To use your CPF to buy your next residential property or not to use it?
A common point of confusion among new home buyers is the role of CPF. Most of us know that our CPF can be used for our housing (and let’s be frank, few of us could afford to buy a home without it). However, there are many misconceptions about using your CPF to buy properties.
Some buyers think they need enough CPF to buy the whole flat or condo (they don’t), or that CPF only applies to HDB properties (it doesn’t, you can use it for any residential property). Perhaps the biggest confusion comes from the idea that you need to “return everything to your CPF” when you sell your home, which would make upgrading almost impossible.
This sort of misinformation is hazardous, as it leads to home buyers making poor decisions. In this article, we will clarify exactly how your CPF is used when you buy a residential property; and what you can or can’t do with it..
How is your CPF used to pay for your property?
Your CPF Ordinary Account (CPF OA) can be used to pay for the following things, within limits:
- The down payment on your property
- The home loan repayments for your property (private and HDB)
- Stamp duties
- In some cases, you can pay the lawyer fees with your CPF
1. The down payment on your property
For an HDB loan, the minimum down payment on your flat is 10 per cent of the price. It can be paid in either cash or CPF. If your CPF OA can cover the full 10 per cent, you will not need to pay any cash at all.
For example, say you buy a BTO flat for $300,000. You qualify for the full HDB loan of $270,000. If there is at least $30,000 in your CPF OA, you will not need to pay any cash – your CPF will cover the entire down payment.
For private properties, the minimum down payment is 25 per cent. Only the first five per cent has to be in hard cash, and the next 20 per cent can be from your CPF OA.
For example, say you buy a condo for $1.5 million. The minimum cash down will be $75,000. The next $300,000 can come from your CPF.
This is why many Singaporeans can afford to upgrade to a private property, soon after the Minimum Occupancy Period (MOP) of their HDB flat. Most of the time, the sale proceeds from the flat will be enough to cover the cash portion of $75,000. And if you’re buying with a co-owner, such as your spouse, you both only need $150,000 in your respective CPF OA, to cover the rest of the down payment.
I will explain more on this below.
2. The home loan repayments for your property (private and HDB)
Your monthly home loan instalments can be paid in cash or CPF, it’s up to you. The main difference is that, if you pay through CPF, you must refund what you used when you sell the property (more on this below).
However, note that it doesn’t matter whether your property is private or HDB. You can always use your CPF OA to pay the monthly mortgage loan instalments.
Note that, even if you turn 55, you do not have to roll your CPF OA into your Retirement Account (RA) straight away. If you’re still working, you can keep your CPF OA, and keep paying your home loan through it. Do contact the CPF Board for help in this matter.
3. Stamp duties
All stamp duties except Sellers Stamp Duty (SSD) can be paid through cash or CPF. The other stamp duties are the Buyers Stamp Duty (BSD), and Additional Buyers Stamp Duty (ABSD) if it applies.
The main advantage of paying in cash is, again, that you don’t have to refund this amount back to your CPF when you sell the house.
For the SSD, if it applies, the amount is deducted from your sale proceeds.
4. Sometimes you can pay the lawyer fees with your CPF
Conveyancing fees are usually $2,500 to $3,000. You can sometimes pay this with your CPF; it will vary based on the law firm you choose. If you want to avoid paying in cash, you need to be very clear with your banker or mortgage broker, that you want to use a law firm where this is possible.
(Incidentally, some banks won’t even ask you which firm you want to use. If you don’t say anything they’ll just pick for you. So I suggest you pop the question, as some law firms are also cheaper than others).
What can’t you use your CPF for?
As I mentioned above, there are limits in your CPF usage. Some of the key restrictions are:
- Cash Over Valuation (COV)
- Any amount over the CPF withdrawal limit
- Properties with advanced lease decay
- Age restrictions
- A second property
1. Cash Over Valuation (COV)
For resale flats, the seller’s price may sometimes exceed the actual valuation. This amount is called COV.
