CPF is a system that, like it or not, is there to help you with the three biggest financial situations you’ll ever face – healthcare, retirement, and property.
Let’s face it, if you haven’t used your CPF account to purchase a property – you will eventually. After all, purchasing a property is one of the rare exceptions where CPF allows you to use the funds stashed away in your Ordinary Account (OA).
However, CPF does have limitations.
If you’ve read our article An Ex-CPF Employee Exposes the 3 Biggest Complaints Singaporeans have About Their CPF Accounts, you know that CPF’s housing limitations are a huge source of discontent.
So before you develop the false idea that CPF will completely cover your home purchase, take a minute to understand the following CPF limitations:
Know the Limits of CPF When it Comes to Financing Your Home
You probably already know that until you reach the age of 50, you and your employer will contribute 36% of your salary (you contribute 20% directly from your salary, your boss contributes another 16% of the value of your salary on top of that) to your CPF account (Ordinary Account, Special Account, and Medisave).
But it’s your OA that get the lion’s share of your contributions.
You can use your OA to service your monthly mortgage repayments for any of the following property types:
- A Build-to-Order (BTO) flat from the Housing Development Board (HDB)
- A Resale HDB Flat
- A Private Property (Condominium, Private Apartments, Landed Property)
But do you really know how much of your OA you can use? Well, that depends on whether you used a bank loan for purchase a resale flat or a private property.
In that case, you’d need to pay close attention to the Valuation Limit (VL) and the Available Housing Withdrawal Limit (AHWL).
The Valuation Limit (VL)
In short, the VL is the lower of either the purchase price, or the valuation of a property.
So if you purchased a $1 million dollar condominium but the valuation of the property was $950,000 – the VL of the property is $950,000.
That means the MOST you can use from your OA is $950,000.
What if you exhaust your VL when paying for your property?
The CPF Valuation Limit (VL) Letter
Before you reach your VL limit, CPF will send a letter at least three months before you reach your VL limit.
Don’t ignore it!
That letter comes with one VERY important message:
You won’t be able to use your OA to service your mortgage UNLESS you set aside HALF the cash component of the Minimum Sum Scheme (MS), which is $74,000 (MS is $148,000) currently.
If you already have the MS set aside, you can take advantage of the AHWL. If not, you’ll need to start paying your mortgage repayments with cash until you do.
The Available Housing Withdrawal Limit (AHWL)
If you’ve already set aside the $74,000 for the MS, you can tap on the AHWL, which is maxed out at 120% of the VL.
The AHWL provides a small buffer that’ll hold you over on your mortgage repayments and might give you the OA funds you need to pay off your mortgage.
If not, you’ll need to start paying with paying your mortgage repayments with cash until you do.
If You’re Over 55 and Over – The Game Changes
Age matters, especially when it comes to using your CPF to purchase a property. And the magic number to keep in mind is 55.
Because in Singapore, 55 is the age at which your CPF contributions begin to decrease dramatically. So if you reach you VL and you’re 55 and older – new rules will apply to you when it comes to using your CPF for your mortgage repayments.
If you’re 55 or older and reach the VL, the only CPF funds you can use to service your mortgage repayments are your excess OA savings AFTER you reach the FULL MS of $148,000!
Before You Use Your CPF OA to Service Your Mortgage – Consider These Factors!
What’s the best way to avoid the problem of not having enough CPF to cover your monthly mortgage repayments?
Knowledge is your best defense. In particular, before you purchase a property, you should understand the following factors:
- Your CPF Contributions to your OA decrease dramatically after the age of 50, so have enough in your savings to cover the prospect making repayments in cash.
- The longer your loan tenure is, the more you’ll be paying for your property in the long run. So keep in mind that making higher payments over a 15 year tenure is cheaper than making lower payments over a 25 year tenure.
- The higher your interest rate is, the more you’ll be paying for your property in the long run, so refinance to the lowest possible rates.
If you’re currently thinking about purchasing a new property or refinancing your current one, visit MoneySmart.sg for free advice on the best home loan interest rates available.
Have you had to deal with the CPF situation above? Tell us about your experience here.