Is it currently preferable to pay off your home loan with cash rather than CPF?

Is it currently preferable to pay off your home loan with cash rather than CPF?

In the past two weeks, it seemed as though our countrymen had grown extremely distant from one another. Now is the moment to put aside disagreements, allow our country's psyche to mend, and concentrate on weathering the storm together.

Even if we disagree with some of the ruling party's current policies, we must now support the individuals who are fighting for Singapore's and subsequently our future, even if they occasionally make mistakes (Who doesn't?).

Aside from the excitement surrounding the elections, my team has had an amazing June and first half of July, as we had anticipated.

Property purchasers flocked back in droves to continue their renovation and investment plans while they still had time to view and check actual properties.

A monthly record high in sales volume could assist lube the economic cogs of the entire real estate sector, where thousands of jobs are on the line.

Let's hope that we avoid entering a second lockdown, which would have a negative influence on our economy and endanger many more people's livelihoods.

It's interesting to see that in the past month, more buyers have expressed interest in floor plans with a study and have shown a greater willingness to extend their budgets to include an additional bedroom if necessary.

I suppose this reflects the widely held belief that the culture of working from home will persist.

Is it currently preferable to pay off your home loan with cash rather than CPF?

Should I pay down my house loan instalments with cash or CPF? is one of the frequent queries I get from readers that I have assisted with refinancing to lower interest rate packages (As low as 1.1%!).

You can choose to pay your monthly loan instalments out of either your CPF Ordinary Account (OA) or cash, whether you are the owner of a public or private property.

Given that we have all heard the adage "Cash in hand is king," some of you may be asking why house buyers would choose to pay off their loans with cash as opposed to CPF.

Advantages of making cash instalments on your mortgage

Paying off your mortgage with cash can assist you avoid future negative cash sales if you're considering moving up from a HDB flat or a private residence.

In this case, you would have to pay back all of the earnings from the sale of your property to the CPF, which would leave you with nothing to put down as a deposit on your subsequent property.

For instance:

Let's say you obtain a bank loan to pay $350,000 for a condo.

You pay the initial down payment with $70,000 from your CPF.

You use your CPF to make monthly house loan payments totaling about $1,120 over the following five years.

You would have deducted a total of $137,200 from your CPF.

However, you must return this sum together with the difference when you resell your apartment five years later.

Your CPF would have accumulated interest on it (2.5% annually for OA), which amounts to about $155,200+.

Imagine that you sell amid a recession and the sales are not very successful.

You only have $150,000 after paying all of your expenses (such as the outstanding home loan, extra fees, and so forth).

You won't have any cash on hand because the entire sum will be deposited back into your CPF (together with the cash deposit you received from the buyer). (Note that this affects owners of both private and HDB properties.)

Although some would argue that you can utilise the refunded CPF for your new home, I have known folks who did not have enough funds saved and were unable to move on with their plans to upgrade their private property.

As a result, some purchasers opt to pay off their loan entirely in cash to avoid having to cut back on their upgrade budget in the case of a bad sale.

Paying loan interest with CPF or cash

If left uncontrolled, CPF Accrued Interest might spiral into a bad sales situation.

There is also the increased possibility that, if you use CPF and wait too long to sell your HDB or private home—say, 10 years or more—the principal amount due plus the CPF accrued interest will snowball into an incredibly large (or sad) sum.

To fully capitalise on the risk-free returns that CPF offers us, we will use all of the funds available for the down payment and monthly payments.

There are very few (if any!) investments in the world that give us a 2.5% (or 3.5% on the first) risk-free interest, which over time accumulates effectively to assist us protect against inflation.

Any investment that yields me less than 2.5% returns annually, in my opinion, just does not make sense financially. I would instead reinvest my money, whether it were tied up in a home or a stock holding that was stagnant, into something else. If you manage your money less actively, you can simply add some money back to your CPF for risk-free growth.

To get returns on our investments of at least 4% without taking any risks, we can even move all of the money in our Ordinary Account to our Special Account. Where else might one locate such returns?

Even though it's a common misconception that "cash is king," money in the wrong hands can reduce a person to poverty.

Several variables will determine whether this method is effective for you, and everyone has a favourite method for saving for retirement. But even though it requires more financial restraint, some homeowners use it as a sound protective measure.

However, it is typically not advised to pay all of your instalments in cash because it is also important to set aside money for unforeseen expenses or an opportunity fund to take advantage of investing opportunities.

Personal loans or lines of credit may be an option if you don't have any money in the bank, which has a pricey 6-9% annual interest rate. This undermines the goal of trying to increase your CPF and may prevent you from upgrading.

Additionally, investing in subsequent homes sooner in your life with more cash on hand often results in better long-term returns on equity than CPF. Read about an important factor that many real estate investors overlook: ROE vs. ROI.

In conclusion, certain homeowners may benefit by paying their mortgage in full with cash;

For instance, people who use CPF as the foundation for their retirement or those who choose to be more watchful / disciplined in the five years before an upgrade.

Anyone else should speak with a property wealth planner to determine whether the opportunity costs outweigh the trade-offs.

Do you want advice on potential real estate investments, the greatest deals to be had, or assistance with promoting your properties?

About The Authors

With over two decades of experience in the industry, the couple Mortgage-Bankers-turned-Realtors, Jan Tan and Leonard Cheah have been providing valuable and unbiased solutions to Home Owners & Seekers.

With a fusion expertise on real estate and mortgages, Property Bankers have helped their clients to make informed decisions that aligns with their unique needs and financial capabilities.

Their approach is transparent as they provide all the necessary information and support to help our clients navigate the complex and ever-changing real estate market. Trust them to be your guide in your real estate journey. Contact them today for a one-time free 30-min consultation.