Earlier in this blog, Mr Salty mentioned that it is possible to cushion our HDB purchase with CPF savings, so that in the event that we get unemployed (willingly or unwillingly), we need not resort to selling our flats. This is possible based on a single fact: You don’t have to use up your CPF to pay for your house.
Basics of Using CPF To Pay For HDB
In the past, we had to “wipe out” our CPF when paying for our HDB flat. That is, HDB take out whatever we have in our CPF Ordinary Account (OA) to pay for the flat first, before determining if we need to top up with cash (if that amount does not meet 10% of the flat’s value) and how much loan we have to take.
After August 2018, all things being the same, we can opt to keep up to $20,000 in our CPF OA when paying for our HDB, even though that means our CPF won’t be able to cover the 10% down payment required – we just have to top up the outstanding amount with cash. The only caveat is that this applies to buyers who are going to use HDB loan (and not private bank loans).
Why Should I Keep Money in My CPF?
When I don’t pay as much as I can upfront, it means I will take a bigger loan, which will translate to paying more interest over the loan period (for me, 25 years). Therefore, stashing cash aside in the CPF, when I can actually afford to pay more, is counter intuitive. In fact, I have seen dozens of “experts” advocating layman like me to avoid “activating” this feature.
There is only 1 reason why I, or we the layman in general, should try not to use up all our CPF OA money for HDB down payment:
Emergency
Any financial advisor will not be able to fight this argument, because having cash for emergency is a basic tenet of financial management.
In the case of keeping money in CPF, we will be able to continue paying for our house even if something happens and stops our income for an extended period of time: unemployment, extended sick/hospital leave, sabbatical etc.
One of my friends told me that HDB will repossess our flats only in the extreme scenario. However, being unable to repay any loans has a negative domino effect on our lives, from credit ratings to our professional reputation. Since we will only be unable to repay our loans due to loss of income for a long time (which in itself is a big issue), the problem will only snowball, not dissipate, for months after we resume earning money.
In the case where we can keep the maximum sum in CPF – $20,000 – I can actually last up to 2 years without regular income, using the instance that my loan repayment is $850. For married couples at 25 years old, their monthly payment per person is about $500, so keeping $20,000 can actually last them up to 3.5 years!
| HDB Monthly Repayment | Amount Set Aside in CPF | Period (Month) | Period (Year) |
| $850 | $20,000 | 24 | 2 |
| $500 | $20,000 | 42 | 3.5 |
How Much Should I Leave in My CPF OA?
Since both taking as little loan as possible and leaving some cash in CPF OA are important, how do we decide how much to leave in our CPF? After all, CPF allowing us to keep up to $20,000 does not mean we should keep to the maximum.
In my post on deciding whether to use IKEA Kitchen Planner for my HDB’s renovation, I stressed that the most important thing to do in a decision making process is assessing our needs.
The first need to look at is “How Long Should the Saving Last?” A typical Singaporean finds a job within 25 weeks of being unemployed (the graph from Ministry of Manpower below showed that only 0.8% of the people remain unemployed for more than 25 weeks), which means having enough CPF savings to last us for at least half a year will be sufficient. Of course, there may be people who think that “employment” may refer to part time jobs that don’t make contributions to our CPF, so having at least 1 year of buffer should be more than enough for the majority of us.
https://stats.mom.gov.sg/Pages/Long-Term-Unemployment-Rate-Topline-Chart.aspx
The next factor we should look at is the amount of monthly repayment we incurred. Admittedly, my loan is on the high side because I bought a resale flat and am paying for everything myself. Therefore, in my scenario, I should set aside at least $10,000 in my CPF before paying for my HDB down payment.
Again, for the married Singaporean who are able to buy BTOs at a cheaper price and share the burden of the loan, their monthly repayment should be up to $500 per person. Therefore, setting aside $6000 in CPF will cater for the 1 year of rainy days.
The last factor, which is sort of related to the previous one, was the price of the flat. If I earn $3,000 a month and want to buy the 4-room flat that I’m owning, I would have to top up around $200 in cash every month in order to repay the loan. This does not make financial sense when I hold a job, and will definitely not make sense when I stop working. This factor is about buying within our means. If I earn $3,000, I most likely can only afford a new 3-room HDB flat, so that my CPF contribution is more than enough to pay for the instalment.
| HDB Loan Repayment Sum | Amount Set Aside in CPF | Number of Months |
| $850 | $10,000 | 12 |
| $500 | $6,000 | 12 |
How Much Did Mr Salty Leave in CPF?
Here’s the part where I will make all readers’ minds groggy.
Looking at the first factor, I had to make sure my CPF last me for 4 years, because in these 4 years, I would be studying and (very likely) unable to top up my CPF. Therefore, theoretically, I should have set aside $40,000 (which was wayyy above the limit set by CPF).
On the other hand, I literally wiped out everything I had in my CPF back when I was asked to pay for my down payment. Nope, I still went for the HDB Loan (simply for the reason that they offer a simpler financing method than the banks), which meant that I was eligible for the scheme, but I didn’t take it up.
So how did I make sure I have enough money to pay for my repayment for 4 years? Did I lie about any of the above?
Catch #1: Assumption That There Was No CPF Contribution From The Start
Eagle-eyed readers would quickly see that the “flaw” of the tables I showed was not “The tables are unrealistic because Singaporeans will be always be unemployed due to [insert Government-blaming excuse]”, but simply because they were worked out assuming the savings was activated right from the start.
