You will be able to compare paying a home loan from CPF with paying it from cash.
At the HDB appointment, the officer asked Kelvin and Mei how they wanted to pay their monthly instalment. Kelvin said CPF, because that's what everyone does. Mei asked whether they could pay part of it in cash, and the officer said yes. They looked at each other and realised neither of them knew which was better.
There isn't one right answer. But there is a clear way to think about it, and it starts with what each choice does to your money.
Paying the instalment from your OA keeps your cash free. Your take-home pay is untouched, so you can build your emergency fund, pay for the renovation and save for other goals. For a young couple with a new flat, that is a big advantage.
The cost is on the CPF side. Every instalment taken from your OA stops earning CPF interest, and every dollar of it adds to the refund you owe when you sell, with accrued interest on top, as lesson 2.3 showed. If you never sell, the money spent on the home is simply not in your OA when you reach 55, which can leave less to move into your Retirement Account.
Paying in cash does the reverse. Your OA keeps growing at the guaranteed CPF rate, and there is less to refund on a sale. The cost is that the cash is gone from your bank account. Money that could have gone to a buffer, a goal or your own investments is now inside the flat.
Here is the comparison with made-up figures. Kelvin and Mei's instalment is S$1,800 a month in total. In plan A they pay all of it from CPF. In plan B they pay S$1,000 from CPF and S$800 in cash. Both plans use an example OA rate of 3%, not the current rate, and the model adds a year's interest at a time.
After ten years, plan B has cost them S$800 times 12 times 10, which is S$96,000 in cash. In return, their OAs hold about S$110,053 more than in plan A: the S$96,000 they didn't withdraw, plus about S$14,053 of interest on it. If they sold the flat then, plan B's CPF refund would be smaller by the same S$110,053, so more of the sale price would come back to them as cash.
Put plainly, paying S$800 a month in cash works like lending that cash to yourself at the OA rate, repaid when you sell. You give up access to the money for as long as you own the flat. You get the CPF rate on it, with no market risk.
That makes the decision a comparison you can actually make. Would you rather have the cash now, for a buffer, a goal or investments that might beat the OA rate? Or would you rather lock it away at the OA rate until a sale, or until 55 if you never sell?
Three things matter more than the interest rate.
Your buffer comes first. If paying cash would leave you without an emergency fund, pay from CPF until the fund is built. The guaranteed interest is not worth being one bad month away from borrowing on a credit card.
Your cash goals are next. A wedding, a renovation or a child in the next few years all need cash, and CPF can't pay for them. Paying the instalment from CPF while those goals are funded is often the sensible order.
Job security is the third, and it cuts in an unexpected direction. Your OA is refilled by contributions only while you are employed. If you lose your job, the OA balance has to carry the instalments on its own, and when it runs out, you pay in cash anyway. Some owners keep a reserve of several months' instalments in their OA for exactly this reason. Paying part in cash while working builds that reserve.
You don't have to choose once. Paying part of the instalment in cash is allowed, and you can change the split later through your lender and the CPF Board. Many people pay fully from CPF in the early years, while the renovation and wedding bills are fresh, and shift part of the instalment to cash once their buffer and goals are in place.
Kelvin and Mei chose to pay fully from CPF for the first two years, then move S$500 a month to cash once their emergency fund reached six months of expenses. They wrote the date in their calendar. Paying from CPF or cash is also discussed from the loan side in Property & Mortgages: buy a home and manage the loan, lesson 5.4, Loan tenure, and paying from cash or CPF.
Write down the monthly instalment you pay or expect to pay. Then decide how you would split it between CPF and cash today, and the one reason that matters most to you.
Write the monthly instalment you pay or expect to pay, and how you would split it between CPF and cash, with one reason.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).