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

Wednesday, 11 November 2015

Difference Using Cash or CPF to Pay Off Housing Mortgage

This post is dedicated to another reader of ours who post us the following question:
Is there any difference if I use cash to pay off my mortgage and not use the cpf vs I use my cpf and then add in the equivalent in cash into my cpf account.

CPF Voluntary Contribution Rates
What to Own during Rate Hikes?
Fine Print of CPF Money Withdrawal
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Repaying CPF Accrued Interest - Why?
Reducing CPF Housing Accrued Interest

Scenario 1: Use Cash to pay Mortgage, CPF money remains in CPF.
1) You are earning interest (2.5% + 1%) paid by CPF.
2) No accrued interest from housing loan needs to be paid back when the house is sold
3) You will have less cash on hand, thus it is not recommended to do this UNLESS you have quite a sum of cash or income to sustain your monthly mortgage

Scenario 2: Use CPF to pay Mortgage, THEN contribute the same amount of money to CPF
1) Not earning interest from CPF
2) When you sell your house, you need to return back to your CPF account the accrued interest
3) When you voluntarily contribute money to your CPF, it is subjected to the Voluntary Contribution Rate Requirement (click for more info), which splits your money into different accounts
4) You will accumulate interest faster, at a double rate. 1 set of interest from selling your house (the accrued interest) and 1 set of interest on the amount you voluntarily contribute into your CPF.

Do note that regardless of choosing Scenario 1 or 2, CPF will only pay you 1 set of interest

Advantage of using Cash
1) Less Cash at hand, less likely to spend the cash (money bites us, once in a while)
2) Your money is earning higher interest from CPF, instead of being in bank earning miserable interest.

Disadvantage of using Cash
1) Opportunity cost: can your cash be used to invest at a higher return?
2) Voluntary contribution got limit - refer to the above link for more information about voluntary contribution

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1 comment:

  1. There are two types of Mortgages in Canada, one is a Conventional Mortgage, less than 80% loan to value. The other is a High Ratio Mortgage, 80% to 100 loan to value. Within these two types there are several sub-types, such as Open, Closed and Variable Rate Mortgages.
    To know more visit- mortgage