Your CPF savings can be your best friend. But it can also be your worst enemy if you don’t manage it well. For some unknown reasons, some readers attacked me in my previous article, claiming that I wrote “misleading” and “nonsense” information on the CPF Accrued Interest. They refused to believe that CPF Accrued Interest could lead to potential wealth destruction if the game is not played correctly.
First of all, CPF Accrued Interest is of course your money! I have never disputed that in my previous article and I don’t know why some readers tried to stir up negative emotions without getting their facts right. I read my article over and over again and verified that I did not write that CPF Accrued Interest is not our money.
But then again, so what if readers know that CPF Accrued Interest belongs to them? Of more useful to them should be the understanding of the mechanism of CPF Accrued Interest right? Not understanding the law can cost you an arm or leg. In this article, I am going to discuss how wealth can be destroyed if Singaporeans mismanaged their CPF monies.
Fundamentally, CPF’s principle is that whatever amount of CPF savings you take out for housing or education purposes, you must refund the amount with compound interest. This is because our CPF monies is primarily meant for funding our retirement needs. A simple analogy would be like borrowing money from your own retirement fund and paying back yourself with interest.
Let’s assume a Singaporean couple who bought a 4-room HDB flat for $300,000 and paid off the loan with their CPF savings in 2002. Let’s also assume that they had taken an HDB loan. In 2017, they decided to upgrade to an Executive Condominium (EC) and managed to sell their unit for $350,000. They thought there would be cash proceeds of $50,000 but actually they were wrong.
Purchase price: $300,000
Estimated CPF to be refunded: $380,000
Even though the couple has paid off the loan to HDB in 2002, the amount of CPF is still attracting accrued interest every day, month and years. Most Singaporeans do not realize that even when they have paid off their housing loan using their CPF monies, the interest is still compounding. And in the financial industry, many practitioners know that “compound interest is the Eighth Wonder of the World”. Sound scary? You bet it is. But what is more frightening is not only the potential cash flow issue, you may even lose huge amount of hard cash during property transactions.
In this case, CPF Accrued interest has caused the amount to be refunded to grow to a whopping $380,000 in 15 years. But because of the poor market condition, the couple could only sell their property for $350,000. There is still a shortfall of $30,000. The CPF Board would not force the couple to top up in cash if the transaction is completed at market value.
But that is not all. The couple would also need to pay resale levy of $40,000 for the EC because it was launched after 9 December 2013.
So for this example, $30,000 would evaporate from the couple’s CPF Ordinary Account (OA). Gone. Just like that. How many years do you take to accumulate $30,000 worth of CPF savings? Although technically you need not top up the shortfall in hard cash, the wealth destruction can be really heart pain! And that is not all!
Because there was no cash from the sale proceeds, the couple needed to pay the resale levy of $40,000 in cash from their own pocket! And I did not even factor in the real estate agent commission, renovation and legal fees yet. So in this case, the couple stood to lose at least $100,000 from the property transaction.
Hence, what was meant to be a happy occasion could potentially turn into an unimaginable financial nightmare. Many Singaporeans unwittingly force themselves into a corner because they tend to underestimate the power of compound interest.
Of course, my critics would argue that in order to avoid paying CPF accrued interest, just don’t sell the HDB flat and live in it forever. This argument is not entirely wrong but is not practically at all. Look, I have rarely heard of Singaporeans who live in their first HDB flat and never moved house. Even if there were such cases, they were exceptions rather than norm.
When I was a young boy in the eighties, my parents already shifted home twice. In today’s context, I have my own family and already moving into my third property in 7 years. So to claim that you may avoid paying CPF accrued interest by not selling the property is an unrealistic statement. Most Singaporeans would surely upgrade or rightsize their properties in different stages of their lives.
And what about HDB Loan? Some readers took the opportunity to bash me by claiming that I conveniently overlooked the fact that bank interest rates were 7 to 8% prior to the Great Financial Crisis (GFC). But then I have pointed out the risks of bank interest rate fluctuations and highlighted that bank loan may often not be superior than HDB Loan. Fundamentally, the advantage of getting HDB Loan is that it is a fixed rate and is not subject to market conditions.
Property can definitely enhance our wealth but only if you played the game correctly. Hence, you must really consider all aspects before making a move. Otherwise, it may result in catastrophic losses. The thing about building wealth with property is that it is made more complicated in Singapore because our CPF monies is involved. Due to this, you need to make the effort to study the system.
To be frank, there is nothing wrong with the policy of CPF Accrued Interest at all. Most of the times, Singaporeans lose money in property because of their wrong moves arising from the lack of knowledge on the CPF rules. Basically for CPF Accrued Interest, it is like borrowing money from yourself and paying back to your own retirement account with interest. But if you failed to understand this principle, you are set for a nasty surprise when you sell your property.
So how do you manage the CPF Accrued Interest? Make sure that from time to time, monitor the amount in your CPF account. You may find out the amount online through your CPF account. Having this data would help you to set the correct selling price for your property. Henceforth, the golden rule in selling house is that the price is shaped by the CPF Accrued Interest and not the prevailing market price.
Read my other articles on CPF:
- Devastating HDB Loan and CPF Accrued Interest
- CPF’s Home Protection Scheme (HPS)
- The Dark Side of CPF Housing Withdrawal Limit
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