You will be able to explain what using CPF for housing costs your retirement savings.
Daniel's father paid for his flat almost entirely from CPF, and he often says it was the best decision he made: the home was paid off and he barely noticed the money going. What he mentions less is that when he turned 55, his retirement savings were thinner than his friends', and that when he sold the flat to downsize, much of the sale money went straight back into CPF instead of into his bank account.
Neither of those is a mistake. They are the two sides of using CPF for a home, and this lesson is about seeing both before you decide how much to use.
When you pay for a home from your Ordinary Account, the money leaves the account. From that day, it stops earning CPF interest. The Ordinary Account pays interest at a rate set by CPF Board, so every dollar used for housing gives up the interest it would have earned in the account for the rest of your working life.
CPF Board keeps a record of the amount you used, along with the interest it would have earned had it stayed in your account. That interest is called accrued interest. The Singapore personal finance system, lesson 5.2, What CPF can and cannot be used for, introduced it.
When you sell the property, you must refund to your CPF account the amount you used for it plus the accrued interest, from the sale proceeds. The money goes back into your CPF, where it can be used for your next home or stays for retirement. It doesn't come to you as cash.
Here are Mei and Daniel's figures from lesson 4.2, Which parts must be cash and which CPF can pay, with an interest rate made up for the example. Check the current Ordinary Account rate on the CPF Board website. This example uses 2.5% a year and, to keep the arithmetic simple, adds it once a year.
They plan to use S$85,000 of CPF for the downpayment and the fees. Suppose they sell the flat ten years later. The amount to refund is S$85,000 grown at 2.5% a year for ten years, which is about S$108,807. About S$23,807 of that is accrued interest.
Accrued interest isn't a fee to anyone. It is the growth the money would have had in their own CPF accounts, and the refund puts it back there. But it does mean that, of the sale proceeds, about S$108,807 goes to CPF before anything reaches them in cash. A couple who expects the sale to fund the next home's cash downpayment, or a renovation, needs to know that number in advance.
If the loan instalments are also paid from CPF, those amounts and their accrued interest are added to the refund as well. Over a long loan, that can become the largest part of what goes back.
Using more cash and less CPF keeps more in your Ordinary Account, earning interest towards retirement. Using more CPF and less cash leaves you more cash on hand for other goals and emergencies.
As an example, suppose Mei and Daniel paid S$10,000 more of the downpayment in cash and S$10,000 less from CPF. That S$10,000 would stay in their Ordinary Accounts. At the example rate of 2.5% a year, left for 25 years until they are in their mid-fifties, it would grow to about S$18,539.
What does it cost them? S$10,000 of cash, at the moment they also need S$32,000 for the option fee, renovation and furniture. That might come out of the emergency fund, delay the car or the diploma, or push the home date back. How money works lesson 7.1, Every dollar spent is a dollar not doing something else, is about exactly this kind of choice.
Neither answer is right for everyone. A couple with a strong cash position, an emergency fund in place and other goals funded might choose to use more cash. A couple stretched across several goals, like Mei and Daniel, will usually lean on CPF for the downpayment and keep cash for the things CPF can't pay. What matters is that they choose, and write down why.
Log in to the CPF website with Singpass and look at three things: your Ordinary Account balance today, your monthly contributions to it, and, if you have used CPF for a property before, the amount used and accrued interest so far. These are your real figures, and the planning in lesson 4.4 uses them.
Then think about how much of the CPF portion from lesson 4.2 you want to use, and how much you would rather leave in the account. You don't have to leave anything there, and whatever you do leave has to be replaced by cash you save.
The rules on CPF usage, loan tenure, and how much to repay in cash or CPF over the life of the loan are taught in Property & Mortgages. This course stays with the savings plan. For the activity, you will write down the two numbers that come out of this lesson for your own case.
Check your Ordinary Account balance and write down how much CPF you would use and how much you would keep.
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