Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Monday, 25 May 2015

CPF Housing Interest

Today's topic will be on the Interest you pay to CPF on your housing loan.
This topic is asked by 2 of our readers.
We got an email asking us to talk in detail the 3rd point (am I paying double interest to CPF?) in this post of ours: LINK .
We also got another reader who asked us to post about using CPF to pay for our housing loan.
We would like to thank our readers for the questions asked, and we hope to see more of them coming our way.
This will be the first part of our CPF Housing Loan Related Posts.
Subscribe to us, because more will be coming!

When you take on a CPF mortgage loan, you are doing several things:
Step 1) You are borrowing money from CPF to pay for your house (a mortgage).
Step 2) You are to pay your mortgage every month to CPF, with interest.
Step 3) You pay your mortgage every month via the money credited into your CPF Ordinary Account (OA).
Step 4) Upon selling your house in the future, you are required to pay back the amount that you had withdrawn from CPF to pay for your mortgage PLUS the interest that you would have earned if that money had remained in your CPF OA.

Step 1:
Think of the CPF as a bank. If you were to borrow money from a bank to buy a house, the bank would charge you interest. This is the same for CPF, in return for lending you money to buy a house, the CPF charges you an interest (currently at 2.6% - OA interest + 0.1%).

Step 2:
If you borrowed money from a bank to buy your house, you have a mortgage loan with the bank. In return, you are required to pay back your mortgage loan via monthly installments/payments.
Think of CPF as a bank, and this is why CPF charges interest on your CPF housing loan.

Step 3:
In a normal bank mortgage loan, you will be required to pay your monthly mortgage to the bank with your monthly take-home pay.
In the CPF housing loan, instead of paying via your income, you can pay it via the money that is deposited into your CPF OA.
While the money in your OA is still considered as your income, you do not have to pay your mortgage with your take-home pay. Instead, you pay it with money that is saved for your retirement - or money that you technically cannot touch.

Step 4:
IF after you have finished paying your bank housing loan, should you decide to sell your house, you are able to earn the price appreciation of your house (selling price greater than buying price).
However, if you used CPF housing loan to pay for your house, you are required to CONTRIBUTE back into your CPF
         a) the amount of money you took out over the years from your CPF OA to pay your mortgage.
         b) the amount of interest you could have earned if you had not used the money in your CPF OA
              to pay for your house (accrued interest).

I used the word CONTRIBUTE instead of the word PAY.
In essence, you are not exactly paying to CPF with the profits of your house.
Instead, the money is actually sent to your CPF OA.
You can actually use the money from that account to Invest, buy insurance, participate in schemes applicable for OA.

If you are wondering why is it so, it is because CPF needs to ensure that you have a bigger safety for your retirement.
This compulsory locking away of your profits ensure that
         a) you do not squander away the money unnecessarily.
         b) money is put into better use - earning CPF interest etc.

I believe there are people who think that this "accrued interest" thing should be abolish because "it does not make sense for me to pay myself the could-be-accumulated-interest when CPF should actually be the one to be paying me it".
Then again, your money is not in CPF's care/usage, as such, why should CPF be paying you the could-be-accumulated-interest?
And, you are contributing, not paying, the profit into your own CPF account. Think about it another way, you are "profit-sharing" with your retirement fund. While it may be unpleasant, the greatness of it can only be seen in the future.
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  1. Correct explanation in a way, but doubt it would convince those who think the method is not 'fair'

    May be better to say that CPF to build your own compulsory savings and interest for retirement as first priority.
    You can "tap" into your own "future" retirement money for other purpose (e.g. housing) BUT provided the savings and interest required for the savings are "put back" in after those other purpose end (e,g, you sell away house or your child finishes education funded by your future CPF retirement money).
    You might also want to highlight that once your RA amount is achieved, you do NOT need to "put back" the saving and interest because already achieved targeted savings/interest.

  2. Hi,

    Thank you for your inputs and tips.
    I really like the way you explain it too :)
    Would you mind providing us with your name?
    I would like to credit you for the example and tip that you have provided above.
    We will credit you in our subsequent post, using your comment.

    Thank you

  3. This is an interesting blog. Truly an enjoyable read. However I have a few differing views. Feel free to contact me to dicuss more, in detail if necessary,about investment choices. -J

    1. Hi J,

      We are happy to hear from you that you find our blog interest and enjoyable reading!
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