This is a follow-up article to our previous article.
When you pay your monthly mortgage via CPF Ordinary Account (OA), you are doing several things:
Here's what happens when you pay your mortgage via your CPF Ordinary Account (OA):
- You borrow money from a bank or HDB to pay for your home.
- Every month, you repay your loan with money from your CPF OA.
- The amount that you use to repay your loan will accumulate accrued interest.
- Upon selling your home in the future, you are required to pay back the amount that you had used from your CPF OA to pay for your loan PLUS the accumulated accrued interest, back into your CPF OA.
If you borrow from HDB (the stat board) to buy an HDB (the house) flat, HDB charges an interest of CPF OA rate + 0.1% (which is currently 2.6%).
If you borrow from a bank, the rates will vary.
This part is simple to understand (I hope).
You borrowed money to purchase your home, you will definitely need to repay your loan.
To repay your loan, you use money from your CPF OA (instead of paying via cash).
By using CPF, you pay it with money that is saved for your retirement - or money that you technically cannot touch.
Because you used money that is "meant" for your retirement, and that effectively reduces the ability for that money to earn CPF interest, that CPF money will start to accumulate accrued interest.
The accumulated accrued interest is meant to ensure that in the future if you were to sell your home, there would be sufficient balance left in your CPF for your retirement.
You sold your home; you can earn the price appreciation of your home (selling price greater than buying price).
However, if you used CPF OA to pay for your home, 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 to CONTRIBUTE instead of the word PAY.
Recommended Read: Your HDB is like a Call Stock Option
Assuming you used $100k of your CPF OA to pay for your home, and 30 years later you sold it.
If there was no accrued interest, $100k would be deposited into your CPF OA after you sold your home.
But that $100k would not hold the same value as the $100k you used 30 years ago - because of INFLATION!
The same as "last time fishball noodle 1 bowl $0.50, now $3.50".
Your $100k 30 years ago can buy 200,000 bowls of noodles.
Now in 2020, your $100k can buy only 28,600 bowls of noodles.
So to ensure that you can still buy 200,000 bowls of noodles in 2020 after you sold your home, there needs to be an increase in the amount of money that goes back into your CPF.
That's what the accrued interest portion, it is to ensure that the $100k you took out is able to retain its purchasing power.
However, CPF will only take the accrued interest from the profit you get from selling your home.
If you made no profit from selling your home, you need not pay the accrued interest in cash.
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.
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.
Recommended Read: CPF LIFE in the Year 2020
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A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
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They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.