Realistically, we don’t immediately get unemployed after paying for our HDB down payment
Assuming the scenario that I bought a new HDB 3-room flat, incurring $500 monthly repayment and earning $3000 a month, I will have $160 left over every month in my CPF OA after my CPF contribution from my work is used to pay for the loan. That leftover will accumulate and, in 4 months, be enough to pay for an instalment. Assuming that I only quit my job 2 years after buying the flat, I would have $3,840 in my CPF OA (assuming I got no bonus and earned no interest from CPF), which would be sufficient to pay for 7 months of instalment.
Or, to put it in another way, for every 3 years I work, I can afford to stay unemployed for 1 year without having to worry about my HDB loan.
Or, to stretch our minds a bit, for my 25-year HDB loan, I can keep working till the 19th year of my loan and stop working, because the remaining CPF can pay for the rest of my HDB loan. (Caveat: CPF rules apply. Follow the link at the end of the post to read about the CPF Withdrawal Limits when we reach 55 years old)
For Mr Salty, I didn’t stop working and go for my studies right after I paid my HDB down payment. My monthly repayment was lower than that of my monthly contribution to CPF OA from my day job and I continued working for 6 months, during which I also received performance bonus. When my salary stopped coming in, I was left with enough savings to pay for another 8 months of loan.
Catch #2: CPF Investment Scheme (CPFIS)
The other “catch” was that every cent of my CPF used to buy stocks was spared from all the confusing rules. It was as though the amount I used for my stocks was non-existent.
What was great about setting aside money in stocks was that we assume the stocks are earning more than the 3.5% interest that CPF is giving for the first $20,000 we have in our CPF OA.
What sucked was that the earning is not guaranteed.
The factor that worked in my favour was that I had been managing my stock portfolio for CPFIS in the past 10 years, and during the time I had to make a decision whether to sell or keep the stocks for my HDB, I already had some good stocks at hand. They were either bought during the lows of 2016 and appreciated in value, or were some consistent, good-performing stocks that gave at least 4% dividends a year.
Some 2 months before I had to start paying for my HDB, I sold off the lousy stocks and kept those that I assessed would still generate at least 3% dividends for the next 3 years (to be frank, 3 years is a rather long time, but let’s just say I bought blue chips that could last that long).
Therefore, after my savings in CPF were used up on the 9th month, I can gradually sell off my stocks until I completed my studies and can start working again.
Learning Point – Who Benefits From This?
As mentioned earlier, if we buy within our means and are able to hold on to a job (or in my example above, stay unemployed only for a year for every 3 years of work), no one actually needs to set aside money in CPF when paying for their HDB down payment.
However, as the Chinese saying goes, 规矩是死的，人是活的 (human beings behave in a myriad of ways), there are still situations when setting aside money in CPF makes sense.
For example, there will be crazy people like Mr Salty who wanted to go for full-time studies after buying his HDB.
Additionally, accidents happen anytime and anywhere. Although I said that no one (except me) plans to be unemployed immediately after buying his HDB, accidents that cause us to be bedridden for half a year at a go can happen right after you end the call with the CPF staff giving him the green light to withdraw your CPF savings for the down payment.
And then there are times when people just want to take a break from working. Just because.
I think this method works best for people who are thinking of starting their own business some time after buying their HDB.
With the combination of maxing out the $20,000 limit, and holding on stocks of $30,000 in value, the total amount can last for 5 years or more, which is sufficient time for the entrepreneur to decide whether to continue with the business venture.
And during this period of time, the entrepreneur need not worry about not having a place to stay.
In the worst case scenario, he can rent out the HDB after his CPF is depleted, since he would have reached the 5-year MOP.
Conclusion
Usually, people will end their blog posts with a recap of what they said. Mr Salty would like to spotlight an important principle instead: Buy within our means.
If I were to buy a 5-room flat in Punggol that cost half a million, I would never have been able to do anything I mentioned above. After wiping out my CPF, I will still be left with a $2,000 monthly repayment, which I must top up in cash. I will not be able to afford to lose my job (and hence do anything I desire).
If you are about to buy a HDB flat, will you set aside money in CPF? Please let me know what you think you will do or how you think we can fully maximise the rules of HDB and CPF.
Most importantly, remember to Like and Share this post! Follow Hello Mr Salty for more of my personal journey on buying my first HDB flat.
Some External Reading
Both HDB and CPF have many rules regarding how we can use our CPF for HDB loan repayment. Different rules may affect how we can use our CPF in the ways I mentioned in this blog post. The ultimate “authority” still lies with HDB and CPF, so it’s always good to go to their websites to study the rules. One good place to start is here:
https://www.hdb.gov.sg/cs/infoweb/residential/servicing-your-hdb-loan/cpf-rules-and-early-repayment
My friend said that HDB will only repossess our HDB only in extreme cases, and he was right. HDB already laid out a full list of at least 7 ways we can take before we lose our flats totally. The key is to act early and not think of “saving face”:
Straits Times wrote a comprehensive report on the change in rules to allow us to keep some of our CPF when paying for our HDB:
https://www.straitstimes.com/singapore/flat-buyers-taking-hdb-loan-can-keep-up-to-20k-in-cpf
Interestingly, I could not find any info about us being able to keep up to $20,000 in our CPF when buying flats with HDB loan, except for the news article above and verbally through my property agent and the conversation with the CPF staff processing my withdrawal to pay for the flat. Anybody who can direct me to an official source (either from HDB or CPF) will be appreciated!
If you enjoyed this post, remember to Like and Share it on your Facebook or Twitter! For the 35 year old singles, you can also read my other post on how I managed to get my HDB resale flat in 14 weeks! Or for those who have already bought your resale HDB flat, check out my post on my experience using IKEA Kitchen Planner, or my experience installing Yale digital lock!
Remember, salty is life!