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Before we dive into all things HDB Loan and talk about the $20,000 CPF, it’s kinda helpful and nice to understand how the HDB Home Loan came about. Let’s go back in history...
The Housing and Development Board (HDB) introduced a Home Ownership for the People Scheme in 1964, shifting the focus from only building rental flats to selling them to citizens.
The goal was to give Singaporeans, especially those in the lower-middle-income group, a tangible stake and sense of ownership in the country, promoting national stability. The HDB offered these flats for sale and provided loans to buyers, with monthly mortgage payments often lower than rental rates.
CPF came about in Singapore in 1968, which then made HDB loans possible.
Then CPF happened
And then in 1968, the government passed the Central Provident Fund (CPF) (Amendment) Act in September 1968. This new legislation allowed citizens to use their compulsory CPF savings—a mandatory social security savings plan—for two key purposes:
- Downpayment on a new HDB flat.
- Monthly instalments (to service the HDB loan).
Before this, people had to rely solely on their take-home income and cash savings to buy a HDB. By allowing the use of CPF, homeownership was suddenly brought within reach of the majority of the working population, as they could finance their flats primarily using their retirement savings.
This led to a massive increase in demand for owner-occupied flats and cemented the success of Singapore’s public housing programme.
HDB Loan
Today, the HDB continues to offer the HDB Housing Loan (or HDB Concessionary Loan) to eligible buyers at an interest rate of 2.6% - a stable interest rate currently pegged at 0.1% above the CPF Ordinary Account interest rate.
Should I keep $20,000 in my CPF Ordinary Account when buying a HDB?
“Did you wipe out your HDB OA?” I asked Home & Decor’s social media manager, who sits next to me.
“$20k?” I burted.
“No lah, I kept a bit,” she replied.
Yes, it’s an emergency CPF fund
The option to retain up to $20,000 in your CPF Ordinary Account (OA) was only introduced in August 2018. Prior to that, you had to wipe out your CPF OA to take a HDB loan. But then people wanted to keep some CPF savings for rainy days - e.g. loss of income or retrenched from jobs. So, this $20,000 CPF OA emergency fund was formalised.
Ok - but other than it being an emergency fund, are there any other pros and cons of keeping a $20,000 in the CPF OA?
Yes, it can earn you 3.5% interest
While the basic CPF Ordinary Account interest rate is 2.5% per annum, you currently get an extra 1% on the first $20,000 (if you are under 55 years old) too. If you were to take 0.035 x $20,000, that gives you $700 earned in interest per year!
No, you’re loaning $20,000 more
The most immediate disadvantage is that by choosing to retain $20,000 in your OA, you will be taking out an HDB loan that is $20,000 more than if you had used the full amount.
Since your loan principal is higher, you will naturally pay more interest over the entire loan tenure (e.g., 25 years).
Let’s do the math. Take the HDB loan interest rate 0.026 x $20,000 extra loan you had to take, you’re paying $520 in interest every year. Assume you’re paying for 5 years before you sell the HDB, that’s $2,600 in interest you’re paying.
Immediately, you can tell that the previous option of earning 3.5% in interest is better. But hey, some people don’t like to pay a single cent in interest to the ‘gahment’ at all!
No, your monthly repayment will be higher
Because your loan amount is higher, your monthly mortgage payment will be slightly higher as well. This increases your recurring financial commitment, which might slightly strain your monthly cash flow, especially if you are already stretching your budget.