There are times when not using CPF money for your flat is not an option. For example if you are taking a home loan from HDB, you must first use all the money in your CPF Ordinary Account (OA).
Other times, many people still use their CPF to pay for their property without much thought, as it's a common perception that one cannot really withdraw CPF monies in one go, even at retirement.
Putting aside cases where one does not have much choice in the matter, there are only 2 scenarios where it makes financial sense to utilise CPF for your residential property.
If you will never sell your property, tap on your CPF when
Loan Interest Rate > CPF OA Rate
Based on today's CPF OA interest rate of 2.5% - 3.5%, it will make sense to use CPF to reduce your loan when the loan interest rate is going to be consistently higher. Simplistically, if the loan interest rate is higher than 3.5%, just use everything from your OA to reduce your housing loan. If the loan interest rate is 3%, keep $20,000 in your OA (as you get 3.5% for this) and use the rest.
Why not just use CPF funds regardless since it cannot used for anything else anyway? Because we can still use CPF subsequently, after earning more interest.
If you sell your property down the road, the benchmark shoots up. CPF should be utilised when
Loan Interest Rate > 2 x CPF OA Rate
Even if the loan rate is slightly higher than the CPF OA rate, you will only save if you never sell your property. If you do sell, you will have to pay back any CPF utilised, inclusive of accrued interest. i.e. Instead of getting interest from the Government on money that would have been in your OA, you will have to pay back the interest from your sales proceeds. The benchmark is hence double the CPF OA rate.
The compound effect of interest rates can be significant. Accrued interest for $50,000 at 2.5% per annum over 10 years is more than $10,000.
Do be prudent with your CPF. We can still withdraw a sizeable sum when we turn 55!
This article is contributed by blogger Goh Eck Hong from www.myhousingloan.com.sg