Should You Pay Off You HDB Loan Fully with Your CPF Monies?

This is one of the most frequently questions I get throughout my 10 year real estate career.

The truth is, I have been looking for the best answer from people who are more smarter than me.

But the truth is – even a top banker I know cannot give me a satisfying answer for this question.

Scenario: We make a decision to fully pay for our HDB flat with our CPF monies.

Immediate Consequence:
The moment we draw out the money from our CPF, we will need to start paying the accrued interest for the money we draw out.

Let’s say we bought a HDB BTO at $400k. Then we fully paid for the flat with the money from our CPF.

Yes! Finally no more debt. No more monthly installment.

We also don’t need to keep paying interest for the HDB loan. You feel happy, you feel free…..

This seems like the common goal and dream of the hard-working Singaporean couple. Pay off our HDB loan in full. Right?

Guess what will happen next.

We will need to start paying interest for this $400k we withdraw from our OA — at 2.5% per year.

For example, if we hold this property for 10 years and we pay off on the 10th year – the amount of compound interest we have to pay to CPF board is $112k.

Usually we will not feel this “accrued CPF interest” when we sell early.

This is because our HDB BTO property is likely to have made some money in the first 10 years especially if we had bought it directly from HDB. Maybe at this point, the HDB flat should be worth between $550k to $600k.

But what will happen beyond that?

How about after 30 years?

We need to pay back $439k interest. And the total returned will be $839k back to CPF. You can check the calculations here.

Honestly – are we able to sell a 30-year old flat at $839k?

I am really not sure.

But from my past experience dealing with various clients, as our age catch up, we become more nostalgic and we become even more resistant in selling our flat.

Then you ask me the next question: If we don’t fully pay off the HDB loan, then this problem will not arise right?

If we don’t pay off and choose to leave the money in our OA, the CPF board will give us 2.5% interest.

But then again, HDB loan will charge us 2.6% interest.

So one pocket in and the other pocket out plus we lose additional 0.1%.

So when we fully pay off the HDB loan using our CPF – we don’t have to pay HDB interest of 2.6%. But at the same time, CPF will NOT give us interest of 2.5%

But “someone” still have to give the interest.

And we are the ones who have to come up with it.

So every year, we will use our cash proceeds from our HDB flat sale and top-up back to our CPF.

What happens if we reach a point that our HDB flat value is lower then what we need to return to CPF?

Then we will have the issue of “negative cash sale”.

So how do we prevent this? The truth is, we really need to constantly review our property portfolio and always reset our accounts.

Imagine if we have a $600k property, then it means we can have a minimal $90k CPF usage.

But many homeowners will put in more – thinking they are saving on the interest.

Yes they did save interest but they also unknowingly change cash to CPF.

And sometimes cash is so much more important that CPF – the liquidity allows you a lot to take more advantage and more leverage on opportunities.