If you’ve ever used your CPF savings to buy a property, you might be sitting on a ticking time bomb without even realising it – CPF accrued interest.
In this post, you’ll discover:
- What CPF accrued interest is and why it matters
- How it can significantly impact your finances when you sell your property
- Strategies to reduce or avoid CPF accrued interest altogether
If you’re curious about how CPF accrued interest could affect your future plans, keep reading – you won’t want to miss this.
What is CPF accrued interest & how does it work?
The CPF accrued interest is the interest your CPF savings would have earned if you hadn’t used them for your property purchase.
Here’s how it works.
The CPF Ordinary Account (OA) typically offers an interest rate of 2.5% per annum.
So, every dollar you withdraw from your CPF to finance your home would have otherwise been earning that 2.5% interest while sitting safely in your account.
Why?
Well, it’s essentially like you’re taking a loan from your future self.
You’re borrowing money from your own CPF account to make a significant purchase today, with the understanding that you’ll repay that money, along with the interest it would have earned, when you sell your property.
The amount of interest you’ll need to repay is directly tied to how much CPF money you used for your property purchase.
When it comes time to sell your home, the process of repayment begins.
You’ll have to refund not only the principal amount you took out but also the accrued interest.
This repayment goes back into your CPF account, essentially restoring your retirement savings.
By paying back the accrued interest, you’re bolstering your CPF savings, which can then be used for other critical financial needs, like retirement planning.
Why must I pay back the CPF accrued interest?
The repayment ensures that your retirement savings remain on track.
The amount you pay back, including both the principal and the interest, will go directly into your CPF OA.
When you turn 55, the money in your CPF OA, along with your Special Account (SA), will form your Retirement Account (RA).
This RA is crucial because it’s from here that your CPF LIFE payouts will be drawn, providing you with a steady income during your retirement years.
How do I calculate my CPF Accrued Interest?
Here is the formula for you to use to calculate your CPF accrued interest:
Accrued Interest = Principal Amount x CPF OA Interest Rate / 12 x Number of Months
How does CPF accrued interest affect you?
Diminished retirement savings
When you use your CPF savings to purchase a property, you’re essentially diverting funds that would otherwise be growing in your CPF Ordinary Account (OA).
This growth is crucial because it contributes to your retirement nest egg, ensuring that you have sufficient funds when you stop working.
As CPF accrued interest accumulates, it represents the potential returns you’ve missed out on by using your CPF for your property instead of letting it sit and earn interest in your OA.
When it’s time to repay this accrued interest – typically when you sell your property – you’re effectively restoring these lost returns to your CPF account.
However, the period during which your funds were not compounding in your OA can leave a gap in your retirement savings.
As a result, when you reach retirement age, your CPF balances might be lower than they would have been had you not used your CPF savings for property.
Investment Returns
When you use your CPF savings to finance a property, you’re diverting funds that could have been invested elsewhere, such as in CPF-approved investment schemes, unit trusts, or even just left in your CPF Ordinary Account (OA) to earn a steady interest of 2.5% per annum.
The opportunity cost here is important.
If those funds had remained in your CPF OA, they would have continued to generate a return, contributing to your overall retirement savings.
Alternatively, if you had invested them in higher-yielding CPF-approved investment options, you might have achieved even greater returns, boosting your retirement portfolio.
By using these funds for property, you forgo these potential returns, which could have compounded over time.
Unexpected higher total housing cost
The concept of CPF accrued interest is not known to many.
Because of this, many homebuyers underestimate how much it actually costs to own their homes.
As such, they ended up paying a higher total housing cost than they expected, affecting their financial plans.
Financial Strain
CPF accrued interest can also contribute to financial strain, especially when property owners are faced with the reality of repaying both the principal amount and the accumulated interest upon selling their property.
This repayment obligation can significantly reduce the cash proceeds from the sale, leaving you with less liquidity than anticipated.
If property values haven’t appreciated as expected, or if you’re selling in a down market, the amount you owe to your CPF account – including the accrued interest – can exceed the cash proceeds from the sale.
This scenario is particularly challenging because it means you might need to dip into other savings or even take on additional debt to cover the shortfall.
How can I avoid or reduce the accrued interest in CPF?
