The Singapore property market is in a buoyant mood, mirroring real estate markets around the world. Buyers were out in full force after the Chinese New Year holidays, mainly in anticipation of an economic recovery. With the COVID-19 vaccination exercise rolled out, many people are hoping that things will return to the normal pre-COVID days.
Singapore property prices went up 4 straight quarters as of Q1 2021 and sales of new private homes for the month of March 2021 were the highest since 2017. With so many entering the property market, it begs the question – is it wise to use your CPF funds to buy property in Singapore. Buying a home may be one of the largest financial commitments you will make, and many of us would have to make use of our CPF savings to finance it. In today’s article, we will look at the pros and cons of using CPF for property investment.
Pros of using CPF
When buying a property, most of us will not have the cash in hand to pay for the downpayment of the property. That where the CPF funds will come in handy, using CPF funds for the downpayment allows us to have more cash to use for other expenses now. As we are not allowed to withdraw our CPF savings until we reach the age of 55, using CPF monies to invest in property seems like a no-brainer. It is definitely better to be able to use the 20% CPF contribution from our monthly salary to pay for the monthly housing loan, leaving the remaining 80% of our monthly income for other essential expenses such as the children’s education, renovation and other investments. Even though we are using CPF monies to pay for our property investment, please take note that CPF savings cannot be used to pay for the purchase price that is above market valuation for resale properties; the minimum cash down payment for taking bank loans; the cost of renovation; and the agent’s commission.
If you are a business owner, the cash in hand would be very useful for expansion or if you are thinking of starting a business, the extra cash will come in handy. You can use the extra cash to grow your investments and secure your future financially. Instead of having your monies tied up until age 55, you can actually be increasing your wealth.
Cons of using CPF
Using CPF to buy a property could result in a smaller retirement fund. Monies put inside CPF is earning a guaranteed interest of 2.5% per annum in the Ordinary Account (OA), 4.0% per annum on the Special Account (SA) and Medisave Account. In today’s record low-interest environment, that’s a very good opportunity to grow your retirement fund.
To enhance our retirement savings, the Government is paying an extra interest of 1% on the first $60,000 of our balances (capped at $20,000 for OA). The more you use for your property, the less you may have for your retirement. While you may use all your OA savings to pay for your property, you should consider retaining some savings in your OA. These savings can help with future mortgage payments in times of emergency, and if left unused can grow at attractive interest rates to better prepare you for retirement.
It is difficult to find a comparable risk-free investment that yields higher than the CPF OA’s 2.5% per annum. Finding an investment that yields higher than CPF SA’s 4% per annum without a significant increase in risk is almost impossible.
Another reason why you shouldn’t use your CPF savings to buy a property is that you can deplete your OA to the point of reaching the CPF withdrawal limit without even realizing it. When paying off the monthly housing loan installments using CPF OA funds, there is a possibility that you may not know how much money is left in the OA. In the unfortunate situation, if you are affected by an economic downturn and not able to find employment, you may find yourself in a situation where you barely have enough to service your next monthly mortgage installment. This could lead to late payments, which in turn will result in penalties, or worse, your home might get foreclosed if you default on repaying your housing loan.
While it is all well and good that you are paying for the property using CPF funds, take note that you need to refund to your CPF account, the accrued interest upon sale of the property. Accrued interest is the interest that your CPF monies would have earned if they were left in the CPF account and not withdrawn. This is the way CPF safeguards your retirement by ensuring that CPF monies that would have been compounding in your CPF account are returned and set aside for your retirement.
So, even though you sold off the property at a much higher price, do take note that you have to return the monies withdrawn for the property purchase plus the accrued interest. What is worse is when you have a situation when you have to sell off the property at a price that is lower than the purchase price. Then, you will have to top-up the shortfall in the CPF refund of principal and accrued interest in cash, even when you are making a loss on the sale.
In the end, if you use all your CPF for housing, there would be little left for your retirement unless you right-size when the timing presents itself or you have other contingencies like cash savings, endowment plans etc.
If you are an active investor, the gains may or may not be better than the interest rates that the CPF board is paying. Keep in mind that the CPF scheme was introduced by the government with the aim of providing a sufficient retirement nest egg for all Singaporeans, and also to ensure that every citizen should have enough money for their housing needs, healthcare and their children’s education.
Ultimately the CPF OA is intended to help fund home purchases, so there will always be those who are for it and those who are not. After all monies in the CPF accounts are our hard-earned money and you should do your due diligence before deciding on whether to withdraw it for the purpose of investing in real estate. Importantly if you choose to do so, you have to mindful not to hit the CPF withdrawal limit.