Most Singaporeans pay their home loans via their CPF Ordinary Account (CPF OA). However, some choose to service their loan in cash instead.

And no – it’s not a case of having too much money! There is in fact a reason for choosing to use cash. It can provide some advantages to the disciplined home buyer:

When is cash used, and when is CPF used, when buying a home?

To begin, let’s understand what you can pay through CPF, when buying a home:

• The down payment on your home*
• Stamp duties such as Buyers Stamp Duty and Additional Buyers Stamp Duty
• Conveyancing / legal fees can sometimes be paid through CPF (always if using HDB’s lawyers. Otherwise, it depends on the law firm you use)
• Home Protection Scheme (HPS), mortgage insurance which is required for HDB properties
• The monthly home loan repayment (you can always use CPF to pay for your home loan, regardless of whether the property is HDB or private)

*HDB loans finance up to 90 per cent of your property; the remaining 10 per cent can be paid in cash or CPF.

Bank loans finance up to 75 per cent of your property; another 20 per cent can be paid in cash or CPF. An absolute minimum of five per cent must be paid in cash for bank loans.

How much CPF can you use to pay for your house?

You can use up to the CPF Withdrawal Limit – this is set at 120 per cent of your Valuation Limit (VL). Your VL is the lower of your property price or valuation.

E.g. If your flat price is $430,000, and the official valuation is $420,000, you can use up to $504,000 from your CPF (120 per cent of $420,000).

Note that it’s quite possible to end up paying 120 per cent or more of your home value, due to factors like stamp duties (particularly if you incur ABSD from buying a second property), and the compounding interest rate from your home loan. Most people don’t reach the Withdrawal Limit, but it does happen from time to time.

Why would I ever choose to use cash instead of CPF?

Now that you understand how the CPF is used, here’s why some home buyers like to use cash:

• They want to avoid the risk of negative cash proceeds
• The buyers are relying on CPF as a primary retirement tool
• They may not have regular CPF contributions

1. They want to avoid the risk of negative cash proceeds

Whatever you use from CPF, you need to pay back when you sell your house. This is inclusive of the 2.5 per cent compounding interest, which you would have earned from CPF.

(This is to prevent people from indirectly withdrawing their CPF money, by buying a house with CPF and then selling it for cash).

Sometimes, if the sale amount is not particularly high, it can result in negative cash proceeds. For example:

Say you buy a flat for $450,000, and have been paying for your flat for 15 years before you sell.

By this point, you would have used roughly $375,000 from your CPF (this includes the initial down payment, and 15 years of loan repayments at 2.6 per cent interest per annum).

You then sell the flat, but the market is in a down cycle when you do so; you only manage to get $520,000 for your flat.

But the amount that you must return to CPF is not just $375,000 – you must also return the interest that would have accrued at 2.5 per cent per annum. In total, you would have to return roughly $540,000, more than you’re getting from the sales proceeds of the flat.

This is the what is known as negative cash proceeds.

(If you’re worried about this kind of situation, I advise you to be careful in how you pick your home; particularly if your first property will be a resale flat. It’s also important to have holding power, so you’re not pressured to sell at a bad time. Drop me a message about the property you’re interested in buying or selling, and I can help you work out the risks).

Note that you do not have to top up the difference. If you need to pay back $540,000 into your CPF, but only receive $520,000 from the flat, you will only need to pay back $520,000 (subject to policy changes). But that’s where the good news ends.

Negative cash proceeds might put an end to your aspirations of upgrading to, say, an Executive Condominium. Without cash in hand, for example, you may struggle to pay the required the minimum five per cent down payment (e.g. if your EC is $800,000, the minimum cash down payment is $40,000).

As such, some buyers prefer to use cash – when they sell their flat, they will get almost the entirety of their proceeds in their pocket. This leaves them with a lot of flexibility for their next purchase.

2. The buyers are relying on CPF as a primary retirement tool

The good thing about CPF is that it provides an absolute return. Whether the economy is good or bad, you will get 2.5 per cent in your CPF OA, and four per cent in your CPF Special Account (CPF SA). This is guaranteed by the government.

As such, some home buyers want to rely primarily on their CPF for retirement, instead of products like annuities, endowments, etc.

This group of buyers choose to use cash so that their CPF can continue to generate the guaranteed interest. Some of these buyers may even transfer their CPF OA into their CPF SA, to get a higher guaranteed return of four per cent (visit the CPF website to see how to do this).

The flipside, however, is that they must have the discipline to pay for their homes primarily in cash.

3. They may not have regular CPF contributions

Some home buyers are self-employed business owners or contract workers. They may have other retirement tools besides CPF, and hence contribute only the required minimum to their CPF Medisave account.

These buyers don’t have much in their CPF OA to speak of, and hence have to use cash.

As an aside, I find that buyers who pay in cash tend to be more prudent and informed on their home loans

When you pay cash every month, you tend to be more aware of how much your home loan is costing you.

Home owners who pay cash feel the pinch every month. They’re often the ones who bother to refinance and keep costs low, hunt around for the lowest rates, and generally save a lot more money.

This is not to say people who use their CPF are always less prudent; but as a whole they tend to be less attentive. This can sometimes be devastating: imagine if you don’t notice you’re reaching CPF withdrawal limit, and one day you get a letter saying you now need to pay a few thousand a month in cash. Would you be prepared for such an event?

Please stay aware of your loan repayments, even if you use CPF.

So is it a good idea to pay cash for your home, and let your CPF accumulate for retirement?

It is not inherently right or wrong to do so. It depends on two main factors:

First, is CPF a big part of your overall retirement plan? If it is, then it might be prudent to use as little of your CPF as possible, and let it accumulate.

The more you have in CPF, the more comfortable your twilight years can be. Speak to a financial planner for specifics here, such as how much you need to accumulate to meet your goals.

Second, it’s an issue of cashflow. If you’re self-employed and don’t have regular income, or your income level is not high, then it’s probably best to just use your CPF.

The worst thing you can do is pay cash for your home loan, find out you lack money for emergencies, and then start using credit cards or personal loans.

If you’re still uncertain on the best way to afford your home loan, don’t hesitate to contact me directly. I can provide you with the optimal approach, by understanding your specific situation.

Ron Chong is a leading property agent with Orange Tee & Tie, and had a previous background in construction and Interior Design. His background gives him a wider breadth of experience in dealing with Singapore properties, and he aims to provide practical, actionable advice to buyers and sellers today. Like him on Facebook for the latest news and updates.