Buying one's own home is one of the most monumental moments in anyone's life. While Singapore's HDB has kept housing prices relatively affordable compared to other urban areas around the world, it's still very difficult for most people to shell out tens of thousands dollars (if not hundreds of thousands) to acquire their residences. Given this, many have turned to drawing on their CPF accounts to help finance their home purchases. However, this is actually an economically unsound tactic that most experts advise their clients against. Here, we discuss why this is so, and possible alternatives that you could explore to finance your home.
Using CPF to buy a flat doesn't justify the opportunity cost
There are couple ways of using your CPF money to finance your home. First, you can replace the whole or a part of your down payment with CPF money. For those who are getting a HDB loan, they can pay up to 10% of the home value with the amount saved up in their CPF Ordinary Accounts. For those whose are getting a loan from a bank, they can finance up to 15% of their home value with their CPF account. Besides that, you can also use your CPF money to pay for home loan repayments and other fees associated with a home purchase.
However, none of these methods can actually justify the opportunity cost of withdrawing funds from your CPF account. Normally, CPF Ordinary Accounts provide a guaranteed investment yield of at least 2.5% per year. That may not sound like much, but it could actually more than double your funds in 30 years. Not only that, this risk-free, guaranteed yield increases to 4% if you transfer your money to CPF Special Account, which doubles your money in 18 years. If you decide to using your CPF money to replace your down payment, however, you would be foregoing this 2.5%-4% of investment return that is both guaranteed and free. Not only that, you would be sacrificing the 4% yield to avoid using cash that is yield exactly 0%.
Paying your home loan your CPF account is similarly uneconomical. The best home loans in Singapore cost you 1.6%-1.7% per year, meaning using cash to repay your loans would "yield" you just about that much returns. However, to giving up a 2.5% risk-free return on your CPF account to save 1.6-1.7% on interest would only net 0.8%-0.9% of economics, which only gets worse if you consider what you could've earned on your CPF Special Account.
Paying out of pocket for what government would've paid
Another reason why withdrawing from you CPF account is that you eventually have to "pay back" the amount when you sell your home. Not only that, the amount you need to repay actually grows at 2.5% per year, basically the amount it would have become if you had left the money in your CPF. Had you bought a S$350,000 flat, the S$52,500 (or 15%) you would have withdrawn from your CPF account would translate to S$97,332 that you have to return to CPF after 25 years. Of course, this money still "belongs to you," so you may not consider it to be a real cost. However, what you are doing is effectively shifting the responsibility of growing your retirement fund from the government to yourself. In this example above, you would be "paying" for the additional S$45,000 that would have been provided by the government had you left your CPF account untouched.
Unfortunately, there's no "silver bullet" to solving this conundrum. On one hand, you may not have enough funds to make your dream come true immediately. On the other hand, withdrawing from your CPF account has real economic consequences that could impact your retirement. In our view, the only way out of this pickle is to use time: if you can't afford to make a downpayment with your cash savings, you should wait for few more years to save up, or a buy a cheaper home.
In a way, time is a great friend for those in this situation. Time allows us to compound returns to increase our wealth exponentially. Investing in stocks, for example, is supposed to return about 8-10% of annual returns on average, while some P2P crowdfunding platforms also claim to offer similar returns. At such return profiles, one could hypothetically increase S$30,000 of initial capital to S$53,000 in just 6 years.
One could also argue that using CPF to buy a home now could help save cash that can be invested to earn higher returns than 2.5%-4%. However, giving up the guaranteed return to chase higher returns that may or may not be realised isn't exactly the best financial move. Not only that, the fact that you are losing out on CPF's guaranteed return would effectively reducing the "net" return of whatever you end up earning on your cash.