Thursday, October 5, 2017

Should Home Buyers Use Up Their CPFOA Completely Before Taking A HDB Loan?

One common question many Singaporeans would ask whenever they are taking up a HDB loan for their flats is whether or not they should let HDB used up their CPF Ordinary Account (CPFOA).
In case you don’t already know, let us first explain.
When you buy a HDB flat, new or resale, you have the option of taking a HDB loan. Interest rate for the loan is 2.6%.
There are some conditions to taking a HDB loan. You can find them all here on the HDB website. Most of them have to do with your age, income and whether or not you are deemed eligible.
One area worth thinking about is whether or not you should allow HDB to used up your CPFOA before they grant you a HDB loan.

Technically, you don’t have a choice. The above statement clearly stats that homebuyers have to use all their CPFOA monies for the purchase of a flat before a housing loan from HDB will be granted to them for the remaining amount they need.
For example, if a HDB flat costs $300,000 with a downpayment of $30,000 already made, homebuyers would need a remaining $270,000 loan. If homeowners have a combined $60,000 in their CPFOA, it will be used to pay down the balance of the flat first, before HDB loans them the remaining $210,000.
I Am Assuming I Have A Choice?
That’s right. You have some options but they are not immediately obvious. That is to say, you won’t find them being discussed on the HDB or CPF website.
If you were familiar with CPF, then you would already know that CPF members are able to invest any amount above $20,000 in their CPFOA. For example, if you have $60,000 in your CPFOA today, you can invest up to $40,000. Investments can be made in stocks, unit trusts, ETFs, investment plans offered by insurance companies and even Singapore Government Bonds.
The trick here is that if you were to invest in some of these instruments before you take a HDB loan, HDB will not request for you to liquidate your investment holdings when granting you a HDB loan. They will give you a loan based on how much you need after your CPFOA has been used up, regardless of whether or not CPFOA monies have been used for investment purposes.
If you were to liquidate your investments after the loan has been given, the investment would be returned to your CPFOA. HDB will not crawl back the loan they have given just because you suddenly have an injection of fresh cash in your CPFOA.
In case you still don’t understand. Here are two simple scenarios.

Scenario 1:

Alex needs a housing loan of $300,000. He has $60,000 in his CPFOA. He will be expected to use the $60,000 in his CPFOA first before HDB loans him the remaining $240,000 he needs.

Scenario 2:

Ben needs a housing loan of $300,000. He has $60,000 in his CPFOA. He invests $40,000 in Singapore Government Bonds. As such, he only has $20,000 left in his CPFOA now. He is expected to use the $20,000 in his CPFOA before HDB loans him the remaining $280,000 he needs.
If he liquidates the Singapore Government Bonds holdings after that. The $40,000 will be returned to his CPFOA.
What Are The Considerations?
While the use of CPFOA would reduce the housing loan and monthly mortgage that homeowners would need to pay, some people may prefer holding on to extra cash balance in their CPFOA. This gives them greater future flexibility in the short term in being able to utilise the balance in their CPFOA for mortgage repayment.
For example, if a homeowner intends to take a break from work for one year, having some balance in his CPFOA can help him cover the mortgage during this period of time.
Most Singaporeans would generally just allow their CPFOA to be fully used before taking a HDB loan. However, if there are unique circumstances (e.g. intention to go for further studies, quitting your job soon) that make it beneficial for you to hold on to some extra CPFOA cash balance, then you should think about whether the alternative of “parking” some CPFOA money away via an investment would make financial planning sense for you.