CPF Accrued Interest – Will it REALLY come back to haunt me if i use it to finance my property?
Recently, i have read articles citing the negative impact that results when CPF is used to finance a property long term. The articles call for HDB owners to sell their homes and restructure into private properties before they enter into a ‘negative’ sale scenario where low/no cash proceeds are returned to their pockets when they sell.
Let’s examine the possiblity of such scenarios and it’s REAL impact on CPF using property owners.
Before we start, let’s establish the required information to understand what i am about to share.
1. CPF pays you 2.5% per annum for funds in your Ordinary Account.
2. When you use your CPF for financing a property, you stop earning the 2.5% interest on the sum used.
3. When you sell the property, the 2.5% interest that you were supposed to have earned during the years you used your CPF, have to be paid back to your CPF. By you. On top of the sum you had used initially.
4. When you sell your property, the sales proceeds are paid out in the following order – Bank first, CPF second and the excess back to you in cash.
5. I’ll refrain on commenting on the extra 1% CPF pays, Special Account 4% returns etc in this post (We’ll discuss it in another post.)
Alright? Let’s dive in! Don’t hold your breath.
So.. because of interest accrual on your CPF funds, you may encounter a scenario where upon the sale of your property, all the proceeds go back into your CPF account and you are left with nothing in cash. This can be a problem if you are intending to buy another property and have not been saving up enough in cash. You are then CPF rich and Cash poor. And facing the hurdle of putting down a minimum of 5% cash for your next property.
A $1m home will require you to put down $50,000 in cash before you are allowed to touch your CPF funds and draw on a bank loan for the remainder.
To illustrate further, let’s take an example of a married couple who had bought their HDB 20 years ago and utilised 200K in CPF back then and another 200K in CPF to service their bank loan throughout the 20 years till today.
Assuming they were to sell it at $530K today, they would have insufficient sales proceeds to refund to CPF the accrued interest plus principal sum used and would get zero dollars back in cash. Why? Banks have the first bite of the sales proceeds, CPF has the second right and finally any excess is yours to pocket. In this case, there are insufficient funds left over AFTER CPF has taken its bite.
Realistically though, the scenario above will rarely happen for 2 reasons.
1. Over 20 years, there would have been significant capital appreciation for the property that would result in a profit with sizeable cash proceeds for the owner. (Provided of course that the property wasn’t one with a very short tenure remaining in the first place OR has depreciated significantly due to other reasons which one would be hard pressed to reasonably name.)
2. A married couple with 200K in CPF to use for properties, would typically be in their early to mid 30s. And with 20 years having passed, they would now be in their early to mid 50s and will be able to draw out their CPF for use in a few years time when they reach 55. Hence, access to the 5% cash would not be an issue if proper planning was done by a professional real estate adviser.
The typical negative or zero cash scenarios could be due to poor capital appreciation of a property, owners being forced into a sale situation due to financial difficulties at the bottom of a market cycle or if the owner had taken out additional equity loans that has increased his outstanding loan amount today.
Another example:
If the couple mentioned above did not have much cash savings and are looking to sell their HDB and buy a $1.2m condominium, they would require a minimum of 5% cash ($60,000). Due to their situation above, they are caught in a predicament and unable to proceed with the purchase despite being CPF rich (More than $400K was refunded back to their CPF when they sold the HDB).
The bottomline is, the longer you have used your CPF for property, the less cash proceeds you will get back when you finally sell.
However, if you have been prudent in having at least moderate savings, are not over-stretching your finances for that Penthouse to keep up with the Jones, and have held your property for a considerable amount of time (Given that properties appreciate over time with inflation and market cycles), you will most likely be fine. There’s really not that much to worry about the hype about a ‘negative’ sale and not having sufficient cash to buy your next property.
That being said, if you have the intention of owning multiple income generating properties, it is always good to start early and soonest so that you will be able to obtain the most cash in hand when ‘rolling’ your funds to build a larger property portfolio.
And if you are wondering, yes it is still a good idea for building wealth through properties given our government policies and macro-outlook in the long term. (Which i won’t bore you with in this post… It’s been long enough and you should reward yourself if you have managed to stay with me till now).
If you’re confused, fret not.
Speak to a Property Wealth Planner who can provide you with in-depth and practical (Non-salesy) advisory services on optimal property investing, holding and structuring strategies and can recommend the better ones to help you with your property portfolio.
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