This article delves into the intricate relationship between CPF accrued interest and property ownership in Singapore, shedding light on its implications for homeowners in the context of HDB flats and private properties. We will also explore the dynamics of CPF, how to calculate accrued interest and its impact on the financial well-being of property owners.
Understanding CPF and Accrued Interest
CPF is a comprehensive social security system in Singapore designed to help Singaporeans save for their retirement, medical, and housing. A significant portion of a Singaporean’s monthly income is allocated to the CPF, with employers also contributing. The CPF consists of three accounts: the Ordinary Account (OA), Special Account (SA), and Medisave Account (MA).
i. Ordinary Account (OA): caters to housing, allowing Singaporeans to use their CPF savings for housing-related expenses like mortgage payments, insurance premiums, and property maintenance.
ii. Special Account (SA): focuses on long-term financial security, including retirement planning and investment in approved financial instruments.
iii. Medisave Account (MA): reserved for healthcare expenses, such as medical insurance and hospitalisation.
The Retirement Account (RA) is automatically opened at age 55 and combines the funds from the OA and SA.
One of the main features of CPF accounts is the CPF accrued interest. It is the interest accumulated on the amount withdrawn from the CPF OA savings. CPF members can use their OA savings to finance property purchases.
Remember: when you use CPF funds for housing, you borrow from your future retirement funds. The government pays you a competitive interest rate on your CPF savings, and when you withdraw them for property purchases, you’re effectively forgoing the potential returns you could have earned.
In other words, CPF accrued interest is the interest you would have earned if your CPF savings had not been withdrawn for your property purchases.
As you withdraw these CPF funds, they start accumulating CPF accrued interest. The interest is based on the prevailing interest rate for the specific CPF account from which the funds were withdrawn (e.g., OA for property).
CPF interest rates play a pivotal role in determining the rate at which accrued interest accumulates. These rates can vary between the OA, SA, and MA, which can, in turn, affect the overall cost of property ownership.
From 1 October 2023 to 31 December 2023, the CPF interest rate set by the government for CPF OA is 2.5% p.a.
What happens to CPF accrued interest?
While using your CPF savings to finance your home may seem like a good idea at the time, it’s important to remember that you’ll need to pay back the funds with interest when you eventually sell your property.
When you utilise funds from your CPF OA to pay for a house in Singapore, you have to refund the principal amount withdrawn, plus the accrued interest when you sell the property.
The longer the duration between your purchase and sale date, the more accrued interest you’d have to refund back into your CPF OA on selling your property.
If you plan to retain your home without ever selling, there is no requirement to repay the accrued interest.
Note that the CPF accrued interest is accumulated annually and compounded monthly from the time funds are taken out from the CPF until the property is sold. Over the years, the interest can accumulate to a significant amount, especially when it is allowed to grow untouched.
Suppose you decide to buy a property in Singapore worth $1 million. To facilitate the purchase, you utilise $200,000 from your CPF funds while the remaining balance is covered through cash and a mortgage. Fast forward five years when you opt to sell the property. During this period, CPF accrued interest has been at play, accumulating on the $200,000 withdrawn from your CPF.
Formula to calculate CPF accrued interest:
Accrued Interest = [Principal Amount] x [Interest Rate] / 12 x [Number of Months]
We can calculate the accrued interest:
Accrued Interest = $200,000 × 0.025 / 12 × 60 = $26,281.64
So, after five years of property ownership, $26,281.64 (representing the accrued interest on the $200,000 CPF withdrawal) must be returned to your CPF accounts from the sale proceeds. This deduction impacts the final amount available for your utilisation, whether for retirement purposes or future property investments.
Please note that you can use the amount you refund to CPF to finance your next home purchase. CPF refunding doesn’t mean you cannot reuse your CPF monies.
In addition to the principal amount and the accrued interest, you must also pay back the CPF grants received back to your CPF OA. Most of the grant money you put back into your CPF will go into your OA.
How can I pay back CPF accrued interest?
Your CPF funds are meant to fund your retirement, so the funds you take out from CPF to finance your house must be put back when you sell the property. You can repay CPF accrued interest in several ways:
Cash: You can pay in cash to the CPF Board to repay the accrued interest.
Sale of Property: When you sell your property, the accrued interest will be deducted from the sales proceeds before you receive the balance.
CPF Savings: If you have sufficient CPF OA savings and meet specific criteria, you can use your funds in OA to repay the accrued interest.
