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

Tuesday, 14 January 2020

CPF Accumulated Accrued Interest



Today's topic will be on the interest you pay to CPF on your housing loan.
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):

  1. You borrow money from a bank or HDB to pay for your home.
  2. Every month, you repay your loan with money from your CPF OA.
  3. The amount that you use to repay your loan will accumulate accrued interest.
  4. 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.
Step 1:
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).

Step 2:
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.

Step 3:
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.

Step 4:
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

Case Study:
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.

Conclusion:
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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8 comments:

  1. This is good. But the recent message sent out seems to be hinting further increase in payout age. "More people are living into theor 90s..." not to show disrespect, recently a few prominent figures passed away in their 70s. I also observe at wakes the age of people passing away and compare. I dont really believe the number cited by the miniter. Best to let the monthly payout start at 60, those who dont want to take, let them opt out. Using opt in at 65 is like trying to mislead illiterate people. Commoners worked their life and if unfortunately they leave in their 70s, can't enjoy their fruit of labour.

    ReplyDelete
    Replies
    1. At age 55 , you could already withdraw quite a sum of money upon first retirement. If you are still working from 55 to 65, there is no need to withdraw any money since you have a steady income. Better to earn 4% to 6 % interest. Next withdrawal at 65 seems right.I know of some friends who does not withdraw any cash at 55, but prefer to keep it in CPF and accummulate interest.

      Delete
  2. Initially we were unhappy that we had to pay interest to use our own CPF money to buy properties.

    But in recent years as we near retirement age, we changed our thinking about the accrued interest. Upon realising the benefits of having CPF pays the 2.5% pa interest rather than we struggling to earn the 2.5% and then pay ourselves this interest into our CPF, we decided and embarked on the disciplined journey to return all the money we took from our CPF in buying our properties back to our CPF accounts.

    Now we are seeing and enjoying the benefits. For last year 2019, we received a delightful $81,000 in interests combined from all our CPF accounts. And almost zero risk!

    ReplyDelete
  3. This comment has been removed by the author.

    ReplyDelete
  4. We intent to pledge our HDB flat (first hand) to maximise our CPF withdrawal and make HDB our final resting place. Hence the accrued interest matter won't affect us as long as we don't sell our HDB. When we pass on, the remains in CPF and HDB would be inherited by someone else.

    ReplyDelete
    Replies
    1. Hi,

      That is true: if you don't intend to ever sell your HDB, the accrued interest will never be a concern for you

      Delete
  5. Hello
    Very good article. I have question. Should we return the accrued interest even if we meet minimum sum?

    ReplyDelete
    Replies
    1. Hi Sethu,

      Should or Must?
      When you sell, the accrued interest will go back into your CPF. However, if you managed to have money in excess of your cohort's FRS after the principal and accrued interest are transferred back into your CPF, you can withdraw the excess out.

      Should you keep the money in CPF even after you met the minimum sum, that is your choice and depends on circumstance. If you think you can make better use of the money by withdrawing it out, go ahead. If you think you cannot do better than the 4% CPF is giving you for money in your Retirement Account, then it might be best to keep it inside.

      Delete