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Devastating HDB Loan and CPF Accrued Interest

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Be afraid. Be very afraid after reading this article. This is an article that all aspiring and existing home owners can ill-afford to miss. And I do mean it because you may live to regret for dismissing the message in this article. Today, I am going to share with readers the devastating effect of HDB Loan combined with CPF Accrued interest.

Many financial bloggers wrote about CPF accrued interest and HDB Loan. However, they may not have the real experience of purchasing an HDB flat or obtaining an HDB loan before. Most of them merely touched on the interest rate figures without providing much analysis on the bigger picture of the housing scheme framework in Singapore. In my perspective, this is dangerous as not knowing the full picture of the law can cost you an arm or leg.

However, I am different because in this article, I am going to provide some basic analysis and share with readers the frightening aspect of the HDB Loan and CPF Accrued interest. At the end of the day, I hope readers can avoid the financial pit-falls and grow wealth with me together. So, if you do find this article useful, please lend your support and subscribe to my blog.

HDB Loan

For many decades, Singapore government has been selling HDB Loan as a form of concessionary loan “exclusive” only to Singapore citizens. Undeniably, the interest rate for HDB Loan is extremely stable and is not subject to fluctuating market conditions. This is because the interest rate is pegged to the CPF Ordinary Account (OA) interest rate.

Currently, the interest rate for HDB Loan is pegged at 0.1% above the CPF OA interest rate of 2.5%. Hence, the total interest rate payable for HDB Loan has been 2.6% for many years.

CPF Accrued Interest

But in life, there are always trade-offs. In exchange for the unbeatable stable interest rate, those who took HDB Loans are essentially forking out a huge premium as compared to those who opted for commercial bank loans. For the past 8 years, interest rates offered by bank for home loans had been consistently below 2%. Of course, nobody can tell when the interest rate will spike as a lot will depend on the policy developments of US Federal Reserve. Thus, this is not to say that bank loans are better than HDB Loan because there is the risk of rising interest rate to be considered.

Nonetheless, what I am going to highlight is not the interest rate payable for HDB Loan, but the conditions set by HDB. If you are taking HDB Loan, one of the conditions is that you and your partner are required to use all the CPF OA savings to pay for the flat before an HDB flat is granted. Although the amount is used to pay HDB, it is being automatically tracked in your CPF OA account and interest is charged on this amount every year. This is an important point because you would realize that the compounded interest can be scary and may inflict collateral damage on your asset planning.

It should also be noted that for commercial home loans, you are not required to wipe out your CPF OA interest to pay for your property before the loan is disbursed. And this is a big, big differentiating factor.

At the point of buying an HDB flat, most Singaporean couples would likely to have accumulated a combined CPF OA savings of $150,000 to $200,000. This is especially so if the housing grant is factored in. So, if a couple chose to take HDB Loan, this is the ball-park figure that would be wiped out from their CPF OA savings and it is also the interest rate will be charged. But things become very complicated when they start using their monthly CPF OA contributions to finance their HDB Loan installments and this is what most Singaporeans are doing.

HDB Loan Interest and CPF Accrued Interest

Most people overlook the CPF Accrued Interest when doing asset planning. CPF Accrued Interest is the amount of CPF monies that you need to refund back to your CPF OA account when you sell off your property. The guiding principle is that this amount of CPF monies utilized would have earned the 2.5% of CPF OA interest rate had you not used it for property purchases. Fundamentally, the rule is that your CPF monies is meant for your retirement. So, you must return the money back to your CPF OA account (with compounded interest).

For HDB Loan interest, the 2.6% is payable to HDB, and not to CPF Board. But on top of this 2.6%, there is accrued CPF interest of 2.5% if you use your CPF OA to finance your HDB Loan.

You would recall the above paragraph in which I pointed out that you need to wipe out your CPF OA account at the point of applying for HDB Loan. So, picture this. This initial pot of money in your CPF account is constantly growing at 2.6% every year. To top it off, most couples also use CPF OA to make monthly instalments. Within 10 years, with the potent effect of compounded CPF accrued interests and HDB interest rate, it is not inconceivable that the initial $150,000 or $200,000 would balloon to $400,000.

