CPF accrued interest, the silent killer of sales proceeds

In 2019, an old friend of mine, Amos, contacted me with the intention of selling his HDB and upgrading to a condominium. In our conversation, one phrase he mentioned caught my immediate attention. “I had fully paid my HDB with CPF when I bought the HDB flat,” he said. In the back on my mind, I knew instantly that CPF accrued interest will affect him.

Amos is happily married with 2 beautiful kids. His eldest son is 9 and daughter 6 years old. We were schoolmates back in our poly days. He bought this resale 4 Room HDB flat about 8 years ago for $400,000 and had fully paid the flat with CPF funds from both Amos and his wife’s account? This is ideally the best arrangement, isn’t it? Or is it?

Is fully paying your CPF a good move?

WHAT ARE MY SALES PROCEEDS? 

We sat down for coffee that very weekend to do his financial calculations. Amos was very optimistic that he could at least get about $60,000 since he bought the property for $400,000 8 years ago and today averagely it can sell for $480,000. When I did the breakdown for him on paper he was shocked that he almost broke even without getting a single cent from the sale. What had eaten away his estimated difference of $70,000 given that he had no mortgage loan to service?

Estimated Sale Price: $480,000
Outstanding Loan: $0
CPF to be refunded: $487,361
Sales Proceeds: -$7,361

His eyes were glued to the amount of money to be refunded back into his CPF ordinary account. “Why is my CPF to be refunded to my CPF so much?” he asked.

What had happened is that CPF accrued interest has snowballed faster than the rate of HDB resale price appreciation.

Unbelievable, all my sales proceeds gone!

CPF ACCRUED INTEREST EFFECT

Let us first understand that any monies withdrawn from the CPF account must be refunded back including CPF accrued interest. The moment we start taking out funds from our CPF it will start accumulating interest on a monthly basis.

Accrued interest is calculated differently as it is compounded monthly. Let me do a simple illustration below to help you better understand. Assuming you are to withdraw $400,000 to fully pay for your HDB flat on 1 Jan 2020.

CPF Accrued Interest at the end of Year 1

$400,000 x 2.5% = $10,000

What this means is that at the end of year 1, you will have to return $410,000 if you sell your HDB flat. There is nothing scary about that, but let’s see what happens from Year 2 onwards.

CPF Accrued interest at the end of Year 2

($400,000 + $10,000) x 2.5% = $10,250

At the end of Year 2, you need to refund $400,000 + $10,000 + $10,250 = $420,250 back to your CPF account. Below illustrates what happens along the year till Year 8.

After looking at these numbers, Amos was very uncertain about what to do next. Should he breakeven and sell or just hold on to his HDB flat and upgrade?

ANNUAL CPF ACCRUED INTERESTCOMPOUNDED CPF ACCRUED INTERESTAMOUNT TO BE REFUNDED
YEAR 1$10,000$10,000$410,000
YEAR 2$10,250$20,250$420,250
YEAR 3$10,506$30,756$430,756
YEAR 4$10,769$41,525$441,525
YEAR 5$11,038$52,563$452,563
YEAR 6$11,314$63,877$463,877
YEAR 7$11,597$75,474$475,474
YEAR 8$11,887$87,361$487,361
Table 1: CPF accrued interest, compounded CPF accrued interest and amount to be refunded first 8 Years

WHAT WILL HAPPEN IF I DON’T SELL MY FLAT? 

Amos does have a choice of not selling his flat. What will happen if he doesn’t sell? The table below shows the amount of CPF accrued interest over the year until Year 20. In order not to have any shortfall, Amos will need to sell his current HDB flat at about $660,000 to breakeven with expenses included. Will our HDB flat keep appreciating at the same speed as the compounding CPF interest?

ANNUAL CPF ACCRUED INTERESTCOMPOUNDED CPF ACCRUED INTERESTAMOUNT TO BE REFUNDED
YEAR 9$12,184$99,545$499,545
YEAR 10$12,489$112,034$512,034
YEAR 11$12,801$124,835$524,835
YEAR 12$13,121$137,956$537,956
YEAR 13$13,449$151,404$551,404
YEAR 14$13,785$165,190$565,190
YEAR 15$14,130$179,319$579,319
YEAR 16$14,483$193,802$593,802
YEAR 17$14,845$208,647$608,647
YEAR 18$15,216$223,863$623,863
YEAR 19$15,597$239,460$639,460
YEAR 20$15,987$255,447$655,447
Table 2: CPF accrued interest, compounded CPF accrued interest and amount to be refunded from Year 9

A. GAZING AHEAD 20 YEARS

Remember the accrued interest that we had calculated earlier, I will continue to calculate the estimated amount to refund till Year 20.

Looking at the final figures, in Year 20, our selling price must keep going up in order to match the refund of CPF including accrued interest. Charting the historical trend of HDB flat resale prices as it ages, their prices start slipping after 10 to 15-year mark. Even if I can magically keep the price constant from now to the next 20 years, we will still have a shortfall.

B. LET’S LOOK AT THE NUMBERS

Imagine that I REALLY have superpowers and I can hold the property prices today without changes for the next 20 years, because of CPF accrued interest, all sales proceeds will be wiped out and all funds from the sale will go back to Amos CPF account.

$480,000 – $655,447 (CPF returned at Year 20) = -$175,447

Assuming CPF policies don’t change for the next 20 years, Amos will have a deficit of $175,447 from his CPF account. The only saving grace is that Amos doesn’t have to top up the difference in cash if he sells the HDB flat at or above valuation at that point of time.

IT’S STILL MY CPF MONIES

Interestingly most people I chat with regarding CPF accrued interest will have a moment of unhappiness and will commonly state that “nevermind, my CPF is still ultimately my money at the end of the day” or similar permutations.

I definitely agree with that.

Remember that CPF accrued interest works as if your CPF monies have never left your CPF account.

Which situation do you prefer? 20 years from now, having $655,447 or just $480,000 sitting in your CPF Ordinary Account.

OKAY! LET’S GO!

After looking through all the calculations, Amos decided to sell his 4 Room HDB flat and we managed to sell it at $488,000.

Today, Amos is a proud owner of a 3 bedroom condominium he bought for about $1,000,000 and has taken a 75% loan to fund the purchase.

What he can enjoy now because of taking action is that he has about $255,000 sitting in his Ordinary Account that is still attracting interest. This buffer can in the future can acts as a safety net up to 5 and a half years of instalments.

Every day I will enjoy the opportunity to speak with HDB owners from all walks of life with various opinions about property investment. I noticed that the understanding of CPF accrued interest is somewhat lacking and yet we are still actively using it to finance our HDB flats.

CPF, if used correctly, does help Singaporean families have a roof over their heads and also act as a foundation to accumulate wealth and asset value over the years. Speak to me today, I appreciate the opportunity to share and exchange knowledge with you.

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