties have higher interest rates.

To find the best rates for home mortgage loans, you can check out our home loan calculator here.

Bonus Tip: Refinancing Your Loans

When you refinance your loans, it means you are switching your current housing loan to a new lender with lower interest rates.

Typically, people refinance their loans for a few reasons:

  • To enjoy a lower interest rate
  • To adjust the monthly instalment payment to suit your current economic situation
  • To adjust the payout period

Refinancing an HDB Housing Loan to a bank housing loan is the most common of the three. With a higher Loan-To-Value Limit of 85% compared to paying via bank home loans (75%), many will initially choose an HDB Housing Loan to foot this cost but will eventually switch to a bank home loan for their lower interest rate.

Do take note that once you switch to a bank home loan, you will not be able to refinance that property under an HDB Housing Loan again. Although this might seem like an ominous step, it is not as bad as it seems. With fixed rates from bank mortgage loans readily available at lower rates, you will still have access to stable interest rates without holding an HDB Housing Loan.

Final Thoughts

To get the most savings from repaying your house, review your home loan regularly. Opt for refinancing options with lower interest rates, and a time frame suited to your needs. To ease this process, we have a home loan calculator that can do this for you. It gives you the best rates right now in the market so that you can get the best interest rates that you need.

Liked this article? Read here for our curated list of the best mortgage loans in Singapore, and here for more home loan guides and articles to help you pick your best option.

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Tan Boon Hun

Boon Hun spent over five years in the content marketing space as the managing editor of Goody Feed creating interesting and relevant content for the social media generation. In 2022, he moved to the FinTech space while remaining true to his roots, intending to bring financial literacy to more people in Singapore. When not doing his work, he can be found watching people build homes on YouTube.

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