I sold my HDB and bought a new private property this month đź’¸. Therefore I seriously pondered this question.
It is a very popular question. Some say use cash, some say use CPF.
tldr: In 2020, the year of super low interest rate, I lean towards using more cash (or get more loan) to pay for the property. Conserve your CPF because 2.5% interest rate is the best in 2020.
The Scenarios
Let’s understand the difference first. To do that, we compare 2 simple scenarios, with a downpayment of $100k. Assume you already have $100k cash, so you have 2 choices:
| Pay Downpayment with CPF | Pay Downpayment with Cash |
|---|---|
| Therefore extra $100k cash in hand | Therefore no extra cash |
Assume that the property is sold after 7 years. After paying off the outstanding bank mortgage, the remaining sale proceeds is $300k.
This remaining amount includes what has to be returned to CPF, with accrued interest. At the current OA interest rate of 2.5%, a 7 year period will accrue $20k interest.
| Pay Downpayment with CPF | Pay Downpayment with Cash |
|---|---|
| Return $120k to CPF | CPF already has $120k |
| Cash profit $180k | Cash profit $300k |
| Extra cash $100k + interest | - |
Firstly, in both scenarios, your CPF will have exactly the same amount – $120k.
The difference now lies with how you use that extra $100k cash; how much interest you can earn from it.
In the worse case, where you keep the cash under your pillow, therefore earning $0 interest, then the scenario that paid with CPF will have $20k lesser cash ($180k + $100k vs $300k).
The key is to use that extra cash and earn a return that is more than OA 2.5%.
Let’s talk about interest rates.
Bank Interest Rate ~1.25%
Because of COVID19, home mortgage is now much cheaper. My home loan is perpetually this:
SIBOR 3M + 0.85%
As of Oct 2020, SIBOR 3M is 0.4%, so the bank interest is 1.25%. The bank spread is 0.85% (what they earn).
It’s a good package from my bank. If you are interested, contact me for referral. I do earn referral bonus :)
For these few years, interest rate will continue to be this low. People are buying despite the recession because of the low interest rate.
SSB Interest 0.2-0.9%
Singapore Savings Bond has dropped to a ridiculous 0.23% for first 2 years, and 0.91% for full 10 years!
I used to encourage friends to invest in SSB. But I no longer advise anyone to put money there. If you missed the good times, you just have to move on.
Don’t buy SSB now.
CPF OA Interest 2.5%
Everyone has dropped their interest rate, except our dear CPF. The 2.5% will be maintained throughout 2021.
It will be dearly if CPF reduce their rate. Imagine Hong Lim park protested by “return our CPF” fans.
Because of the support by our Singapore Government, we continue to enjoy 2.5% interest.
I suggest you make use of it too.
CPF SA Interest 4%
You could transfer OA to SA, or topup SA with cash.
But, SA will not be able to be used to pay for property.
So, only transfer all your OA to SA if you’re sure you’ll not need the OA to help pay for a future property.
Partial repayment when interest goes up
You might be worried: What if interest rate goes up?
If it goes up, you can do a partial repayment with the bank. Check with your bank, but my bank does not charge for partial repayment after the 2 years lock-in period.
So let’s say in 2023, SIBOR has increased (from 0.4%) to 2%, therefore I have to pay 2.85% (spread of 0.85%) to bank. In that case, use the CPF or the extra cash to pay off the debt.
You can use CPF to do a partial repayment easily.
How to decide: CPF or Cash?
If you can invest with a return better than 2.5% (with the extra cash), then you can use CPF to pay for the property.
If you can’t, then it is better to use cash to pay for the property, and let CPF earn a almost guaranteed 2.5% for you.
Also consider these.
-
Keep at least $60,000 in your CPF, so as to earn an additional 1% interest.
-
Keep enough cash for liquidity and emergencies.
Here’s what I did personally
I use cash to pay for the property, and conserve as much in my CPF OA account.
I sold my HDB in 2020, and $160,000 was returned to my CPF. Instead of using all of it to pay for my new property, I use only $30,000.
That means I have to get an additional $130,000 cash to cover for the CPF that I didn’t want to use.
It could be $130,000 cash. But instead, I borrow even more from the bank (eg. maxed out your loan).
It’s a leverage. One should borrow more while interest rate is low.
If bank interest goes higher than 2.5%, I will do a partial repayment (after 2 year lock-in) using the $130,000 (plus interest) in my OA.
Remember, interest rate is very very likely to be low for the next few years (as FED has declared). Therefore the risk is low that interest will go up within the lock-in period.