6 things you need to know when buying your property using your CPF

While paying for your property using your CPF Ordinary Account (OA) is the default way to finance your home purchase, there are implications that you need to be aware of.

By Khalil Adis

CPF Bishan Building. Photo: Khalil Adis Consultancy.

Buying a property is perhaps the single big-ticket item that we will possibly purchase in our lifetime.

As such, it is no wonder most Singaporeans will use their CPF Ordinary Account (OA) towards their property purchase.

It makes sense since we  have worked so hard and set aside a tidy sum in our CPF.

However, there are implications if you wish to use your CPF OA.

Here are six things you need to know before committing.

#1: Your CPF OA will be (almost) wiped out when you buy an HDB flat

A Built-To-Order (BTO) flat in Punggol. Photo: Khalil Adis Consultancy.

While you can get up to 90 per cent financing when buying an HDB flat, HDB will usually use up your CPF OA towards your flat's purchase.

This is to reduce your loan amount and therefore, your monthly mortgage.

The good news is you do have the option of keeping $20,000 in your OA to pay for your flat purchase.

If you do not have enough, then you will have to pay for it in cash.

This is a better option in my opinion which I shall explain later in point number 6.

#2: You will be subjected to the MSR and Valuation Limit when buying a resale HDB flat (for HDB loan)

An HDB estate in Punggol: Photo: Khalil Adis Consultancy.

If you are taking an HDB loan, do note you will be subjected to the Mortgage Service Ratio (MSR) and Valuation Limit.

MSR refers to the portion of a borrower’s gross monthly income that goes towards repaying all property loans. 

Your MSR is capped at 30 per cent of a borrower's gross monthly income.

If your gross monthly income is $5,000, your MSR will be $1,500.

Therefore, your monthly mortgage cannot exceed this amount.

Your Valuation Limit is the lower of the purchase price or valuation at the time of purchase.

Assuming the valuation for the flat and purchase price are the same at $500,000 (which means there is no cash-over-valuation), you can use up to $500,000 in your CPF OA.
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If you are unable to meet your Basic Retirement Sum (BSR), you will need to pay for your mortgage in cash. 

You can use CPF's Housing Limit Calculator here.

#3: You will be subjected to the MSR, Valuation Limit and Withdrawal Limit when buying a resale HDB flat (for a bank loan)​

An HDB flat in Sengkang. Photo: Khalil Adis Consultancy.

If you are taking a bank loan, do note you will be subjected to the Mortgage Service Ratio (MSR), Valuation Limit and Withdrawal Limit.

Assuming the valuation for the flat and purchase price are the same at $500,000 (which means there is no cash-over-valuation), your Valuation Limit is $500,000.

For a bank loan, you will be subjected to Withdrawal Limit which is 120 per cent of the Valuation Limit.

This means you can use up to $600,000 in your CPF OA towards your flat purchase.

If you are unable to meet your BSR, you will need to pay for your mortgage in cash. 
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#4: You will be subjected to the TDSR, Valuation Limit and Withdrawal Limit when buying a private property

A condominium in Buangkok. Photo: Khalil Adis Consultancy.

If you are taking a bank loan, do note you will be subjected to the Total Debt Service Ratio (TDSR), Valuation Limit and Withdrawal Limit.

Your TDSR should be less than or equal to 60 per cent.

Assuming you have a gross monthly income of $5,000 with a total monthly debt of $1,000, this is your TDSR:

$1,000/$5,000 x 100% = 20%

Assuming the valuation for the private property and purchase price are the same at $1 million (which means there is no cash-over-valuation), your Valuation Limit is $1 million.

For a bank loan, you will be subjected to Withdrawal Limit which is 120 per cent of the Valuation Limit.

This means you can use up to $1.2 million in your CPF OA towards your private property purchase.

If you are unable to meet your BSR, you will need to pay your mortgage in cash. 

Do note, your monthly mortgage and monthly debt cannot exceed more than 60 per cent of your TDSR.

#5: Pro-rated CPF usage for properties with less than 60 years of lease

The mature HDB estate of Ang Mo Kio. Photo: Khalil Adis Consultancy.

Why are older HDB flats or private properties seeing their value diminishing?

This is because their value will revert to zero towards the end of the lease.

​They are also subjected to a pro-rated CPF usage if their lease is less than 60 years.

This makes them harder to sell as it limits the pool of buyers who can buy such properties.
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Let us assume the following:
Remaining Lease: 50 years 
Youngest Buyer Age: 35 years old 
HDB Flat Price: $400,000

The formula to calculate the pro-rated CPF usage is as follows:

Remaining Lease of Property – 20 / 95 - Age of Youngest Buyer Using CPF - 20

50 - 20 / 95 - 35 - 20 = 30/40

Valuation Limit = 0.75

CPF Usage = 75% x $400,000 = $300,000

For a bank loan, you will be subjected to Withdrawal Limit which is 120 per cent of the Valuation Limit which is $360,000.

#6: CPF amount used with accrued interest needs to be refunded to your Ordinary Account when selling your property

An HDB estate in Jurong West. Photo: Khalil Adis Consultancy.

Most people prefer to use their CPF OA when paying for their monthly mortgage. 

In fact, this seems to be the default way to finance our home purchase.

However, there are some repercussions that you need to be aware of.

When you sell your property, the CPF amount used with accrued interest needs to be refunded to your CPF OA.

As such, this may result in fewer cash proceeds or even a negative sale when you sell your property.

Let us assume the following:
Property’s selling price: $600,000
Property’s purchase price: $500,000
CPF amount used with accrued interest: $300,000
Outstanding loan:$200,000
Sales proceeds: $600,000 - $300,000 - $200,000 = $100,000

Do note, this does not include your legal/conveyancing fees, agent’s commission and other miscellaneous costs.

Conclusion
As you can see, paying for your property using your CPF OA may reduce your cash proceeds or even result in a negative sale when deducting all the expenses.

They say cash is king.

So perhaps paying for your monthly mortgage in cash is not such a bad thing after all.