Why you should not be rushing to pay back your housing loan using your CPF savings

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Recently, the achievement of a young couple who in their mid-30s had managed to pay off the housing purchase of their Bishan flat in 2 years was lauded on social media.

The thrifty and hardworking couple earning an ordinary income had accumulated a large sum of savings in cash and CPF before they purchased their flat. 

After their flat purchase, they took a small HDB loan of $53,000 and paid it up within 2 years. This decision almost wiped out their cash and CPF savings, but they achieved the feat of fully paying up for their flat in 2 years.

It is indeed an accomplishment, but is it really a financially wise choice?

You stand to lose tens of thousands of dollars in CPF interest gains

Many Singaporeans are so fascinated with the idea of achieving a “Debt-Free” status that they use their precious CPF Ordinary Account (OA) savings to pay up their outstanding housing loans. This is financially unwise.

The math does not work out in favour of you withdrawing your CPF monies from your OA to pay for your housing loan.

Your CPF OA savings earn you an interest of 2.5 per cent annually. A housing mortgage loan from a bank usually charges an interest of about 1.5 per cent today.

ALSO READ: Definitive guide to using your CPF to repay your home loan installments for HDB flats and private property

 If you have an outstanding housing loan of $100,000, and if you redeem the $100,000 loan with your OA, this is how the maths stack up:

Interest earned from OA at 2.5 per cent: $100,000 X 2.5 per cent = $2500

Interest paid for Bank Loan at 1.5 per cent: $100,000 X 1.5 per cent = $1500

Interest forgone by redeeming housing loan = $1000 per year

If you have withdrawn from your CPF savings a few hundred thousand dollars for a loan that could be stretched for 10 to 20 years, you would have forgone tens of thousands of dollars that you could have generated in interest from your CPF savings.

In case you are worried that the bank interest will increase above 2.5 per cent, you always have the option of paying up the loan with your OA savings. Hence, it is pretty risk-free.

The interest difference is even larger if you transfer your CPF Monies from CPF Ordinary Account (OA) to Special Account (SA)

Had you transferred the $100,000 from your CPF OA to Special Account (SA), the math would work even more in your favour:

Interest earned from SA at 4 per cent: $100,000 X 4 per cent = $4000

Interest paid for Bank Loan at 1.5 per cent: $100,000 X 1.5 per cent = $1500

Interest forgone by redeeming housing loan = $2500 per year

However, there is a slight risk with this move. If the bank mortgage interest rate increases beyond 4 per cent, you could suffer a financial loss. As the transfer from OA to SA is irreversible, you would have to fork out cash to pay the loan instead of your OA CPF monies.

ALSO READ: Why you should not pay for your HDB with CPF

Arguably, the likelihood of the mortgage rates exceeding 4 per cent is low for a long time to come, given the current low interest rate environment.

By not redeeming your housing loan with your CPF monies from your Ordinary Account, you can make money by arbitraging the interest rate difference between the higher CPF interest rates and the lower bank mortgage rates.

Incurring debt is not always unvirtuous

In our Asian culture, having debt is often frowned upon.  It is true that many types of debts are “bloodsucking” in nature, (e.g. debts involving loan sharks, credit card, bank overdrafts, etc). Such debts have sky-high interest rates and one should never dabble with them.

For example, the interest for a car loan is based on the original amount borrowed, so it does not matter how much you have already paid down, making it a very expensive debt that we should all minimise.

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However, as a financial principle, when the returns generated from debt are higher than the debt cost, they can be deemed as “positive” debt.

That is why many companies take on loans to help them generate higher profits, though companies also take on business risks in doing so.

In the unique case of housing loans in Singapore, the interest returns of leaving your CPF untouched is higher than the mortgage interest, and it is almost risk-free (barring policy changes). 

So, let’s not demonise all debt and instead harness it to our favour, especially in the case of housing mortgage loans.

Returning what you have withdrawn from CPF for housing may be wise

On a related note, if you are sitting on a pile of spare cash and have no appetite for risky investments like property, bond and shares, you might want to consider ploughing back your cash into your CPF by returning back what you have withdrawn for your housing payment from your CPF . 

The returned CPF would generate 2.5 per cent interest, which is far higher than what you can ever get from any fixed deposit or government bonds now.

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If you are like many Singaporeans falling into this category of having a lot of spare cash, you probably have met your Full Retirement Sum (FRS) in your CPF. 

In such a case, you should not fear that your money is stuck in your CPF as you would be able to withdraw whatever you return to your CPF at 55 years, with generous interest returns.

Given the current property bull run , and the fact that many property owners are selling their houses, it is worth considering keeping the monies (or a portion of it) in CPF. Be wise with what you do with the proceeds from the sale of the house.

In short, let’s not blindly rush to attain a “debt-free” life, but we should all aim to achieve a “financially-wise” life.  Through better CPF and financial literacy, we can be better off financially and enjoy a very comfortable retirement.

In case you still think you should chase the property bull run, do click on the video below to watch the video for our opinion.

This article was first published in Dollars and Sense.