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Wealth destruction from CPF Accrued Interest



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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.

CPF Accrued Interest

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:

  1. Devastating HDB Loan and CPF Accrued Interest
  2. CPF’s Home Protection Scheme (HPS)
  3. The Dark Side of CPF Housing Withdrawal Limit

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Add a Comment
  1. That’s why I started repaying my home loan with cash instead of my CPF. The accrued interest from my initial downpayment made it easier to switch to cash payment.

  2. In 1989, I sold my direct-purchased 3NG for $50k. I did not pay the 15% levy then. Today, if I want to buy a BTO, second time direct from HDB, I need to pay this levy at about $30k, sixty per cent of my sale price! The power of compounding at 5% per annum for 28 years! 5%per annum is punitive when compounded!

    In 1997, I drained my CPF OA to purchase a property, a sum of $271k then. Today, twenty years later, the accrued interest of 2.5% for that amount is $170k, making a total of $441k to be refunded when I sell the property!

  3. Rather than tell us the rules, why not provide a solution? Based on what you advocate, what people should do is to take a Max loan if they intend to sell in the short or medium term to use as little CPF as possible.

  4. I do not know what was said to u but based on my own experience. I fully paid my house back in 2009. The flat’s current selling price is now worth 2.5 times. But my grant (yes, accurred int is also based on the grant we rec fr the govt) plus my p n my int means that I will only get back max 60k cash, and Rest have to go into my cpf if I sell my flat now. We did a quick calculation, and the conclusion was that within 10yrs, there will b 0 cash proceeds because of the interest.
    It is true that cpf belongs to me. But if i m depending on the cash proceeds to pay for my Reno or whatsoever, I can dream on…
    The question therefore will be, do I need the cash or am I fine with everything gg into my cpf account.
    I m not selling my flat coz of the location and it is possible tat I might b the minority who will own my current flat til I died.

  5. No worries with accrued interest. It’s not necessarily a “die die” must pay back … like loanshark money!

    Take for example Fred’s case above. Let’s say, touch wood, can only sell for $400K. But total to be refunded is $441K. So what?? All the $400K just go back into CPF-OA account. Just cannot have cash on hand to play play, that’s all.

    And if buying a replacement flat, that $400K + whatever in the OA account can be used (subject to various CPF regulations e.g. valuation, age of house, age of home buyer).

    And if don’t sell the flat — that means no need to ever return the accrued interest.

    Let’s say another person with same housing situation as Fred:
    This person now 55 years old. He has fully paid for his flat. But his OA+SA only $100K. Cannot meet the (currently) $166K Full Retirement Sum.

    This person has intention to sell his flat in a year’s time when property market is much better. He wants to hang on to the sales proceeds as much as possible, and doesn’t want CPF to take back a big chunk of it.

    What to do?

    At 55, he has to “sacrifice” his existing $100K of OA+SA. This $100K will go into RA. He has $0 in both OA & SA. He does NOT pledge his flat to CPF, hence CPF will only give him $5K token sum. The rest of the $95K will remain in RA and eventually will be used for CPF Life.

    Next year, when he is 56 years old, he manage to sell his flat for $480K. CPF will retain $66K to make up the full FRS. The rest of $414K can be used by the guy for whatever purpose, get a smaller flat, buy a private annuity, retirement savings, etc.

    BTW all this CPF monies is “chicken feed”. Frankly if you are so desperate for this money, it means you cannot retire. Doesn’t matter if you are 35, 55 or 95.

  6. BTW, the BIG majority of Sinkies live in their 1st flat (especially for HDB dwellers).

    Sad but true. Maybe they learned from Warren Buffet. That old goat still staying in the same pathetic house he bought in 1955.

  7. I think that it is great that the author highlighted this thing called accrued interest, but I disagree with how he views it. I also want to point out that many of the figures appears to be out of the thin air. For example, the 350k meant that the house has only appreciated at only an average of 1.11% over the 15 years period. Even at a modest 2% appreciation rate, the house would have been valued at 400k.

    But what I want to say is that accrued interest simply represented your returns had you kept money in your CPF. It is like there are two investment options: Option A keep your money in CPF and earn 80k (380K – 300k) or Option B buy a house and earn 50k (350k – 300k).

    As such, it is unfair to say the 30k evaporated from the couple’s CPF account, and wealth is destroyed by accrued interest. The correct view is that the 30k lis the opportunity cost for choosing Option B. But we have to factor in other considerations, like the couple do not have to pay rent for the long term, and can enjoy the benefits of home ownership.

    There is also some scare-mongering to highlight the 100k property transaction cost. Many of the costs (resale levy, renovation, fees and commissions) have no relation to CPF accrued interest.

  8. -Buy the largest flat you can afford.( you will grow into it )
    -Keep loan tennure as short as possible ( repay capital amounts asap)
    -Stay as long as you can, beyond 25 yrs.
    -Meanwhile save money and buy a private property.
    -Rent it out. This will be your retirement income.( part of )

    Target timeline to achieve this is before 45yrs old.. or sooner.
    Dont keep moving home.. its expensive, its headache, its speculative.
    If anything, your home could be the constant in this ever changing world.
    Stability, predictability is paramount by the time you are in your 50s.
    Also for your kids.( if any )

    Stories about people making mega bucks in properties are just that: stories.
    Ask them:
    -how much they paid for their original home
    -how much they sold,
    -how much did the new home cost
    -What is the size of the 2 homes

    People will tell you success but seldom failures and they exaggerate profits.

  9. Only when you can fully paid up to 75% of a property on purchase, and that you could and want to stay in that property, then that property will have an intrinsic market value. In this situation, the buyer really enjoys his purchase and he could afford it. Therefore, the buyer can hold it long term as he enjoy in his investment. The satisfaction he derived from that purchase would take a unit oif supply out of the market. Then the market will rise if there are many other similar buyers with holding power. The market will also hold if the cyclical down turn set in.
    When purchase is heavily financed, it will evolve into a lot of financial consequences, like compund interest, accrued interest and so on. I dare say less than 20% of home buyers could part take in this kind of calcuated risks. So, if the buyer can ill afford an expensive home, just don’t think about it. Instead focus on what he/they can afford to have and start from there.
    I think the writer intention of highlighting all those financial consequences is one good way to warn those young buyers to look at their big ticket purchases more closely. And I like that!
    However, I wish to add that if the resale tax of $40K is true, it is just too much! How come nobody say anything about it?

  10. Hi AL,

    I did share my strategy. Perhaps you should start to learn how to read. I notice that you are always criticizing my work without even bothering to read my articles carefully. Improve your EQ and your wealth will grow.


  11. Hi Fred,

    Interesting sharing. The power of compound interest is indeed frightening.
    No matter how good you are with your investment, it is almost impossible to beat the magic of compound interest.


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