This is an article that all existing and aspiring home-owners should never miss. And I do mean it. A few years ago, I wrote about a 54-year-old Singaporean lady who was left stranded after she was not allowed to use her CPF monies to finance her home. In her situation, she had to use cold hard cash to pay for her housing loan even though she still had savings in her CPF Ordinary Account (OA). Read on to find out how to avoid this devastating financial pit-fall created by CPF Housing Withdrawal Limit in your twilight years.
Before I proceed further, there are a few things you need to know about CPF Housing Withdrawal Limit. Specifically, they are Withdrawal Limit, Valuation Limit, HDB loan, type of property and lastly, bank loan. I will first discuss the merits and cons of HDB loan.
Through the years, Singapore government has been packaging HDB loan as a form of “privilege” exclusive only to Singaporeans. To qualify for this “privilege”, you need to meet many eligibility conditions. Hence, this give Singaporeans the impression that getting an HDB loan is the best option when financing property. In my point of view, such thinking may not hold water.
Just think about it. The HDB concessionary housing loan interest rate is pegged at 0.1% above the CPF OA interest rate. The CPF OA interest rate has been 2.5% for the longest time. So effectively, those who opted for HDB loans would be paying 2.6% of interest rate for their housing loans. This is a lot of money considering the fact that housing loans offered by banks had drastically dropped to below 2.6% since the Great Financial Crisis. Currently, there are many different types of home loan packages in the market but essentially, most of them are way below 2%.
Most Singaporeans are sold on the idea that HDB loan interest rate is very stable, thus this gives them a sense of security and peace of mind. Indeed, the interest rate has been very stable and is not subjected to market fluctuations. But the price that you have to pay can be hefty. Imagine taking a $400,000 HDB loan. The addition amount of CPF monies you have paid since 2008 could be at least $40,000 when compared to taking a bank loan.
Could you have used the extra CPF monies that you had paid HDB to finance your children tertiary education? Would you want to deploy the extra CPF monies to invest in stocks and thereby generate higher returns for your retirement fund? Possibly. Henceforth, I have always advocated wealth builders not to take HDB loan even though there are perks. No doubt there are risks involved in taking bank loan but I have shared with readers on how to build CPF emergency fund before.
In life, there are always trade-offs. Don’t commit the mistake of expecting free lunches from the government because there aren’t. Yes, you need to spend time managing the risks of taking bank loans through studying the market and doing research. But you would find the effort worthwhile, at least for your pocket.
But the most important thing that I want to drive home about HDB loan is not the interest payable, but actually the Valuation Limit. It is important to read on because if you failed to do so, you may suffer financial hardship in your twilight years. No, I am not trying to spread fear. There are so many sad cases being reported in the news on Singaporeans who could not finance their homes with their CPF monies even though they still got tonnes of savings in their CPF accounts. I don’t want this to happen to you.
Type of Property
The type of property you purchased will determine your CPF Housing Withdrawal Limit. If you bought a Build-to-Order (BTO) flat, then congratulations! There is no limit on the CPF OA that you can use to finance your HDB flat.
But then again, most Singaporeans would surely upgrade in their lifetime. I rarely heard of Singaporeans who stay in their first home all their lives, especially for those who bought BTO flats. Therefore, don’t just dismiss this article just because you are staying in a BTO flat now. You never know if you might upgrade to a bigger resale flat or even private property in the long run.
Fundamentally, CPF Housing Withdrawal Limit is targeted at buyers of HDB resale flats and private properties. When you obtained HDB loan for your resale HDB flat, you would notice that there is a limit on the amount of CPF monies that you can use to finance your home. This limit is called Valuation Limit – the purchase price or value of the flat at the time of purchase, whichever is lower.
If you are taking HDB loan and have reached the Valuation Limit, you would need to pay your housing loan in cash unless you meet certain criteria. If you are below 55 years old, you need to set aside the current Basic retirement Sum (BRS) in your Special Account and Ordinary Account. If you are 55 years old and above, you need to meet the BRS in your Retirement Account, Special Account# and OA. Under such circumstances, you need to seek approval from CPF to utilise your OA savings.
There are Singaporeans who cannot qualify for the BRS criteria, hence they need to pay cash. This is very sad. Because many of these Singaporeans did not do asset planning and when they reached the twilight years, they may not qualify for bridging loans. Many of them also suffered the double-whammy of being retrenched and struggled to pay bills, let alone housing loans.
Even if you could meet the BRS requirement and CPF allowed you to use your CPF funds to finance your house beyond the Valuation Limit, it is not known exactly how much CPF OA savings you are allowed to use. It is always case-by-case basis and is under the CPF Board’s discretion. In this regard, do you want to take chances when it comes to financial planning?
If you are taking a bank loan, the CPF Housing Withdrawal Limit is less onerous because you can use up to the Withdrawal Limit to finance your property. Withdrawal Limit is 120% of the Valuation Limit. Effectively, you are given more flexibility to use your CPF monies when your Valuation Limit is reached. Of course, you are still required to meet the BRS requirements when the Valuation Limit is reached. But if you do, you can further use your CPF up to the Withdrawal Limit. Beyond the Withdrawal Limit, you are required to pay cash for your housing loan instalments.
When your CPF withdrawal reached the Valuation Limit, presumably when you are in your forties, then you need to start strategizing when it comes to refinancing your home loans.
What does all these mean for you?
Generally, HDB Loan is considered stable and will never be subjected to market fluctuations. This is the primary merit which HDB is selling to Singaporeans. However, there are restrictions, such as Valuation Limit, to be considered when you are paying HDB loan with your CPF savings. The policy intent is to discourage Singaporeans from using all their CPF savings to fund their property purchases. After all, CPF savings are meant for your retirement and not just to finance your home.
But in my opinion, it may be more worthwhile to take bank loan to finance your property purchases because of the lower interest rates and flexibility. The key thing to highlight is that with a HDB loan, you don’t know how much CPF OA savings you are allowed to use beyond the Valuation Limit. Without such information, it is almost impossible to do a proper asset planning.
Currently, I am taking a bank loan to finance my Executive Condominium. Thus, I have absolute visibility on the maximum amount of CPF OA savings I can used to finance my home, taking into consideration the Withdrawal Limit. I plan to pare down the borrowings within the next five years and do mortgage re-financing every three years to reduce the interest costs. This is important because when I reached fifties, not only would my income stagnant or drop, my CPF contributions would also be reduced.
I hope you find this article useful. Join me in my wealth building journey by subscribing to my blog email notifications. In the next few articles, I will touch on how to build wealth with property.
Read my articles on HDB and property investments:
- 99-to-1 Tenancy-in-Common
- Frightening HDB rules
- Managing your CPF proceeds from the sale of your HDB to build wealth
- HDB: The thin fine line between Joint Tenancy and Tenancy-in-Common
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