After waiting for 4 long years, Heartland Boy will finally be able to collect the keys to his BTO. Not yet, but soon enough for him to start pondering about keys collection. Since he is likely to apply for a HDB concessionary loan, his thoughts inevitably swing over to the prospect of HDB wiping out the entire balances in his CPF Ordinary Account (‘OA’). This is the process whereby HDB will deduct whatever balances remaining in the CPF OA, thereby reducing the mortgage quantum, before granting the applicant a HDB loan.
After doing some research online, Heartland Boy realises that there are several ways to prevent this from happening. The trick is to utilise the CPF Investment Scheme to temporarily divert the CPF OA funds elsewhere before HDB’s notice letter on the collection of keys arrives. Once the HDB concessionary loan is approved and processed, the homeowner can transfer the OA funds back to his account. But before we get there, here are the pros and cons of allowing HDB to wipe out your CPF OA before collection of keys.
Advantage of Not Allowing HDB To Wipe Out Your CPF OA
1. Serves As Emergency Back-Up Funds
Given how fast technology is developing, many jobs will eventually be displaced as the skills of today are gradually rendered obsolete. When the pay cheque stops arriving, the bills will stack up. The undeniable truth is that monthly home mortgages will still have to be paid, either via OA funds or cash. This problem is exacerbated by the fact that your OA will accumulate at a slower pace then as the majority of the monthly contribution will be used to pay off the mortgages due. Therefore, it could only be a couple of months before the unemployed CPF member will have to service his mortgage entirely in cash. Unfortunately, it is precisely during such trying periods that it is almost impossible to find spare cash lying around. As such, this is where the appeal of transferring CPF OA funds via the CPFIS scheme lies.
When the OA funds are eventually transferred back, the CPF member will not start from zero in his OA balances. As such, when he starts to service his mortgage, there would already be excess funds in his OA. These additional funds therefore serve as a buffer for rainy days. Indeed, no one can ever predict with certainty whether a rainy day would arrive. Therefore, having this assurance may allow some to sleep more soundly at night.
2. To earn an additional 1% interest rate in your CPF
Did you know that the first $60,000 of your combined balances in your CPF earn an additional 1% interest rate? However, in computing this $60,000 that will qualify for the additional interest rate, only $20,000 can come from the Ordinary Account. If the Ordinary Account is emptied as a result of a HDB concessionary loan, the balances in Special Account and Medisave Account would then be relied upon to form this first $60,000. Here is a comparison of the interest rates of a CPF member who has sufficient balances to maximise the bonus interest rate given to the first $60,000 against a member who does not.
If you are a young working adult, you might not have accumulated over $60,000 combined balances in your Special Account and Medisave Account by the time you commence mortgage payments. That implies that you are not maximising the interest rate given out by CPF. Therefore, this becomes a very useful trick to employ as the funds in CPF OA is earning 3.5% (2.5%+ 1% bonus) compared to the cost of HDB loan at 2.6%.
3. Prepayment to HDB loans incurs no penalty
The other advantage is that lump sum prepayments to HDB concessionary loan to reduce the loan quantum will not incur any penalty. Therefore, in the event that the aforesaid advantages do not materialise, the mortgager can simply instruct HDB to deduct a specific amount in the OA at no additional cost. In other words, any regret that stems out of making such a move is very low when measured in dollar terms.
Disadvantage of Not Allowing HDB To Wipe Out Your CPF OA
1. Pay A Larger Mortgage
When you take on a bigger mortgage amount, either the monthly mortgage payments get bigger or the payment period gets longer. The overall interest paid increases as well. Depending on one’s risk profile, one may not feel comfortable to be saddled with a bigger debt burden.
2. Opportunity Cost of OA Funds transferred away
It is important to note that monies in OA earn a risk-free, guaranteed 2.5% per annum. As the interest in your CPF accounts are compounded on a monthly basis, funds that are not inside the CPF will not earn interest, even if they are only “away” for a couple of months. Therefore, there is an opportunity cost to transferring your OA funds away to other investment vehicles. Once again, depending on one’s risk profile and investment capability, there are a variety of investment products promising returns across the spectrum. Do bear in mind that from the period of Oct 2014 to Sep 2016, 51% of CPF members would have been better off leaving their OA monies in their respective accounts.
3. Minimum $20,000 OA balance to be eligible for CPFIS
Finally, as much as one may like to utilise his/her OA funds for investment, this option is only available for those who have OA balances in excess of $20,000.
In a future article, Heartland Boy would detail some of the investment products that are eligible under CPFIS Ordinary Account. It would be a continuation of this article and provide readers with more knowledge if they decide to execute this CPF Investment Scheme Shield.