Pay down housing loan with CPF

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Pay down housing loan with CPF

Thinking of using your CPF to pay down your housing loan? Some mortgage advisors will suggest doing it when the prevailing housing interest rate is more than 2.5% p.a. Is this correct? Before we answer the question, let’s look at the interest rates in details.

CPF Interest Rates

For ordinary account (OA), CPF members will receive a market-related interest rate.

Minimum interest rate is 2.5% p.a. The interest earned will be significant when it’s compounded over the years.

Assume a OA balance of S$20,000, with no additional contribution or withdrawal. The interest earned will be:

TimeInterest Earned
In 10 yearsS$5,602
In 20 yearsS$12,772

Housing Loan Rates

In Singapore, most of the housing loans rates are monthly rest and amortise over the repayment period.

Eg: Assume a loan of S$300,000 at 4% p.a over the entire repayment period.

TimeTotal Interest payable
In 10 yearsS$64,482
In 20 yearsS$136,306

Do the maths

Step 1: Calculate the interest you will earn if you keep the money in your OA.

The first step is to compute the interest that you will earn in your CPF account. To do the calculations, you can use any compound interest calculator available online. Alternatively you can use the Compound Interest Calculator at CPF website.

Step 2: Calculate the housing interest savings

To do this, you can make use of the interest calculator at your lender’s (eg: DBS or UOB) website.

Step 3: Compare

To decide if you should do the prepayment, just compare the interest earned against the interest payable. If its higher, then it may make sense to keep your money in the CPF OA.

Worked example:

Ryan is thinking of doing a partial payment on his HDB housing loan. He plans to use S$20,000 in his CPF ordinary account (OA) to do the payment. He has a balance of S$300,000 on his loan. The remaining loan tenure is 20 years.

Let’s assume that CPF OA interest rate is flat at 2.5% p.a and his housing interest rates is 4% p.a for the next 20 years.


(1) Interest earned from CPF: S$12,772
(2) Interest payable on S$300,000: $136,306

Interest payable on S$280,000*: S$127,219

Total Interest saved: S$136,306 – S$127,219

= S$9,087

*after S$20,000 partial prepayment

In this example, it seems that even if his housing interest rate is higher than CPF OA, Ryan is better off keeping his money in his CPF OA. His S$20,000 will earn more interest than the interest it will help to save.

One last thing, Accrued Interest

Accrued interest is the amount that CPF members would otherwise have earned had they not withdrawn their CPF savings for their housing repayment. The interest is computed on the principal amount withdrawn for housing on a monthly basis (at the prevailing CPF Ordinary Account interest rate) and compounded yearly.

Because accrued interest is compounded yearly, the earlier you use your CPF to fund your property, you more you need to put back into your CPF account when you sell your property. So you need to decide if you want to earn interest from CPF or you prefer to top it back from your property sale.

Whats next?

Remember CPF is a form of retirement savings. While its good to pay down your mortgage. The more money you spend on housing, the less you will have for retirement. Secondly there is also accrued interest.

As mentioned in one of Dr Money (Dr Larry Haverkamp) articles to The New Paper, “It (HDB home loan) is too good to pay off all at once. Enjoy the low rates while you can. This is especially true if you have other debts that cost more than 2.6 per cent OR investment opportunities that pay more than 2.6 per cent.

In addition, your HDB loan is a type of insurance. If you hit hard times – like losing your job – your CPF money could dry up. Then, it would be good to have something in reserve. Paying down your home loan depletes that reserve.”

What happens if we invest the money

Previously in part 1 of the article, the assumption is that the money saved from a reduced monthly instalment is not reinvested.

So in option 1, at the end of 20 years, you own the flat and your $20,000 in CPF OA at 2.5% compounded will grow to $32,772. The money saved from reduced monthly payment is $29,087 ($121×240 months, earning nil interest).

Therefore its suggested that Ryan continue to service using his CPF and keep extra lumpsum intact in CPF.

Lets continue with our example and examine the cash flow.

In option 1, Ryan will continue to service his entire loan payment from CPF OA. The extra $20,000 will stay intact in his CPF OA earning him 2.5% p.a for the next 20 years.

At the end of 20 yrs, Ryan will pay off his housing loan and the $20,000 would be about $32,772.

In option 2, Ryan will prepay $20,000 from his CPF. As a result, the new monthly instalment will be $1,696. This means he saved $121 per month. Assuming all the monthly surplus are kept in his CPF OA earning him 2.5% p.a. ie reinvested in CPF OA.

At the end of 20 years, his CPF will be $37,688.

In this case, it would seem that Ryan is better off doing a prepayment since his CPF is going to grow faster. The difference of 1.5% p.a over 20 years has increased his CPF by $4,916 on a $20,000 prepayment.

But what about accrued interest? Since he is using his CPF to service the entire loan, the accrued interest would be $129,027 in option 1 and $133,198 in option 2. (including the accrued incurred by the lumpsum of $20,000).

If we take accrued interest and CPF at end of tenure (Net position) into consideration, Ryan is also better off doing a prepayment.

Note, compared to option 1, the difference in net position is a mere $746.11 even though we are comparing a bank loan of 4% p.a

(To calculate accrued interest, you can use the FV function in excel)


What happens if we change the tenure 10 years?

CPF 10-yrs


Assuming we only change the tenure from 20 years to 10 years. Bank interest remains at 4% p.a and CPF OA is 2.5% p.a

If we consider accrued interest and CPF at end of tenure (Net position), then it looks like option 1 is better AT the 10 year mark.


What happens if we change the bank interest to 3% p.a?

CPF 3-percent


Assuming we only change the bank interest to 3% p.a and tenure remains at 20 years. CPF OA is 2.5% p.a

Again if we consider accrued interest and CPF at end of tenure (Net position), then it looks like option 1 is better AT the 20 year mark. Which is different to our first scenario. But if we consider only the balance in CPF, then option 2 looks better.

Article contributed by Lee@PPS

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