Cutting down the use of CPF for properties

People visiting the Parc Canberra executive condominium sales gallery. Close to one million homes here are now funded fully or partially with CPF. PHOTO: HOI HUP REALTY

A healthy balance is a good safety net for hard times, retirement

If you have regular income but find that the balance in your Central Provident Fund Ordinary Account (OA) is still low, it could be a sign that you have used too much of it to pay for your home.

Almost every member looks to their CPF to fund the purchase of property, whether in lump-sum down payments or to meet the monthly mortgage.

Up to $1,200 of your monthly take-home pay will be directed into your CPF, so using it to pay the mortgage seems like a good idea to help with the cash flow problems many people are facing now.

After all, if you are in your 20s or 30s, having a low balance in the OA is just a fact of life and far from a clear and present danger.

And having the chance to use the CPF before 55 is certainly tempting, especially if this can free up more cash for your expenses.

Not surprisingly, close to one million homes here are now funded fully or partially with CPF. Last year alone, members withdrew $17.8 billion from OAs to pay for property.

About 75 per cent of these properties are Housing Board flats with owners withdrawing $11 billion from CPF for down payments and loans. A further $6.8 billion went to paying for private property, such as houses, condominiums and executive condominiums.

Some owners even use their CPF to fund more than one property at the same time. Suffice it to say, that those who do so are likely to have very low OA balances.

In good times, it may be fine to use your retirement funds to pay home loans if you are confident of being able to replenish the account later.

But the Covid-19 pandemic has thrown up important lessons that cannot be ignored – nothing is guaranteed and you would do well to have a financial safety net to cushion any impact on your regular income.

Many people do not realise that the CPF is a solid safety net even when they are still years from hitting 55.

PREVENTS YOU FROM LOSING YOUR HOME

If you need to use CPF to buy your home, try not to use every cent of it. Keep a healthy balance so that you don’t need to have sleepless nights when your income is disrupted.

Assuming your mortgage repayment is $2,000 a month and you have a balance of $50,000 in your OA – if you suddenly lose your job, that balance can help you service the loan for over two years even if you need more time to look for another job.

SAFEGUARD YOUR RETIREMENT

If you conserve your CPF funds, you stand a chance of having a good retirement, with a guaranteed decent monthly income after 65, for life.

From 2022, it will pay to try to set aside $288,000 as the highest retirement sum for CPF Life, the longevity insurance scheme for those who hit 55. People who do that can receive up to $2,400 a month for as long as they live. Even if they live beyond 90 or 100, their CPF Life payouts can be used for living in a senior’s home.

Is $288,000 a difficult target for working folks to hit? Not if you start early and are conscious of the need to save for this.

Those who start young have more than two decades to hit the target while those in their 30s and 40s can use extra cash to do Special Account top-ups and earn 4 per cent interest to help them reach the goal.

If this target is too high, you can aim for the mid-tier of $192,000 (for monthly payouts of $1,400 to $1,600) and the lowest tier of $96,000 (for payouts of $800 to $850).

Since buying property is the biggest drain on your CPF, here are some ways to conserve your funds while still getting your dream home.

IT’S OK TO RENT FIRST

While folks in Western countries think nothing of renting homes, many Singaporeans are brought up believing that paying rent is “wasteful” because they should be using their cash to pay for a home loan.

But if you don’t have enough to buy your first home comfortably, you should consider renting first.

Renting for a year or two allows you to save more and let your money in CPF grow. This in turn increases your budget and gives you more leeway when you are ready to buy. By renting, you can also have a first-hand feel of the area, before deciding if you want to live there eventually.

This was what I did – I bought my first home, a resale five-room flat in Bukit Merah, after renting a smaller flat in the same neighbourhood for two years.

AIM TO USE ALL CASH FOR MORTGAGE

It can be tough for young families to avoid having to use CPF for their homes. Even when they do, they should set a target to slowly reduce the outlay from their CPF annually, if not more often.

For instance, when they get a pay hike, they should dial back on the use of CPF; you can adjust your CPF monthly payments for housing loans easily by logging on to the myCPF portal.

Indeed, it is a good time now to consider reducing your CPF outlay – with mortgage rates falling below 1.5 per cent, it does not make sense to use CPF, which earns 2.5 per cent.

So if you can afford to direct more cash to your loan, do so because a dollar that is saved in your CPF today will translate into a lot more money for your retirement later.

REDEEM AND CUT SHORT YOUR HOUSING LOAN

Unless you are the type who watches over every penny you spend, you may not realise that a big chunk of the monthly mortgage payment actually goes to paying off the interest and not the principal loan amount.

This means that quite often the amount you pay for the interest can exceed what goes into clearing the loan.

This is especially so for borrowers who want to reduce the quantum monthly repayments by stretching the loan period to 30 years.

Again, while this may be necessary in the beginning, you should not lose sight of the loan and treat it as a necessary expense.

Don’t squander your money on paying tens of thousands if not more just on mortgage interest.

Some families do this – they can end up having a substantial cash saving in fixed deposits, which earn a lower interest rate, while still paying off the housing loan.

A prudent way would be to set aside a comfortable sum for emergencies and then use the rest to redeem the loan with gradual lump-sum payments.

If you are disciplined in doing this, you can pay off your loan quicker and allow your CPF to start growing as well.

REFUND YOUR HOME LOAN TO CPF

If you have paid off your home loan, you should consider using spare cash to refund the sum that you had withdrawn earlier from CPF. This will ensure that you can hit the highest retirement sum that guarantees decent monthly payouts for life.

Even if you have amassed a good balance, it still pays to refund the money because it will earn 2.5 per cent interest.

Finally, all the money in your CPF is yours, not the Government’s – if you choose to deplete it, you better make sure you have other savings to tide you through old age.

The saying that “you reap what you sow” applies aptly to your CPF too.

So make sure it stays as healthy as your own health.

“Source:[Cutting down the use of CPF for properties] © Singapore Press Holdings Limited. Permission required for reproduction”

Leave a Reply

Your email address will not be published. Required fields are marked *