Sell or not to sell your HDB flat?

Technically, it is true that if you chose not to sell your HDB flat, you need not return the CPF accrued interest back to your CPF OA. So, you may not worry about the CPF Accrued Interest exploding in your face. But wait a minute, things may not be so straightforward after all.

This is because even if you and your spouse managed to pay off the HDB Loan, the CPF accrued interest would still continue to compound. Sound scary? You bet it is.

Most people also forget that there is the CPF Housing Withdrawal Limit to take into consideration when using CPF OA to finance their properties.

Basically, there is a limit to the amount of CPF OA you can use to finance your HDB Loan and this is set at the Valuation Limit – the purchase price or valuation of the property at the time of purchase, or whichever is lower. For those who bought Built-to-Order (BTO) flats, the Valuation Limit is not applicable and you may use all your CPF OA savings to finance your property.

In my previous article, I have shared on what will happen if you take an HDB Loan and have reached the Valuation Limit. In gist, you need to build up your Basic Retirement Sum (BRS) before CPF Board will consider letting you to continue using your CPF savings to finance your property. But you need to write in to appeal and in most cases, approvals may be granted on case-by-case basis. So, don’t harbour the mistaken thinking that if you appeal to CPF Board, the approval would be granted by default. This is not the case!

To put things into perspective, the CPF Accrued Interest would not affect the quantum of Valuation Limit. But because of the snowballing effect, you are likely to reach your Valuation Limit way before you reach 55 or even before you build up your BRS. In fact, one reader even wrote in and shared that she and her husband reached her Valuation Limit in her early thirties! Unbelievable but it is true and I suspect many Singaporeans are facing this situation right now.

For those Singaporeans affected by Valuation Limit, they could be caught unprepared because they may be still building their careers and could be struggling with family expenses. In this regard, many Singaporeans may not have sufficient take home pay to fork out the hard cash to pay for the monthly installments.

And then there are those Singaporeans who decided to stop working for others and become self-employed. They forgot that they had utilized their CPF savings to finance their HDB Loans. Several years down the road, they may face the problem of insufficient BRS and having to pay cash for their HDB Loans.

The worst thing about CPF Accrued Interest is that upon the sale of the HDB flat, you are required to refund the CPF monies used to finance the property back to your CPF OA account. Under the current poor market condition, many HDB owners suffered from explosive negative HDB sales. This means that the sale proceeds are not sufficient to cover the CPF refund. In such cases, these people are not required to top up in cash if the house is sold at market value. Nonetheless, they would suffer wealth destruction in their CPF OA savings.

So, you are essentially caught in a situation whereby you are damned if you sell your HDB flat and damned if you don’t sell your HDB flat.

Do not underestimate the compounding effect of HDB Loan and CPF Accrued Interest. This is real.

How to beat the system?

It is extremely difficult to beat the system because the policy framework is crafted by smart people who are mostly government scholars. If you think about it, the rules are very tight and to be honest, you have to give credit to policy-makers for coming up with such elaborated rules. With such tight rules in place, it is almost impossible for Singaporeans to abuse their CPF savings to finance properties.

However, if you are prepared to think out of the box, it is not impossible to beat the system. For example, if you still insisted on taking an HDB Loan, you may consider my strategy of building up your CPF Emergency Fund in my previous article. This would help to mitigate the amount of interests and defer reaching the Valuation Limit.

Then again, with such complicated housing rules, it may be more worthwhile to consider taking a bank loan to finance your property purchase. Of course, there are market risks to consider and you need to take the conscious effort of reviewing your loan every few years. But the effort may be worth it considering the flexibility and cost-savings.

Don’t ever make the mistake of letting HDB Loan and CPF Accrued Interest explode in your face. The financial outcome could be disastrous. Don’t be in the dark side because when it comes to personal finance, ignorance is not bliss. Join me in my money journey and start learning how to avoid financial pitfalls in your life.

Read my other articles on CPF:

  1. CPF’s Home Protection Scheme (HPS)
  2. The Dark Side of CPF Housing Withdrawal Limit

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22 Comments

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  1. So what to do? Live on the streets? No live for at least 10 years with your parents ! a bit of squeeze is ok!

