Don’t Use CPF to Pay for HDB! Here are 3 reasons why

The debate over using CPF versus cash to pay for an HDB mortgage is a long-standing and significant one in Singapore, with a lively discussion taking place on forums, social media, and in financial articles. There’s no single “right” answer, and the debate centers around a fundamental trade-off: short-term cash flow versus long-term wealth accumulation and retirement planning.

For those new to the housing market, the idea of paying your HDB mortgage with cash might seem daunting. After all, using your Central Provident Fund (CPF) savings is a common and convenient option. However, there are significant advantages to using cash instead of CPF to pay for your HDB Loan.

CPF’s High Interest Rates

One of the biggest pros is that it allows you to fully capitalise on the growth of your CPF savings. The money in your CPF Ordinary Account (OA) currently earns a guaranteed, risk-free interest of at least 2.5% per annum. By not touching this money for your mortgage, you allow it to compound over the years, which can result in a much larger retirement fund down the line. Basically, you let your CPF savings grow on their own, without being used to service a HDB Loan debt.

The interest rate for the CPF Special Account (SA) is 4% per annum.

Avoid Paying Back CPF’s Accrued Interest

Another key advantage relates to the sale of your property in the future. When you use CPF funds for your mortgage, you are required to refund the principal amount you used, plus all the accrued interest, back into your CPF account when you sell the flat. This can significantly reduce the amount of cash you receive from the sale.

By paying with cash from the outset, you avoid this obligation entirely. This means that when you sell your HDB or BTO flat, you get to keep all the cash proceeds after paying off the remaining loan, giving you much greater financial flexibility to use that money for your next property, for investments, or for any other purpose.

Forces You to be Prudent with Cash

Finally, using cash for your mortgage can lead to a healthier financial mindset. It requires you to be more disciplined with your income and budget, ensuring you have enough money set aside each month to cover your payments. This can also provide a solid emergency fund in your CPF, should you ever face a sudden loss of income. By not relying on your CPF for your home loan, you preserve it as a safety net, which can be a huge relief in times of financial hardship.

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Use CPF for Greater Cash Flow

The primary argument for using CPF is to maintain a healthy cash flow and liquidity. Many people, especially young couples buying their first home, simply do not have enough disposable income to service a large mortgage with cash. Using CPF allows them to manage their monthly expenses, save for other financial goals, and build up an emergency fund. As online discussions often highlight, this frees up cash for things like renovations, family expenses, and other life goals - which are all normal, necessary, and by no means a bad thing!

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Use Up Your CPF ‘Forced Savings’

Pro-CPF online users also argue that using CPF is a form of “forced savings.” While the money might not be earning as much as a high-performing investment, it is a stable, reliable way to pay off a major debt.

They also highlight that HDB loans, which are pegged to the CPF OA interest rate, have been stable at 2.6% for many years. This provides predictability and protects homeowners from the volatility of floating interest rates offered by banks.

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Cash + CPF to Pay HDB Mortgage

Ultimately, the online debate often concludes that the best strategy is a hybrid one. Many financially-savvy individuals advise a mix of both CPF and cash.

Pay with cash only when (and if) your income allows for it: If you have a high income and a healthy cash buffer, using cash to service your mortgage is often seen as a prudent move!