Using CPF or Cash to pay for your HDB?
My first post will be on something that Singaporeans feel very strongly about, whether against or for it. What's that? Of course i'm talking about CPF! I will talk more today about the choice of using Cash or CPF to pay for your first HDB flat.
Before I begin, I would like to say that I understand CPF monies are yours and you have the right to spend it however you like. But, especially in Singapore with high costs of living, you have to put some thought to support your future self, and any money taken out of your CPF will be done so at your own expense in retirement with huge opportunity costs.
WHY ARE MAJORITY OF SINGAPOREANS USING CPF TO PAY THEIR HDB MORTGAGE?
Something that concerns me is that a vast majority of Singaporeans are using their CPF monies to pay for their HDB flat mortgage. I think that a huge reason why Singaporeans do that is due to the negative perception that people have towards CPF. "Aiya CPF money can't take out one la!" is a commonly heard statement. The other reason, I think, is the lack of discipline and long-term planning among Singaporeans. "YOLO la!" is a mindset that can contribute to financial destruction of oneself.
OPPORTUNITY COST OF USING YOUR CPF TO PAY YOUR HDB MORTGAGE
Your CPF-OA will grow at a rate of 2.5% per year. Transferring your CPF-OA funds to your CPF-SA will give you an additional 1.5% in interest.
After 30 years, at a 2.5% compounding interest rate, a $100,000 capital left in your CPF-OA will grow to $209,757. For CPF-SA, after 30 years you will have $324,340. That is an extra $109,757 for your CPF-OA, and $224,340 for your CPF-SA. Had you choose to pay your HDB mortgage using your CPF, you are basically losing out on the potential for the growth of your monies (opportunity cost).
Granted, many people say that they can utilize the extra cash on hand to invest and get greater than 4% returns that the CPF-SA has. If you can consistently achieve that and have the intention to invest the extra cash, by all means go for it. But, more often a time we see Singaporeans either leaving the extra cash in their bank (rotting away), or spending the money on lavish vacations or new cars. So, you need to ask yourself, am I putting my money to better use if I use my CPF to pay for my HDB mortgage? Even if you think you can better grow your money with your investments, I would like to remind you that the CPF is guaranteed by the Singapore Government, which is AAA rated. Also, guaranteed interest rates? Sign me up!
How I see it, I consider my CPF monies to be the bedrock of my investment portfolio, and I use the other spare cash that I have to invest in high yielding investments for better returns. We have been in a Bull Market for the past decade, so many investors have become complacent to the point where they think that they are infallible. When the market eventually crashes, and it will, these people will be in for a rude shock. Should I lose the entirety of my investment portfolio, at least I still have CPF giving me guaranteed interests rates, even in a Bear market.
BUT I CAN DO BETTER THAN CPF
Granted, many people say that they can utilize the extra cash on hand to invest and get greater than 4% returns that the CPF-SA has. If you can consistently achieve that and have the intention to invest the extra cash, by all means go for it. But, more often a time we see Singaporeans either leaving the extra cash in their bank (rotting away), or spending the money on lavish vacations or new cars. So, you need to ask yourself, am I putting my money to better use if I use my CPF to pay for my HDB mortgage? Even if you think you can better grow your money with your investments, I would like to remind you that the CPF is guaranteed by the Singapore Government, which is AAA rated. Also, guaranteed interest rates? Sign me up!
How I see it, I consider my CPF monies to be the bedrock of my investment portfolio, and I use the other spare cash that I have to invest in high yielding investments for better returns. We have been in a Bull Market for the past decade, so many investors have become complacent to the point where they think that they are infallible. When the market eventually crashes, and it will, these people will be in for a rude shock. Should I lose the entirety of my investment portfolio, at least I still have CPF giving me guaranteed interests rates, even in a Bear market.
CAN YOU AFFORD TO DO SO?
The thing about using cash to pay your HDB mortgage is that you are forking out money from your own income. So, if after working out your monthly expenditure and you do not have sufficient spare cash as a household to finance your monthly HDB mortgage, then it would make sense to use your CPF to pay your mortgage. You might even consider a combination of cash and CPF for your monthly mortgage.
Assuming you buy a 4-room HDB flat for $400,000, over 25 years, that works out to a monthly mortgage of $1815. That means $908 each for the couple. I would think that it is reasonable to say that most couples are able to have sufficient spare cash to afford this mortgage. If not, you need to ask yourself, am I ready to purchase a house? Am I overextending by buying a 4-room flat instead of a 3-room flat? Am I spending too much on frivolous things? These are the hard questions that you need to evaluate before you take that plunge.
CONCLUDING THOUGHTS
Not to sugar coat things, Singapore is an inherently expensive place to live in. This is something every Singaporean needs to accept. Therefore, we cannot afford to be complacent in our financial decisions. Just because the majority of us are doing it, does not mean that it is the most wise thing to do. What is CPF to Singaporeans? It's a financial tool to help you in your retirement. But if you don't subscribe to what it stands for, then it won't work for you.
Really, the magic of CPF stands in its compounding interest, which takes time. If you took all your CPF money out, there can't be a tree at age 55 when you didn't plant the seeds.
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