Refinance housing loans
Refinancing your housing loan, especially if you move from an HDB loan (at 2.6% interest) to a bank loan offering lower interest rates, can help reduce the total loan repayment amount, which indirectly impacts CPF accrued interest.
With a lower interest rate, your monthly mortgage repayments will decrease, meaning less CPF is required to meet these payments.
Since CPF accrued interest is based on the amount of CPF withdrawal for housing payments, reducing your monthly CPF usage will also lower the accrued interest over time.
Additionally, refinancing provides an opportunity to shorten the loan tenure.
While this may slightly increase monthly repayments, it allows you to pay off the loan faster.
Faster repayment means that CPF is used for a shorter period, reducing the overall CPF accrued interest.
Furthermore, with the savings from refinancing, you could choose to pay a portion of your mortgage with cash instead of CPF.
The less CPF you use, the less accrued interest builds up, which can significantly reduce the amount you need to refund when you sell your property.
However, take note that once you shift from a HDB loan to a bank loan, you will not be able to switch back.
Pay off home loan instalments using cash
When you choose to make your monthly mortgage payments with cash, you leave your CPF savings untouched in your CPF Ordinary Account (OA), allowing them to continue earning interest of 2.5% per year.
Thus, you avoid depleting your CPF savings, meaning there’s no accrued interest to worry about later.
This not only preserves your CPF savings for future needs but also prevents the accumulation of CPF accrued interest that you would otherwise need to repay when you sell your property.
This can significantly boost your retirement funds, ensuring you have a more substantial nest egg when you reach retirement age.
Transferring the CPF OA monies to your SA
By transferring money from your OA to your SA, those funds are locked in the SA and can no longer be used for property-related purposes.
As a result, there is less CPF available to withdraw for housing, which directly reduces the CPF accrued interest you accumulate over time.
Additionally, the transferred money in your SA earns a higher interest rate of up to 4% per annum, compared to the OA’s 2.5%.
This allows your funds to grow faster for retirement, while simultaneously preventing them from being subject to accrued interest related to housing payments.
In the long run, this strategy limits your reliance on CPF for mortgage payments, thereby lowering your total accrued interest and boosting your retirement savings with the higher SA interest rate.
This option is particularly suitable for individuals who are financially stable and can afford to use more cash or other resources to fund their mortgage payments, rather than relying heavily on CPF.
It’s also ideal for those who are focused on building their retirement nest egg, as the higher interest rate in the SA offers a better return on savings.
However, it’s important to note that this transfer is irreversible.
Once funds are moved from the OA to the SA, they cannot be used for housing or other expenses, so it’s crucial to carefully consider your current and future financial needs before making this decision.
A voluntary housing refund (either partially or in full)
By making a partial refund, you return only a portion of the CPF savings you used, which can still help reduce the amount of accrued interest that accumulates.
On the other hand, a full refund involves returning the entire amount you withdrew for the property, which would stop any further accrual of interest altogether.
Both approaches reduce the CPF accrued interest that will need to be repaid when you sell your property, thereby increasing the cash proceeds you can keep from the sale.
Additionally, the refunded amount begins to earn interest again in your OA, enhancing your overall retirement savings.
How can I check the amount of accrued interest in my CPF account?
To check the amount of accrued interest in your CPF account, you can log in to the CPF portal using your SingPass.
Once logged in, navigate to the “My Statement” section, where you’ll find detailed information about your CPF savings, including the accrued interest.
Look under the “Property” section, where the accrued interest on the amount withdrawn for your property will be displayed.
This will give you a clear view of how much interest has accumulated on your CPF savings used for housing.
Should I repay my CPF accrued interest?
Technically, you must repay your CPF accrued interest – stating this just in case CPF Board comes after me.
But there are some considerations as to whether how fast you should repay your CPF accrued interest in full (see what I did there? 😬)
When you should consider repaying CPF accrued interest
One reason to consider repaying CPF accrued interest is to preserve your CPF savings for retirement.
When you repay the accrued interest, it replenishes your CPF Ordinary Account (OA), allowing the funds to continue earning interest at 2.5% per annum.
Over time, this interest compounding can significantly boost your retirement savings, especially if you plan to hold onto your property for a long time.
Repaying CPF accrued interest also gives you the flexibility to use your CPF for future property purchases or other needs down the road.
Additionally, repaying CPF accrued interest can be a smart move if you have sufficient cash on hand and do not want your CPF to be heavily depleted when you eventually sell your property.
