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How to Maximise Use of CPF Savings for Home Loan Instalments?

Written by Patricia Hung on .

In general, most of us will use CPF savings to pay for our properties. In this way, it will mean forking out lesser in cash and the additional cash on hand can be set aside for other uses.

Most people will also choose to maximise the repayment period on home loans to reduce the monthly instalments. One risk is that we might not be able to use our CPF savings to pay for our home loan instalments before the maturity of the loan.

This will happen when our properties reach the CPF Valuation Limit and Withdrawal Limit.

 

Most of us should be aware of the CPF Valuation and Withdrawal Limits, but we can be contentedly servicing the instalment year after year and forgotten about it until the day comes and until we discover it, since home loan is a long term commitment, it will take many years to service...

Let's recall, what is CPF Valuation Limit and Withdrawal Limit?

Since 2003, any purchase of a HDB or private property with a bank loan will be subjected to a cap on the amount of CPF savings that can be used to service the home loan instalments. Under the CPF Housing Scheme, we can only use CPF savings for our property up to the Valuation Limit of the property, which is the lower of the purchase or valuation of the property at the time of purchase. Thereafter, we can use more CPF for the home loan beyond the Valuation Limit (but up to the Withdrawal Limit) only if we can set aside half of the Minimum Sum in our Special and Ordinary Accounts.

The Withdrawal Limit for each property is currently at 120% of the Valuation Limit.

The Minimum Sum is currently $139,000 from 1 July 2012 to 30 June 2013.

If we do not meet half of the Minimum Sum ie. $69,500, we will not be able to use CPF savings for home loan instalments. This means that we will have to fork out the monthly instalment entirely in cash even before it reaches the Withdrawal Limit.

For home owners with HDB properties bought with HDB concessionary loan (whether directly purchased from the HDB Board or from resale market), they are not affected by the above Withdrawal Limits.

For example, a home owner, who purchases a $600,000 private property and finances it with a 30-year bank loan with an average interest rate of 3.5%, may have to start forking out cash as early as the 25th year of the loan.

Property Price: $650,000
Valuation: $600,000
Valuation Limit: 100% of $600,000 is $600,000
Withdrawal Limit: 120% of $600,000 is $720,000

Assume: 80% loan or $480K over 30 years at average rate of 3.5%, the instalment is $2155.

Assume: 5% of downpayment is paid via Cash and balance 15% or $90,000 is paid using CPF. The monthly instalment is serviced using CPF.

Based on the above, it is estimated that around 20th year, the combined CPF used for the property will reach the Valuation Limit. If we are to use more CPF, we are required to meet half of the Minimum Sum ie. $69,500 in our OA and SA first. This will last us till around 24th year. From the 25th year onwards, we will need to fork out cash to service the instalment.

Facing with the above situation, what are the options for us?

We could always set aside enough cash of about $155,160 for the final 6 years of the home loan. But this may be a lump sum to accumulate.

There are a few ways we can maximise or extend the use of CPF savings for the home loan instalment as follows:-

Option 1 - Taking Shorter Loan Tenor

If we have taken a shorter tenor of 20 year, it will take around 15 years to reach the Valuation Limit and 18 years to reach the Withdrawal Limit. Leaving us with remaining 2 years to pay the instalment entirely in Cash. We will need to set aside around $66,816 for the final 2 years.

Option 2 - Using Lesser CPF savings for instalment payment

Another way is to service the instalment with part cash and part CPF, eg. 25% in Cash and balance 75% in CPF. This will extend the number of years to reach the Valuation Limit to close to 20th year, which is the maturity of the loan.

Option 3 - Using Lesser CPF savings for downpayment

We can choose to use lesser CPF for downpayment, eg. 50% or $60,000 in Cash and 50% or $60,000 in CPF. This will take about 16 years to reach the Valuation Limit and close to 20 years (which is the maturity of the loan) to reach the Valuation Limit.

Those who are planning to buy properties, can start to review which of the above options will work better for them. They may also work with a mix of the above 3 options. For those who have already bought the properties and are servicing 100% of the instalment by CPF savings, the only way to extend the use of CPF savings is Option 2, ie. to start paying part of the home loan instalment by cash.

For those who sell and move to new houses every few years, they may not be so much affected as the Withdrawal Limit will be reset to 120% of Valuation Limit with each new home.

Whichever is the way, we will have to find one way that will better suit our situation and meet our needs. Hopefully, by planning ahead, we will be more well prepared when the time comes when we can no longer use our CPF savings for home loan instalments.

Please refer to the table below for more detailed comparison.

 Example
30-Year Loan
Option 1
20-Year Loan
Option 2
Use less CPF for
Instalment
Option 3
Use less CPF for
Downpayment
Property Price
Valuation
Downpayment in CPF
$650,000
$600,000
$90,000 (15%)
$650,000
$600,000
$90,000 (15%)
$650,000
$600,000
$90,000 (15%)
$650,000
$600,000
$60,000 (10%)
80% loan from Bank
Loan Tenor
Average Interest Rate

Total Instalment
- By CPF
- By Cash
$480,000
30 years
3.50%

$2,155
$2,155
$0
$480,000
20 years
3.50%

$2,784
$2,784
$0
$480,000
20 years
3.50%

$2,088
$2,088
$696
$480,000
20 years
3.50%

$2,784
$2,784
$0
Valuation Limit
Withdrawal Limit

Years to Hit Valuation Limit
Years to Hit Withdrawal Limit
$600,000
$720,000

19 yr 9 mth

24 yr 4 mth
$600,000
$720,000

15 yr 3 mth

18 yr 10 mth
$600,000
$720,000

20 yr 4 mth

25 yr 2 mth
$600,000
$720,000

16 yr 2 mth

19 yr 9 mth

 

To access CPF Housing Withdrawal Limits Calculator, Click Here.