Why You Should Pay For Your HDB With CPF

One article showed up in my feed one fine afternoon: Why you should not pay for your HDB with CPF

Naturally, I clicked because I am a believer in paying for your HDB with CPF. Maybe I might get converted to the pay-with-cash camp.

The Summary of The Article “Why you should not pay for your HDB with CPF.”

The main argument for paying with cash instead of CPF is that the money in CPF generates interest. By choosing to pay with CPF, you are forgoing 2.5% per year in interest.

To prove his point, the author used an example of a couple with a median salary of $4,437 who bought a BTO for $520,000 and sold it eight years later for $700,000. Their monthly OA contribution is $1,000 each.

To finance their flat, they had to take up a loan of $403,500 with a monthly payment of $1,810. The author then calculated the scenario where the couple:

1. Only used CPF to pay for their housing loan
2. Only used cash to pay for their housing loan

In the first scenario, he argued that because the couple used CPF to pay for the loan, they had to pay back $345,000 to their CPF. That sum was what they had paid towards the loan and the accrued interest over the eight years. So their net cash proceeds amounted to merely $79,000.

On the other hand, had the couple used cash to pay their loan, the sum they had to pay back to CPF was only $156,000. Since they used cash to pay for the loan, their CPF would have $190,000. They would have a total of $268,000 in cash and $346,000 in their CPF OA. 

They would have a total combined of $614,000 – making them eligible to upgrade to a swanky 2 million condo.

So, use your cash to pay off your loan, and you will get $190,000 more. Surely the CPF OA interest cannot be $190,000 for eight years.

That is a huge difference. 

Or is it a huge difference?

But, I think there are a few things points missing here in this argument. The numbers don’t add up.

#1 Whether to Pay with Cash or CPF Depends on Your Circumstances

Here is the kicker.

Are you ready for it?

The best way to finance your HDB is to pay with cash.

I mean pay with cash. In Full. Upfront.

In the same scenario, the couple had to take a loan of $403,500 to finance their HDB. The couple will have to pay $74,000 in interest for the eight years of their loan, assuming a HDB loan with an interest rate of 2.6%.

And they would have accrued $190,000 in their CPF.

So, their net cash profit will be $525,000 from the sale after deducting agency fees, legal fees and paying back to CPF.

Yes, it is always better to pay with cash.

But here is my meta point: But it does not mean paying with cash is best for everyone – it depends on their financial situation.

If you can afford it, use your cash. Avoid loans and avoid touching your retirement funds.

However, for those of us who are less wealthy or have not made it in life or trying hard to improve our financial situation, save your cash for something else. Use the cash for your investments, start a new business or pay down your debts.

Use CPF to pay for your house instead.

Personal Situation	Recommendation
Extremely Wealthy	Pay for your HDB in full, in cash, upfront. Don’t take a loan – avoid paying interests
Upper Middle Class	Pay for your HDB loan in cash, if only you have a stable income with no cash flow issues
Middle Class and lower	Pay for your HDB with CPF – that is the wisest choice. You never know one day you might face cash flow issues in the future.

This is not a real recommendation. Please do not take this too seriously. I may have exaggerated a bit

#2 CPF is Useless; Cash is King

If you are below the age of 55, your CPF OA is pretty limited in terms of usefulness.

But let’s imagine the same scenario, at year seven of owning your HDB, a global pandemic struck, and thousands lost their jobs, including you. Sure, you are CPF OA rich. But you cannot even withdraw a single cent until you hit 55 years old.

The only way you can get cash is to sell your house. And I hope that the pandemic does not wipe out the price of your home – not the best time to sell.

Or if you were diagnosed with acute disease and need money for treatment, you cannot even withdraw from your CPF.

I am not denying the importance of saving for retirement; I am saying that there might be short term situations which matter way more than retirement.

So, cash is more valuable. If you have not a lot of money, please use CPF to pay off your loan.

Remember, unless you are cash-rich, don’t pay off your housing loan with cash.

Always use CPF OA – that is the primary purpose of that account.

#3 The Opportunity Cost of Cash is Much Higher Than CPF OA

So back to the article from Stackedhomes / Asia One. The author had failed to highlight one thing for the case of using CPF to pay for your housing loan: What happens to the cash saved from using CPF OA to pay off your loan? In that example, the couple would have $1,800 saved every month over eight years which amounts to $172,800.

If you add that amount back, they would have:

Cash / CPF OA	Amount
Money in CPF	$10,000
Money in CPF OA from Sale	$345,000
Cash from Sale	$79,000
Cash saved (which otherwise would have went into paying the loan)	$172,800
Total	$606,800

Sure, in the case where the couple had used cash to pay their loan, they had a total of $614,000 which the author argued is because of the 2.5% interest in CPF OA. So the difference of $7,200 is due to CPF interest.

So congratulations, you would have made $7,200 over eight years by using cash instead of CPF to pay the loan.

So the opportunity cost of CPF OA is 2.5% per year. But what about cash?
Cash is way more versatile. You can use some money for emergency expenses (otherwise you would have taken loans which have very high-interest costs). You can use cash to start a business (earning you more income). You could have invested that cash in an index fund.
When times are good, your cash would have generated much more returns (6% per year)

Why Not Rent Instead?

If you are never planning to stay in a HDB permanently, why not just rent a place and save the money until you can afford a condo?

Looking at our example, you would have gained $180,000 in paper when you sold your house for $700,000 (When the initial purchase price was $520,000).

Cost of the purchase:

	Amount
Stamp duty	$10,200
Legal Fees	$1,000
Home insurance	$1,000
Interest paid to HDB Loan (2.6%)	$73,800
Opportunity cost of your CPF OA (Used for downpayment of the house)	$24,000
Total	$110,000

Actual gain from the sale

Agency fees	$14,000
Legal fees	$5,000
	$19,000

So, your actual profit from the 8 years of holding your BTO is:

($700,000 – $19,000) – ($520,000 + $110,000) = $51,000

However, if you look closely at the costs involved, your net gain is only around ~$51,000.

My opinion is that you should buy a HDB flat with the primary intention of staying in it and not for investment purposes.

Conclusion

Whether you choose to finance your HDB with CPF or cash depends on your financial situation. On the safe side, it is always better to have more cash and use the CPF OA to finance your house. Afterall, CPF OA was created for that very purpose – a means to finance your home.

Property investing is indeed more favourable towards those who are flushed with cash. The more you can pay with cash, the less cost you have to pay in terms of interests. For the rest of us (poorer people who have less cash), investing in property is more costly and the returns can be much lower.

Also, HDB flats were created to provide affordable housing to the Singaporean residents.

I did hear from my conveyancing lawyers (I had just sold my HDB flat recently) that negative sales has become increasingly common. Negative sale is when you sold your house at a loss – because the selling price could not fully cover your loan interest costs and the amount you have to pay back to your CPF (if you had used CPF to finance your loan).

So, HDB might not be the best real estate investment. If you really want to invest – private or landed property will have higher capital gains.

Nevertheless, it doesn’t mean that HDB are bad investments. You can generate good rental income with a strategically located HDB flat. However, that also means you might have to pay more for a better location.

Personally, I am of the opinion that HDB is meant for staying and not for investing. I sold my current HDB to move into a bigger HDB – purely for practical reasons and not for investment reasons.

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