  2. ‘On top of this 2.6%, there is an accrued interest of CPF 2.5%….So effectively, it is 2.6% multiply by 2.5% making a total of 6.5%’? Why multiply instead of add?

    Sorry, I think you weave and entangle yourself till your rationale becomes illogical. You permitted HDB to take the money from your CPF OA to pay for the housing loan at 2.6% interest rate. You could choose not to! In the meantime there is no 6.5% interest rate involved. Only when you sell the flat, will you return the accrued interest(2.5% compounded)and principal back to CPF.

    The Valuation Limit and Withdrawing Limit serve their purpose of ensuring that one should not overuse their CPF for housing and to remind us that CPF is meant for retirement

  3. Hi Wang,

    There is a choice. You can choose to take bank loan or not to use your CPF savings to finance your HDB flat.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  4. On top of this 2.6%, there is an accrued interest of CPF 2.5%….So effectively, it is 2.6% multiply by 2.5% making a total of 6.5%’?

    I could only determine it is 0.065%…. Is there something I had missed out?

  5. Hi Fred,

    I used to think that the combined CPF accrued interest and the HDB Loan interest is 2.6% plus 2.5% which is equal to 5.1%. But after much thinking, this is not the way CPF Accrued interest works. Assuming you paid off the HDB Loan in one year. Let’s assume with HDB interest, the amount of CPF you used to pay HDB is $1000 x 2.6%. Then at the end of the year, the CPF Accrued interest is actually $1000 x 2.6% x 2.5%.

    Secondly, in my article, I did share that you may choose not to use CPF OA to finance your HDB flat. But how many Singaporeans are that cash rich to pay for the housing loan?

    Maybe I was not being clear in my article. Although you don’t have to return the accrued interest if you hold your HDB flat, the accrued interest will cause your Valuation Limit to be exceeded sooner than you may expect.

    Of course I know Valuation Limit and Withdrawal Limit are meant to discourage Singaporeans from overusing their CPF for housing. But do you know that if you take bank loan, the Withdrawal Limit is 120% of Valuation Limit?

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  6. Hi Ylfoo,

    You are absolutely correct. I have amended the typo.
    Thank you for pointing out the mistake!

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  7. This is very misleading. Accrued interest is your own money. It is a deficit that you have to make up if you sell your HDB. The proceeds go towards filling up this hole, but the amount that is used to fill up this hole (accrued interest) is still your money! This is totally different from interest expense, which is paid to HDB and is ab outflow.

  8. Hi SGWealthBuilder,

    Thanks for your article and, wow, it is scary.
    May I ask you a question that, if I take a bank loan to finance my HDB, but I choose to pay the monthly installment by using CPF OA, will I be sufferred from the CPF accrued interest as well when I sell my HDB unit?

    Thx

  9. You conveniently, unintended or otherwise, left out the interest rates from bank loans before 2008. Loan tenures are in the 20-30 year horizon.

  10. Whatever you pay as an accrued interest goes back to your CPF account. When you reach retirement age, they are yours to withdraw including the compound interest.

  11. I read half way and stopped and thought it was nonsense. I agree with Louis and Peter Choy above that the accrued CPF interest is still your own money, at most you suffer some cash flow problem.

  12. Hi Francis,

    CPF interest is of course still your own money. I have never dispute that in my article.
    What I am highlighting is how mismanaging your CPF monies would have devastating effect on your wealth.
    Very disappointed that you jumped to conclusion and did not make the effort to understand what I wrote.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  13. Hi Peter,

    I agree with you that whatever you took out from your CPF account, you need to refund back to your CPF account, with accrued interest.
    Nonetheless, if you don’t play the game right, you may suffer from negative HDB sale.
    I think readers don’t really understand my point.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  14. Hi AL,

    Bank interest rates are never fixed. Most people would refinance their bank loans every few years.
    Furthermore, I have reiterated that my article is not meant to imply that bank loan is better than HDB loan.
    You need to weigh the benefit of stable interest rate (HDB loan) versus the risk of fluctuating bank interest rates.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  15. Hi DUFY,

