Buying one's own home is one of the most monumental moments in 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. As a result, 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.
1. Doesn't justify the opportunity cost
There are a couple of ways to use your CPF money to finance your home.
Down Payment
First, you can pay 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 25% of the home value with the amount saved up in their CPF Ordinary Accounts. For those who are getting a home loan from a bank, they can finance up to 20% of their home value with their CPF account.
After that, you can also use your CPF money to pay for home loan repayments and other fees associated with a home purchase.
2. CPF Ordinary Account’s 2.5% Interest
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.
3. CPF Special Account’s 4% Interest
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 use your CPF money to replace your down payment, however, you would be forgoing 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 whose yield is exactly 0%.
4. You have to pay CPF back your 2.5% interest
You’re paying out of pocket for what the government would’ve paid.
Another reason why withdrawing from your CPF account is not recommended is because you eventually have to “pay back” the amount when you sell your home.
Not only that, the amount you need to repay CPF actually grows at 2.5% per year, basically the amount it would have become if you had left the money in your CPF. If you had 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.
Adapted from Value Champion.