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

Wednesday, 13 May 2015

Repay the Accrued Interest from my CPF Home Loan?

Today's post is an answer to the question: Why do I have to return the into my CPF the accrued interest I would have gotten from my CPF home loan?
This question is posted by one of our readers.
We would like to thank him/her for reading and interacting with us by posting a question for us to answer.

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If you have any more questions regarding this topic, feel free to comment, ask us, or email us.
We would love to hear from you on how you think about this topics or other things that you would like more details/clarity on.

1) What is the Accrued Interest?
The CPF Housing Loan Accrued Interest is the interest that you would have accumulated if you had not used the money in your CPF Ordinary Account (OA) to pay for your monthly mortgage.
However, the accrued interest DOES NOT belong to the CPF. It belongs to you.
The accrued interest goes back into your CPF OA account.

2) Why do I have to return the Accrued Interest?
Assuming you did not used your CPF to buy your house, the monthly contribution into your CPF would have collected an annual 2.5% interest inside your OA. The "returning of CPF principal + accrued interest' is so that your CPF OA account is able to fully reflect the amount that should had been inside if you did not use it to buy a house.
I would say there are 2 big reasons for this:
       a) Keep the money inside CPF at a high level so that you can hit your minimum sum.
       b) Discipline, because people tend to spend the extra cash once they profit from selling a house, thus if a portion of it went into a place that they cannot withdraw and spend, the money is thus saved. 

3) Am I Paying Double Interest via CPF Home Loan?
In a way, yes. You are paying interest to the CPF at a rate of 2.5% + 0.1% (base OA interest rate + 0.1%). In addition, you are also required to top back your OA to the "would-be amount" if you did not use your CPF to pay for your mortgage (OA rate of currently 2.5%).
BUT, you can also consider it as a mortgage loan + forced savings.
You pay your monthly mortgage, and upon selling your house, it automatically helps you transfer some of your money away into a savings plan (forced savings), which you can use for a range of different purposes depending on your age and schemes available.
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  1. Understand that the accrued interest have to paid back when we the property that is used to finance is sold. So if the property is not sold, the amount of OA used will still be incurring accrued interest, in this case can we settle the amount to our CPF OA account using cash to stop it from accruing interest?

    1. Hi Bluelite,

      My apologies for this late reply. Please find below the link regarding your question.
      Thank you for your question and thank you for your support!
      We hope to see you asking us more questions in the future!
      Thank you :D

  2. This comment has been removed by a blog administrator.

  3. Read your blog its really informative and helpful keep updating with newer post on Home loan

  4. Thanks for sharing. If we have accrued interest in CPF, what are the methods to repay this accrued interest before the mortgage loan matures?

    1. Hi Brandon,

      You could apply to CPF to repay your CPF home accrued interest while you are still repaying your mortgage loan.