    Yes, you would suffer from the CPF accrued interest as well when you sell your HDB flat.
    I should know because this is what happened to me. I took bank loan for my current HDB flat and pay off the installments with my CPF savings.
    The accrued interest is mind-boggling even for a period of 5 years only.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  16. Hi Louis,

    In what way am I misleading? CPF accrued interest is of course your money. This is 100% fact and I have never disputed that in my article.
    What I am trying to highlight is not whether CPF money is your money or not. It is about managing your CPF money to prevent cash flow issue.
    Very disappointed you didn’t bother to read and jumped to conclusion.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  17. I think most of you have missed the point on opportunity cost.

    “Assuming you paid off the HDB Loan in one year. Let’s assume with HDB interest, the amount of CPF you used to pay HDB is $1000 x 2.6%. Then at the end of the year, the CPF Accrued interest is actually $1000 x 2.6% x 2.5%.”

    Interest paid to HDB:
    $1000 x 2.6% = $26

    Accrued interest:
    $1000 x 2.6% x 2.5% = $0.65

    Interest with accrued interest repayment to CPF: $1000 x 2.5% + $0.65 = $25.65

    CPF Interest forgone:
    $1000 x 2.5% = $25

    Total cost:
    $25.65 + $25 = $50.65
    This is the actual cost of the scheme for a principle of $1000.

    Now for the point of valuation limit, assuming fully paid and you hold for 20years, interest and accrued interest:
    $1000 x (102.5%^20 – 100%) = $638.61
    What you have owed to your own CPF account becomes $1638.61!
    Can you sell your property at 160%? If not, don’t expect any cash returns.

  18. 1. VL & AWL does not apply if buying direct from HDB and using HDB loan.

    2. Those younger people who already hit “VL” is because they bought property OLDER THAN 39 YEARS …. CPF has a formula for such older properties …. it will be less than the actual valuation amount.

    3. Returning of accrued interest mainly affects cashflow i.e. if you plan on collecting as much cash-on-hand as possible from sale of property, especially downgraders, or investors cashing out of investment properties.

    4. If you’re upgrading, then not so bad since the money will be used for the bigger more expensive property.

    5. There is a way to avoid returning CPF accrued interest — sell your property ONLY AFTER 65 and DON’T PLEDGE YOUR PROPERTY to makeup the Retirement Sum.

    But most people here youngsters …. and they thinking 65?? Die liao lah!!! Hahaha!!!

  19. Regardless of how many percent of interest we have to top up back to the CPF OA account, it is important to understand that the CPF is OUR savings for retirement. Unless we need the cash returns urgently when selling the house, returning the 2.5% interest to CPF savings doesnt sounds that ‘devasting’ for me to be ‘afraid’.

    I think what many of us wants to clarify and made known to the many readers of this blog is that: this 2.5% is not an additional money lost, in case the less financially educated community gets misled into thinking bank loan is significantly advantageous than HDB loan.

  20. Max,

    WRT accrued CPF interest, it’s irrelevant whether bank loan or HDB loan.

    What’s relevant is whether got use any CPF money to buy property? If yes, then the clock starts ticking & 2.5% accrual interest starts computing on the CPF money taken out.

    It’s the same principle when you use your parents’ CPF money for Uni/Poly — you need to pay back the money together with the 2.5% interest into your parents’ CPF accounts.

    Want to beat the system?? Simple:
    1) Don’t use your CPF money.
    or
    2) Don’t sell your property — stay until die.
    or
    3) Don’t pledge your property to CPF & sell only after 65 yrs old.

  21. Sinkie, yes, I know.

  22. So HDB 2.6% interest rate (0.1% above CPF OA rate)
    CPF Ordinary Account 2.5%
    Accrued Interest also 2.5%

    Keep the house (even after fully paid) CPF accrued interest still compounds by 2.5%
    Sell the house (after fully paid), seller’s payment has to first return to accrued interest then to OA.

    Effectively, your loan rate with HDB is only 0.1% since money comes back to you after flat is sold. So anyone complaining anymore?

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