If you get a HDB housing loan, should you keep more than $20,000 or let your CPF OA go?

When it comes to financing a Housing Development Board (HDB) flat in Singapore, homebuyers are faced with a crucial decision: whether to take up a bank loan or an HDB housing loan. Both options have their distinct differences in terms of loan-to-value limits, interest rates, loan tenures, downpayments required, and the usage of Central Provident Fund (CPF) funds. Since the introduction of the Public Housing Scheme in 1968, Singaporeans have been allowed to use their CPF Ordinary Account (OA) savings to finance their mortgages for HDB flats. However, the amount of CPF funds that must be used differs depending on whether you intend to take a private bank loan or an HDB loan.

For a bank loan, you would need to pay a downpayment of 25% of the property’s valuation. Of this, 5% needs to be in cash, and the remaining 20% can be either in CPF OA and/or cash. However, if you were to take an HDB housing loan before August 2018, regardless of whether you are able to pay the downpayment in cash, you will have to use all your OA savings. This meant that flat buyers on HDB loans, particularly young buyers, were not able to earn the extra 1% interest on their combined CPF savings for the first $60,000 (capped at $20,000 in OA).

To allow more CPF members to earn this higher interest on their CPF savings, flat buyers who took HDB housing loans since August 2018 have been allowed the option to retain up to $20,000 in their OA. This leads us to question the options that flat buyers could consider when deciding whether to retain or not to retain that $20,000.

Option 1: Wipe Out Entire CPF Savings

The first option involves using your entire CPF Ordinary Account (OA) savings towards the financing of your HDB home loan, which includes the downpayment, stamp fee, registration fees, and legal fees. This may not even be an option if you are unable to finance the initial 20% downpayment without using your entire CPF OA. For example, if you purchase a HDB flat for $300,000, the minimum downpayment required is $60,000. Assuming you have $30,000 in cash and $30,000 in your CPF OA, then it would be difficult for you to retain $20,000 in your OA since you would need it to meet the minimum downpayment.

Option 2: Keep Up to the Allowed $20,000

The second option, especially if you do not have at least $60,000 in combined savings, is to consider keeping up to $20,000 in your OA savings. The flexibility of allowing flat buyers to retain up to $20,000 each in their OA was first announced in August 2018. Prior to that, flat buyers taking up the HDB housing loan had to use their entire OA savings before HDB determines the loan amount. This was done to allow CPF members to gain the extra 1% interest on their first $60,000 combined savings (capped at $20,000 in OA).

Option 3: Keep More Than $20,000 in OA

The third option, if you are keen on growing your CPF savings even faster, is to consider keeping more than $20,000 in your OA. This option may be more suitable for flat buyers who have enough cash for the downpayment and who have either accumulated sufficient CPF savings or wish to maximize their retirement savings.

Key Considerations

When deciding which option to choose, it is essential to consider the following factors:

Interest Rates: The interest rate on your HDB housing loan is 2.6%, while the interest rate on your CPF OA savings is 2.5%. If you choose to keep more than $20,000 in your OA, you can earn up to 3.5% interest on your OA savings, which is higher than the 2.6% concessionary housing loan rate.

Emergency Savings: Retaining a larger amount in your OA can serve as an emergency fund to pay for your housing instalments, earning a higher interest compared to bank savings or fixed deposit accounts.

Retirement Savings: Keeping more than $20,000 in your OA can help you maximize your retirement savings, especially if you transfer the excess to your Special Account (SA) to earn 4% interest.

The decision to retain or not to retain the $20,000 in your CPF OA when taking an HDB housing loan depends on your individual financial situation and goals. By understanding the options available and considering the key factors mentioned above, you can make an informed decision that suits your needs.