Pros and Cons of Paying Your HDB Home Loan in Cash (Instead of Using Your CPF)

The vast majority of homeowners tap on their CPF funds to pay home mortgages. But is this popular choice necessarily the best option for all homeowners?

Around 800,000 homeowners each year pay for their mortgages using their CPF funds. Perhaps this isn’t surprising; given our high cost of living, many homeowners may have little choice but to tap into their CPF funds to help make ends meet. 

Most people choose otherwise, but paying your mortgage in cash can nevertheless confer beneficial effects on your long-term financial health. Of course, there can also be some deleterious effects in the short term.

While utilising CPF funds for home mortgages is a common practice, some homeowners might find value in exploring alternative financing options like personal loans or home loans for short-term financial flexibility. However, it's essential to weigh the advantages and disadvantages carefully.

Let’s take a closer look at the pros and cons of paying your home mortgage in cash rather than using your CPF monies. 

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Pros of paying your home mortgage in cash

Avoid getting caught in a negative cash sale

You’re probably aware that if you use your CPF to pay for your HDB flat, then sell your home halfway through, you will have to replace the amount you took from your CPF account. 

And this is where you could find yourself saddled with debt, even if you sold your home at break-even or a slight profit. This is known as a negative cash sale, and occurs with startling frequency – according to the CPF Board, 9% of homeowners were affected in 2021, 13% in 2020, and 11% in 2019.

Here’s how it can happen. When you sell your property, you have to pay off the remainder of the mortgage. 

You also have to pay back the CPF monies used, as well as the accrued interest on the amount. The accrued interest is the interest your CPF monies would have earned if it had remained in your Ordinary Account (OA), which grows at 2.5% per annum. 

If the proceeds of your sale are less than the sum total of your outstanding mortgage, CPF monies used, and the accrued interest, you’ll be ensnared in a negative cash sale. 

Note that because of the 2.5% per annum accrued interest, your property must sell at a good chunk higher than what you paid for it, in order to come up even. 

Plus, the longer you wait to sell your home, the larger the sum you have to pay back, due to the effects of compounding interest.

Thankfully the authorities are cognizant of this potential financial trap laying in the path of the unwary, and thus waive any negative cash sale shortfalls – provided the property sells at or above market value. 

If the sale was completed below market value, homeowners would be on the hook for the shortfall. However, they may make an appeal for their case to be reviewed. 

A negative cash sale occurs due to the need to pay back your CPF monies with accrued interest. Hence, it can be avoided if you simply do not use your CPF for your mortgage, and pay cash instead. 

See also: HDB Loan Repayment: Should You Use CPF or Cash?

Gain a backup mortgage fund

By paying your mortgage in cash, you are also allowing the funds in your CPF OA to accumulate and earn interest, thereby building a backup fund you can also use to pay your mortgage. 

If you become unable to finance your mortgage payments in cash, you can continue paying your mortgage using your CPF OA – while you look for a new job, improve your business, etc 

Once you are able to, you can resume paying in cash, allowing your CPF OA to recover and grow once more. 

Increase your CPF Life payouts

Another advantage of paying your mortgage in cash instead of CPF is that you will have a larger CPF balance, which will enable you to receive higher CPF Life payouts

You can accelerate this by transferring unused funds in your OA (which earns 2.5% per annum) to your Special Account (SA), to earn a high interest of 4.08% per annum. 

Do note that OA to SA transfers are strictly one-way, so it might be best to leave a small sum in your OA (perhaps a year’s worth of mortgage payments) as a buffer.

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Cons of paying your home mortgage in cash

Less cash for other needs

Housing takes up a significant portion of your budget, so choosing to pay your mortgage in cash will mean having cash for other needs.

You will thus have to strike a fine balance between your mortgage payments and other expenses – ranging from everyday spending and short-term savings, to long-term financial objectives such as savings, investment, insurance and retirement (although the last one will at least be partially covered by your CPF savings).

And you will also need to be able to keep this up. Given that mortgages typically last for decades, choosing to pay in cash will demand financial discipline. 

Read more:
Mortgage Rates in Singapore are on the Rise. Here's How Homeowners Can Save
Should You Pay Off Your Mortgage Early in Singapore
Should You Still Choose A Bank Home Loan Over An HDB Loan?
Should I Pay Off My Mortgage Or Invest The Money?

May have to settle for a smaller property

After CPF deductions, your take-home pay may not be large enough to afford the property you want, causing you to have to settle for a smaller property, or a unit in a less central location. 

This can have implications later on, such as when your family expands, your children grow up, or when you get a job that is located further away.

Consider supplementing your housing budget with some of your CPF funds, or add someone as a co-owner for increased affordability. 

The bottom line: Plan your home purchase well

As we’ve discussed in this article, using money in your CPF account to pay for your HDB flat isn’t as straightforward as you may have thought. You could be locking yourself into a financial decision that may present troublesome complications in future.

Hence, it is best to have a clear plan when making your home purchase. Ask yourself how long you plan to stay in your flat, how your purchase fits in with your retirement goals, and what contingencies can you deploy should your income get disrupted. 

Perhaps most importantly of all, strive to match your home to your budget. HDB and EC mortgages are subject to the Mortgage Servicing Ratio of 30%, which acts as a guardrail to keep homeowners from overspending on housing. 

While this only applies when purchasing public housing, it is nevertheless a good rule-of-thumb for all homeowners. For financial prudence, your mortgage payments should not exceed 30% of your gross monthly income.

Read these next:
HDB Loan Vs Bank Loan: Which One Should You Go For?
Fixed vs. Floating Home Loan Rates: Which Suits You?
When Should You Start Planning To Refinance Your Mortgage?
Loan-to-Value (LTV) Ratio & Limits In Singapore