Everywhere you turn, you hear how bad it is to carry debt.
So naturally, it is logical to think that paying for your home in full is the smartest choice.
However, there are a lot of things to consider when you are deciding on paying the property in full.
good thing problem for most of us is that we are paying our property with CPF.
Part of our salary has been stashed away, as required by the law, and when the time comes we can use the CPF to pay the house.
However, there is a catch to using the CPF.
#1. Accrued Interest
Accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing.
The interest is computed on the CPF principal amount withdrawn for housing on a monthly basis (at the current CPF Ordinary Account interest rate) and compounded yearly.
A bit wordy there, hence I will give you an example.
Imagine you have used $200,000 of CPF to pay for your mortgage payments 10 years ag0.
The amount that you have to return back to your CPF if you decide to sell your house will $258,525.
An increase of $58,525!!!
This will be taken from your cash proceeds, hence, leaving you with lesser cash proceeds.
This might also mean that you might experience a negative sale after selling your property.
#2. Compounding Interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein
Taking the same example above, instead of using it, you just leave it in your Ordinary Account.
CPF is one of the safest long-term investments available to Singaporeans.
The returns are guaranteed, no matter how the economy is doing.
The $200,000, mentioned earlier, would have grown to become $256,016.
An increase of $56,016!
Best of all, it is risk-free and without doing anything complicated.
#3. No emergency fund
“100% of foreclosure occurs on homes with a mortgage”
By wiping out your CPF, you will be left with nothing in case of an emergency, such as the loss of your job.
This is very dangerous as we have to be prepared for the unexpected.
Since August 2018, HDB has allowed homeowners to put aside $20,000 each.
Prior to this, homeowners had to “wipe out” their CPF savings, and HDB will loan the remaining monies.
With this new policy, I strongly encourage new homebuyers using HDB loans to set aside the full $20,000 if possible.
This acts as an emergency fund and also allows the monies to enjoy the compounding interest.
However, there are exceptions that paying your house full is a great idea.
One is when you are already near your retirement age.
You definitely want to pay your house in full by then, and not worry about mortgage payments.
A second exception is that you have a lot of unproductive cash on hand sitting in the bank.
I akin paying cash for your property like investing in a bond.
Rather than just keep in the bank and wait while inflation start eroding the value of your dollar, paying your home in cash, helps lower your mortgage tenure or mortgage term.
You will enjoy higher cash proceeds when you sell your house later on.
I hope this article has helped you understand the alternative way on how you can utilize your CPF to help in your retirement goal.