For example, say you buy a resale flat for $500,000. However, the official valuation of the flat is just $475,000. The COV of $25,000 must be paid in cash.
The same applies to private properties. If you buy a resale condo priced at $1.5 million, but the bank accepts a valuation of $1.45 million, then the excess $50,000 has to be covered in cash. This is one reason to shop around for different valuations, to try and find one closer to the actual sale price.
If you don’t want to deal with the hassle of this, you can stick to new properties. When you buy direct from the developer in the new launch phase or HDB in its BTO or sales of balance flat program, the sale price is always taken to be the same as the valuation.
2. Any amount over the CPF withdrawal limit
With some exceptions, the CPF withdrawal limit is usually 120 per cent of your property’s Valuation Limit (VL).
The VL is the value of your property at the time of purchase (e.g. if you buy a condo for $1.5 million today, and it’s worth $1.9 million a decade later, then the VL is still only $1.5 million).
So if you were to buy a flat worth $500,000 today, you could use up to $600,000 from your CPF (120% of the Valuation Limit) on the HDB flat. After that you’ll have to start paying in cash, regardless of whether there’s still money in your CPF.
That said, the withdrawal limit varies based on property type:
For BTO flats
- For BTO flats using HDB loans, there is no withdrawal limit
- For BTO flats using bank loans, the usual 120 per cent limit applies
For resale flats
- For resale flats on HDB loans, the withdrawal limit is the same as the VL, unless you have enough to set aside your Basic Retirement Sum (BRS). If you can meet the BRS, the withdrawal limit is 120 per cent.
- For resale flats on bank loans, the usual 120 per cent limit applies.
For ECs and private properties, the usual 120 per cent limit applies.
3. Properties with advanced lease decay
You can use your CPF provided the remaining lease will last till the youngest buyer is 95 years old.
So if the youngest buyer is 55 years old, you would be able to use your CPF even for a property that has only 40 years left on the lease. Note that this supersedes the older rule, which prevents CPF from being used if there’s 30 years or less on the property.
You may use CPF calculator to estimate the amount of CPF you can use for your next property purchase here.
4. Age restrictions
If you’re over 55 years old, the property must have a lease that lasts till you’re 95 years old. Otherwise, you cannot withdraw any CPF savings that would exceed your BRS. Note that the BRS increases every year, so you may want to check your required amount on the CPF website.
5. A second property
If you’re buying a second property, you must have enough to meet your BRS first. Any remaining monies, after meeting your BRS, can then be used for the second property. In addition, the withdrawal limit is always the same as the VL (and not 120 per cent of the VL).
But what about having to return your CPF money when you sell the property?
When you sell your property, you must refund the amount you used from CPF, with the accrued 2.5 per cent interest. So if you sell your flat for $500,000, and you’ve used CPF funds totalling $400,000 including interest, then you’ll get back $100,000 in cash. The remainder will go into your CPF.
You can still go ahead and use your CPF to buy the next property, if you’re upgrading to a condo. The crucial issue is not that you need to refund your CPF (it’s still your money anyway) – the issue is having sufficient hard cash left over.
This is because you need to pay a minimum of five per cent of your next property in cash (assuming it’s a private property or EC). If you don’t have anything left over from the sale proceeds, this can be a tough amount to cover.
What happens if you need to refund more to CPF than you sold your property for?
Contrary to a lot of rumours, you do not have to top up the excess. As long as you sell at market price, it would simply mean your whole sale proceeds are refunded to your CPF (a situation called negative cash sales).
So if you need to refund $500,000 to CPF, but your property sells for $450,000, you would simply end up refunding $450,000 to your CPF. You don’t need to “cover” the excess $50,000.
It could, however, mean you’ll have trouble with the $75,000 cash down payment on a $1.5 million condo. As such, not all home owners use CPF to service their home loans, or pay stamp duties – they sometimes use cash if they can afford it, to minimise the chances of a negative cash sale.
For more help on ensuring smooth asset progression, drop me a message. I can help you to better scrutinise your CPF usage, and work out a prudent budget range for your next home.