Paying back CPF accrued interest can be beneficial in the long run, as it preserves your retirement funds and reduces the financial impact of accrued interest. Whether you want to pay back CPF accrued interest depends on your financial situation, objectives, and risk tolerance. If you have the means and wish to maximise your retirement savings, you can choose to pay it back.
What if my sales proceed cannot cover the refund amount?
If you sell your property at a price below market value and the amount to be refunded, including interest, is greater than the cash proceeds, then you must return all the CPF funds used by default. Even if it requires you to pay cash and refund the option money to cover the shortfall.
However, if the cash proceed isn’t sufficient to cover the full CPF amount, no worries; you won’t have to make up the difference. You only need to top up a payment for the shortfall as long as the house is sold at or above market value.
How does CPF accrued interest affect HDB flat owners vs. private property owners?
Using CPF for HDB flat owners and CPF usage for condo owners function differently due to variations in interest rates, usage restrictions, impact on retirement savings, and others. Let’s look at the pointers below:
1. Interest Rates and Accumulation. HDB flat owners typically face lower accrued interest rates than private property owners. The government typically sets the interest rates for HDB owners lower, resulting in a slower accumulation of accrued interest over time.
On the other hand, CPF funds used for private property purchases accrue interest more rapidly, potentially reducing the amount available for retirement or other financial goals.
2. Usage of CPF Funds. HDB flat owners can use their CPF funds for various purposes related to their flats, including the down payment, monthly mortgage payments, and renovation costs. However, there are more restrictions on the use of CPF funds for private property purchases.
On the contrary, private property owners may still use their CPF funds for property-related expenses but are subject to more stringent rules. There are limits on the amount of CPF funds you can withdraw for private property purchases.
3. Impact on Retirement Savings. While HDB owners may have lower CPF accrued interest rates, they can potentially preserve more of their CPF savings for retirement, as their property purchases are subject to fewer restrictions. It can be advantageous for long-term financial planning.
For private property owners, a significant portion of their CPF savings may be tied up in accrued interest, especially if they have used CPF funds for multiple property purchases over the years. It can impact their retirement savings, potentially leaving them with less to rely on in their golden years.
4. Property Resale and Accrued Interest. When HDB flat owners decide to sell their flats, the accrued interest is capped at a certain amount, which means that even if it has grown significantly, the amount they have to return is limited.
Private property owners, in contrast, need to return the full amount of accrued interest that has accumulated on their CPF funds used for property purchases, which can become a significant financial obligation. It can impact the proceeds they receive from selling their properties.
5. Overall Impact on Property Transactions. While HDB owners may have more flexibility and fewer financial burdens when selling their flats, private property owners must consider the potential impact of significant accrued interest on their property sale proceeds.
These distinctions reflect the government’s efforts to maintain the affordability of public housing while applying stricter regulations to private property transactions.
Other ways CPF accrued interest affects property owners
When considering the purchase of a property using CPF funds, it’s essential to comprehend how this accrued interest can impact your finances:
Reduces Retirement Savings: When property owners use their CPF savings for housing, they divert funds from their retirement accounts. The accrued interest in CPF further reduces their retirement savings, as they are required to refund the full amount when they sell their property. It can result in inadequate retirement funds for those who rely heavily on CPF savings.
Overall Cost of Housing Loan: While you can use CPF funds for the down payment and monthly mortgage payments, the accrued interest adds to the overall cost of your property purchase. It can affect your financial planning and long-term financial security.
Impact on Property Investment: The accrued interest can affect the overall returns on property investments. Property owners must consider the property’s appreciation and the accrued interest when calculating their profits. It may influence their decisions when buying or selling property.
Potential Financial Strain: Paying CPF accrued interest back can become a financial burden, especially if the property owner can’t sell the property at a favourable price or doesn’t have sufficient funds set aside to cover the accrued interest. It may result in difficulties in meeting other financial obligations.
Limited Flexibility: The CPF accrued interest reduces the flexibility of property owners when using their CPF savings. While the CPF offers an attractive interest rate for savings, property owners may be hesitant to utilise their OA savings for fear of incurring accrued interest and jeopardising their retirement funds.
4 Possible Scenarios Where CPF Accrued Interest Impacts Your Earnings
Let’s explore four different scenarios to understand how accrued CPF interest can affect the earnings of property owners.
Scenario 1: Upgrading your home before turning 55
In this scenario, Darren and Amanda Tan, a couple in their mid-thirties, used their CPF savings to fund their first home.
