Your Central Provident Fund (CPF) account is a lot like an indestructible piggy bank that won’t give you a cent back unless you use it for certain purchases such as healthcare and even investments (via your CPF Special Account).
However, the biggest and most important purchase you can use your CPF for is property and it’s part of the process when signing up for a home loan package. Every year, thousands of Singaporean use their CPF Ordinary Account (OA) funds to purchase new/resale Housing and Development Board (HDB) flats and private properties.
Before you use your CPF OA towards the purchase a property, you should know a little more about how to use it, what to use it for and how using it will affect you down the road.
Here are 3 key factors you should know about when using your CPF to purchase property:
1. You Can Use Your CPF for Many Property-related Items
When it comes to purchasing a home, many Singaporeans have only a general idea of how and what they can use theirCPF OA for. However, you can use your funds for three common purposes.
So if you’re a little vague on the details, here’s what you can use your CPF OA for:
- Your Down Payment: You can use your CPF OA for the down payment of a property. Depending on whether you take out an HDB concessionary loan or a bank loan, your down payment (in “perfect” circumstances) would be: A) HDB Loan: 10% of the purchase price or market valuation of a property (whichever is lower) ,and B)Bank Loan: 20% (5% in cash, 15% in CPF) of the purchase price or market value (whichever is lower)
- Your Home Loan: You can use your CPF OA to service your monthly home loan payments (both HDB and bank loan)
- Your Fees: You can use your CPF OA to pay any fees associated with a property purchase (ex. legal fees, stamp duty, etc.)
- Your Home Protection Scheme Fees: You can use your CPF to pay the annual premium for the Home Protection Scheme (HPS), which is the mortgage insurance scheme offered by HDB to protect you in the event that death or a permanent disability renders you unable to make loan repayments on the property.
Note on HPS: You can get exempted from the HPS if you have a whole life, term life, endowments or life riders attached to a policy that covers your outstanding home loan up to the full term or 65 years of age (whichever is earlier).
2. There Are Limits to How Much CPF You Can Use for Your Property Purchase
Well, that’s only half true. If you purchase a new HDB flat with a concessionary loan, there is no limit to how much CPF you can use towards your property purchase.
When it comes to how much CPF you can use, it is factored according to two valuation limits:
- The Valuation Limit (VL): The valuation limit is the lower of the purchase price or the market value of a property at the time of purchase (ex. If a property is valued at $550,000 and the purchase price is $580,000, the VL is $550,000). You can use your CPF OA for your down payment and to service your home loan up to the VL.
- The Withdrawal Limit (WL): The withdrawal limit dictates the maximum amount you can withdraw from your CPF over the VL. Currently, the WL you can withdraw is 120% of the VL (ex. If a property has a VL of $500,000, the WL would be $600,000). If you go over the WL, you’ll need to service your home loan with cash.
However, if you’re in the following categories, you’re subject to the valuation limits imposed by HDB:
|Type of Property Purchase||Valuation Limit (VL) Applicable?||Withdrawal Limit (WL) Applicable?|
|Private Property (Bank Loan)||Y||Y|
|HDB Flat (Bank Loan)||Y||Y|
|HDB Resale Flat (HDB Loan)||N||Y|
But what happens if you reach the VL or WL?
That’s a bit trickier to answer, but here’s how it goes:
- If You Reach Your VL: If you’re below the age of 55, you can continue to use your OA to make your home loan repayments if you set aside half of your CPF OA Minimum Sum (MS), which is $155,000 currently (you can count any funds in your SA towards the MS). If you’re above the age of 55, you can only use any excess from your CPF OA after setting aside half of the MS.
- If You Reach Your WL: The WL applies to properties purchased with a bank loan and HDB resale flats. Currently, it is 120% of the VL (ex. If you purchased a $500,000 property, your WL would be $600,000). If you reach the WL and you still have outstanding home loan repayments, you’ll need to pay cash. This is the absolute limit to how much of your CPF OA you can use.
3. You Can Pledge Your Property When You Reach 55
When you turn 55, your CPF account goes through certain… changes. The powers of your OA and Special Account (SA) combine to create – your Retirement Account (RA). You’ll still retain your OA, but it’ll only have $5,000 in it if your combined OA+SA don’t meet the MS of $155,000 (currently)
If you have $100,000 in your OA and $30,000 in your SA by the time you hit 55, you’ll have $130,000 combined.
At 55, $5,000 will go into your OA (because you didn’t hit the MS) and the remaining $125,000 will go into your RA. That doesn’t leave much CPF available to use towards your home loan repayments.
However, it’s still possible to use your CPF funds to service your home loan – if you pledge your property. You can pledge your property for up to 50% of the MS, which is $77,500 currently.
When you pledge your property, you can free up some more cash from your RA.
If we use the example above, here’s how much CPF you’d be able to free up by pledging your property:
50% MS Pledge =$77,500
RA Balance = $125,000
OA Balance = $5,000
Pledge Amount = $125,000 – $77,500
Total Amount Available for Housing = $52,500 ($47,500 + $5,000)
Of course, before you pledge, you should keep in mind that the amount you’ll be able to pledge depends on your the HDB quarterly average median resale prices (HDB), valuation prices (private properties), any outstanding home loan amount and your/any co-owner’s CPF usage (if applicable).