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

Monday, 25 November 2019

CPF Accrued Interest: Why Do I Need To Pay Them Back?

Today's post is an answer to the question: Why do I have to return into my CPF account the accrued interest I accumulated?
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.
If you have any more questions regarding this topic, feel free to comment, ask us, or email us.
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1) What is 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.
So because you took it out, it could not earn the accrued interest, so that 'interest charge' is accumulated.
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 use your CPF to buy your house, your CPF OA balance would have earned an interest of 2.5% every year from CPF.
That money will be kept inside your CPF and would continue growing every year.
When you sell your house, you return into your CPF OA the amount that you had taken out to pay for your house (principal), plus the interest you would have earned if the principal was not withdrawn to pay for your house.
The "returning of CPF principal + accrued interest' is so that your CPF OA account can fully reflect the amount that should have been inside if you did not use it to buy a house.
I would say there are 2 big reasons for this:
       a) Keeping the money inside CPF ensures that you can hit your minimum sum faster.
       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.

Recommended Read: Moving CPF RSS to 90 is a Good Social Experiment

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%). Also, you are required to return back into 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.

4) What if I Don't Want to Pay the Accrued Interest?
Well, there are 2 ways:

  1. Pay for your home with cash and not with your CPF money.
  2. Don't ever sell your house. You only have to return the money into your CPF if you sell the house. If you never sell, you never need to return.

Recommended Read: What is CPF Basic Retirement Sum (BRS)?

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  1. If let say I can fully paid a house with OA. Instead I pump all my oa to sa. Will that effectively cover the interest that I suppose to pay. My thinking was using SA 4% to cover the 2.6% loan + interest. In the long run when retirement I should earn 1.4% right.

    1. Hi Poh,

      Mathematically correct.
      But, you need to make sure you got enough cash to pay for your loan.
      Because what you are essentially doing is paying your home loan with cash, then using the money in your CPF to earn a higher interest.
      There are people who does this in order to earn more interest.
      But there are more people who rather use CPF to pay for their home since it is money they cannot touch, whereas their cash is something they can touch.

      But, to each their own, and it depends on each individual's circumstances to decide which is the best path forward

  2. I have finished paying my loan but my accumulated interest is still increasing.

    1. Hi,

      Yes, the accrued interest will keep increasing as long as it is not repaid.
      You have finished paying your home loan (and I presume you paid for it via CPF).
      So let's say you used $300k of your CPF money to pay for your home.
      What you have done is used $300k of your CPF money to pay off the loan.
      You technically still "owe" your own CPF $300k, and the accumulated interest is levied on that $300k.
      You can apply to pay cash to your CPF account to pay off that $300k you owe to your CPF, or you can wait till you sell your home and then return that $300k+accrued interest.
      Or, like we said in the article, if you never intend to sell your home, that accrued interest just a number that is never going to affect you.

  3. I have paid back my cpf loan (ie principal) w/ only accrued interest remaining outstanding. However the interest keeps growing. Why charge interest on (accrued) interest. If cpf is meant for retirement, how can this be rational.

    1. Hi FT,

      That's the magic of compounding, it can work for you or against you.
      The interest on our CPF money is compounded yearly - that makes our money grow faster - essentially the interest you earned in Y1 will earn you interest in Y2.
      Hence when you withdraw out money from your CPF, the compounding effect also work on the accrued interest.
      But, like we said, if you never intend to sell your home, that accrued interest just a number that is never going to affect you.

  4. Does it mean if vwithdraw my money from my own saving account at the end i still have to paid back the accurred interest if not the money inside would have earn me interest. Doesnt make sense since cpf is my own money also if i withdraw to purchase house why must i return with incurred interest

    1. Hi,

      The rationale is to ensure that we have enough money for our retirement.
      And to achieve that, the retirement egg nest (aka CPF balance) have to be huge.
      For the egg nest to be huge, you need both 'contribution' + 'interest earned'.
      Since the money is withdrawn and can't be used to earn interest, that 'interest earned' portion will have to be covered by the profits you made from selling your home.
      But, if you never intend to sell your home, that accrued interest just a number that is never going to affect you.

  5. What about the CPF grants given to new buyers? That is given to new buyers to offset the cost of buying a house. So, in any other scenarios, we would not have receive this CPF grant and therefore we should not be liable for the accrued interest for these CPF grants

    1. Hi Versalite,

      So how the grant works is the grant is first "deposited" into your CPF, hence it becomes part of your CPF balance.
      It is then taken out to pay or subsidise for your house.
      So in essence, it is like taking money out from your CPF account, and hence there is accrued interest levied on top of it.
      I guess you can say it's a trade-off: get a grant that accumulates accrued interest, or buy a home without a grant.
      I'll pick 'grant with accrued interest' any time over the other option since it is free money and like we mentioned in the article, if i never intend to sell my home, that accrued interest just a number that is never going to affect me.

  6. Actually for most who sell it's also not a problem as they tend to either upgrade or buy a similar priced replacement property. Whatever that is returned into their OA they will be using again to buy their next property.

    It is those who sell to cash out, or to downgrade to a much cheaper property thinking they can cash out the difference ... who may get an unpleasant surprise from CPF.

  7. As someone who just started his own personal finance journey and blogging, this is very useful to me! Thanks for explaining!