As they decide to sell their flat to upgrade to a larger property, they realise that the proceeds from the sale won’t cover the total CPF principal amount used, which includes accrued interest. Consequently, their earnings from selling their first property effectively amount to zero.
The presence of CPF accrued interest in this scenario has a significant impact. When using CPF funds for the first property, the accrued interest gets added to the principal amount. If Mr and Mrs Tan had split the payment between cash and CPF, they might have retained more earnings, which they could return in cash.
This is because the accrued interest from CPF would be less, affecting their sales earnings to a lesser extent. Regardless, when dealing with CPF accrued interest, the final cash earnings from a property sale may not meet the initial expectations.
Individuals in such situations must calculate the accrued interest beforehand and make informed decisions about whether or not to sell their property.
Moreover, depending on the conditions of the sale, the sellers might also need to refund option monies. Whether this refund is necessary depends on the sale price and market value. It underlines the complexity of CPF accrued interest and the financial implications of property sales for homeowners in Singapore.
Scenario 2: Upgrading your home after crossing 55
Consider the case of Mr and Mrs Tan, who initially decided to retain their property due to the unfavourable earnings they’d receive upon selling it. However, Darren’s career advancement and increased earnings have prompted the couple to reconsider the sale of their flat after crossing the age of 55.
At age 55, the CPF system introduces the concept of the Basic Retirement Sum (BRS), the minimum amount of savings that individuals are expected to have in their CPF accounts.
This sum is subject to annual adjustments to account for the cost of living and inflation. If the total amount in your CPF Retirement Account (RA) doesn’t meet this Basic Retirement Sum, the earnings from selling your first home are automatically credited to your RA.
In the case of the Tans, Darren’s increased income prevents them from being affected by the BRS rule. Additionally, despite having initially used CPF to finance their home, they are now in a position to refinance to a shorter tenure, thanks to Darren’s improved financial status.
It implies that although they will have to repay a substantial amount, including accrued interest, they can comfortably purchase their next property.
This scenario highlights the importance of understanding CPF rules and how they change with age and income levels.
Scenario 3: Divorce sale and equal earnings split
In the context of a divorce, let’s look at Mr and Mrs Tan, who have jointly decided to sell their family home. Both Darren and Amanda contributed 50% to the purchase of the property. However, since they couldn’t reach an agreement on asset division, they are awaiting the court’s decision.
CPF accrued interest can have a significant impact in such situations. According to the Women’s Charter, the proceeds from the property might not be equally split between the two parties due to various factors.
These factors include the financial contributions of both spouses, the presence of children, and the duration of the marriage. Consequently, the court’s decision may result in an uneven distribution of the property’s earnings, such as a 60-40 split instead of the expected 50-50.
This unequal division also extends to CPF refunds, which means that accrued interest is not evenly shared between both parties. Therefore, this scenario demonstrates how CPF accrued interest can add complexity to the division of assets in the event of a divorce and highlights the importance of understanding the legal and financial implications.
Scenario 4: First-time homebuyer in the market
In this scenario, we’ll consider Leo, the 26-year-old son of Darren and Amanda, who is in the market to purchase his first property. His decision revolves around whether to use his CPF funds for the down payment. It is crucial to consider the impact of accrued interest when selling the property in the future.
If you have no intention of selling your property, the source of your down payment might not matter, except if you’re concerned about saving for retirement. In that case, you should consider repaying your CPF account at some point.
However, if you plan to sell your property eventually, the CPF accrued interest becomes a critical factor. The remaining funds in your CPF account can earn up to 4.04% per annum, particularly in the Special Account.
Using your CPF savings to pay for the property might not be worth it due to the opportunity cost of foregone interest. If you sell your property below market value, you’ll essentially have to cover the accrued interest out of your pocket. Therefore, paying with CPF funds could lead to a “loss” from your property.
In Leo’s case, one solution could be to split the monthly payments between cash and CPF. This approach minimises accrued interest, reducing its impact on future earnings from the property sale.
How can I avoid or reduce the accrued interest in CPF?
Managing CPF accrued interest effectively is crucial for property owners in Singapore as it impacts the availability of CPF funds for retirement and future property investments. There is no way to ‘avoid’ paying CPF accrued interest. But you can reduce the amount you need to refund to your CPF account, thereby increasing your sales proceeds.