If you plan to downsize or upgrade in the future, repaying the accrued interest earlier on can help reduce the impact on your CPF account balance when the time comes to refund the principal and interest upon the sale.
Moreover, those with a long-term outlook toward maintaining a strong financial base for retirement may prefer to pay off their CPF obligations sooner rather than later.
When you can consider not repaying CPF accrued interest (or delaying it)
On the other hand, not everyone may need or want to repay CPF accrued interest immediately.
If you are not planning to sell your property in the near future, you may decide to let the accrued interest build up, especially if your current focus is on managing other financial commitments, such as paying down your mortgage or building liquid cash savings.
Since accrued interest only needs to be repaid when the property is sold, there may be little urgency in repaying it earlier, allowing you to prioritise other financial goals for the time being.
Moreover, for individuals with limited cash reserves or those prioritising cash flow for other investments, repaying accrued interest might not be the best option.
If your cash is tied up in other more immediate needs, such as children’s education or medical expenses, it may be more beneficial to focus on those areas first rather than depleting your cash for accrued interest repayment.
In this case, the accrued interest can remain unpaid until the property is sold, at which point the proceeds can be used to settle the CPF amounts owed.
Another important factor to consider when deciding whether to repay CPF accrued interest is the opportunity cost.
If you have cash on hand, rather than using it to repay accrued interest (which would earn the CPF OA interest rate of 2.5%), you might instead choose to invest that money elsewhere for potentially higher returns.
For instance, if you have access to investment opportunities that can yield higher returns than the 2.5% CPF interest rate – such as in stocks, bonds, or real estate – keeping your cash invested could be more profitable in the long run.
By allocating your cash to higher-return investments, you could grow your wealth faster, thus outweighing the benefits of reducing CPF accrued interest.
However, it’s crucial to weigh the risks of such investments, as market fluctuations could impact your returns, while the CPF interest rate is guaranteed.
This trade-off between guaranteed growth in CPF and potentially higher returns from investing is a key consideration when evaluating the opportunity cost of repaying accrued interest.
How can I pay back CPF accrued interest?
You can pay back your CPF accrued interest using either cash or the sale of your property.
However, the most straightforward method is to use cash.
By paying the accrued interest in cash, you avoid further depleting your CPF savings, allowing them to continue earning interest and growing for your retirement.
This can be an effective way to minimise the impact on your CPF balances and maintain a strong financial position for the future.
The most common and natural method is to repay the CPF principal and accrued interest from the proceeds of your property sale.
When you sell your property, the proceeds are typically used to first clear any outstanding mortgage.
Then, the amount of CPF you initially withdrew for the property, plus the accrued interest, will automatically be refunded to your CPF OA.
Only after these amounts are settled can you access any remaining cash proceeds from the sale.
What happens to CPF accrued interest if I die?
If you pass away, the CPF accrued interest, along with the principal amount used for your property, does not need to be repaid and will be distributed according to your CPF nomination.
However, if you have an outstanding mortgage, your next of kin will have to take over your loan unless you have mortgage insurance for your property.
Conclusion
In a nutshell, CPF accrued interest is something every property owner needs to consider carefully.
We’ve walked through what CPF accrued interest is, how it works, and the different ways it can affect you, from reducing your retirement savings to increasing your total housing costs.
We’ve also explored practical strategies like making partial refunds, paying with cash, and even refinancing your home loan to keep those accrued interest amounts in check.
If all this sounds a bit overwhelming, don’t worry – you’re not alone.
Managing CPF accrued interest can be tricky, but the good news is, you don’t have to figure it out by yourself.
If you’re feeling confused or unsure about how to best handle your CPF savings when it comes to your property, why not chat with one of our financial advisor partners?
They’re here to help, and the best part is, it won’t cost you a thing.
A little guidance can go a long way in making sure your CPF is working as hard as possible for your future.
References
- https://www.cpf.gov.sg/service/article/how-does-the-board-calculate-the-accrued-interest-on-the-amount-of-cpf-used-for-my-property
- https://www.cpf.gov.sg/member/infohub/educational-resources/sales-proceeds-after-selling-your-home
- https://www.cpf.gov.sg/service/article/is-there-any-accrued-interest-on-the-amount-of-cpf-savings-used-for-my-property