Here are some strategies property owners can employ to manage and mitigate the impact of CPF accrued interest:
1. Transferring the CPF OA monies to your SA
Transferring your CPF OA funds to your SA can be a strategic method to maximise your retirement savings and minimise the impact of accrued interest on your home loan. However, it’s crucial to understand that this decision is irreversible, and the funds transferred to your SA are reserved for retirement and can only be withdrawn at age 55.
By making this transfer, you effectively redirect your housing-related CPF funds to your retirement savings. The SA typically offers a higher annual interest rate, up to 4.04%, which is more favourable for your long-term financial security.
Let’s say you have $100,000 in your CPF OA. If you use this amount to pay for your house, you incur an additional $12,500 in accrued interest over five years. However, if you transfer the same $100,000 to your SA account instead, you can gain $20,200 in interest over the same period.
2. Refinance housing loans
Home loan refinancing can be a savvy move, especially if you’re initially financing it with an HDB loan carrying an interest rate of 2.6%. Switching to a HDB bank loan with a lower interest rate can significantly reduce your mortgage expenses. Moreover, opting for non-CPF funds for your housing loan payments diminishes your dependence on CPF savings, safeguarding your retirement funds.
To ease the financial load of your HDB loan, consider paying a portion in cash, opting for a shorter loan term, or reducing the duration of your existing loan because HDB loans don’t impose penalties for such changes.
3. Pay off home loan instalments using cash
Paying your remaining home loan instalments with cash vs CPF funds offers distinct advantages. Not only does this cash payment method keep the principal amount untouched, ensuring that no interest is accrued, but it also preserves your CPF savings for other essential needs, such as retirement or healthcare expenses.
4. A voluntary housing refund (either partially or in full)
By making a housing refund in cash – fully or partially – into your CPF account, you effectively reduce the accumulated CPF accrued interest until you sell your property.
This approach not only lowers the total amount due when selling your property, but it also safeguards your retirement savings. By actively managing your CPF funds, you can balance homeownership and long-term financial security, ultimately securing a more comfortable retirement.
If covering your entire mortgage with cash isn’t feasible, contemplate paying off your mortgage partially using cash and CPF funds.
5. Make a partial refund to CPF
Opting for a partial refund is another feasible solution for homeowners looking to manage CPF accrued interest. Making partial repayments (either towards the partial principal amount or the full principal without accrued interest) can mitigate the rapid growth of accrued interest. Although the interest will continue to accumulate, it does so at a slower pace.
This approach provides a middle ground, allowing you to retain some financial flexibility while addressing the long-term implications of CPF accrued interest on your property loan.
6. Optimise CPF Usage for Housing Expenses
Property owners can reduce or mitigate CPF accrued interest by optimising how they use their CPF funds for housing expenses. It may include paying down the mortgage early, reducing the loan quantum, or using cash for housing-related costs to minimise the amount of CPF funds withdrawn and, consequently, the accrued interest.
7. Plan for Property Upgrades (without overstretching finances)
Plan carefully to minimise accrued interest when upgrading to a larger or better property. By selling your existing property and purchasing a new one within a shorter timeframe, you can reduce the period over which accrued interest accumulates.
However, avoid overstretching your finances or buying properties solely for investment purposes, as these decisions can lead to higher accrued interest and financial strain.
How can I check how much cash I can get if I sell my house?
You have two options for this. One way is to calculate it manually by subtracting your outstanding home loan balance, CPF principal, CPF accrued interest (as displayed on your CPF Home Ownership dashboard), and additional costs like agent and legal fees.
Here are four steps to check CPF accrued interest on the CPF Portal:
1. Log in to the CPF portal
2. Go to ‘My Statement’ on the sidebar
3. Scroll down to ‘Section C’ (shows the net amount used & amount available)
4. Check your accrued interest on CPF loan
Alternatively, you can utilise the HDB’s Sales Proceed calculator to obtain an accurate amount.
Final Thoughts
The intricate relationship between CPF accrued interest and property ownership in Singapore underscores the importance of financial decisions for real estate investments. Setting realistic expectations about a property’s potential returns can help property owners avoid financial surprises.
While CPF accrued interest can affect retirement savings and the cost of housing loans, there are strategies to minimise its impact. Decisions regarding repayment depend on individual circ*mstances, but careful financial planning can ensure you have enough for your retirement while enjoying the benefits of property ownership.
When planning to sell a property, it’s essential to account for the CPF accrued interest in the expected sale price. Get the best home loan in Singapore across all major banks and compare mortgage rates with the highest rewards.
