Monday, 5 September 2016

How we use CPF for housing

I considered writing an Aug 2016 Financial Update post. However, not much has happened in the month since the Jul 2016 Financial Update. As long as the trend continues to be upward and positive, I'm satisfied with the progress.

I can provide a summary if it helps. The net worth has jumped more than the previous months mainly because of the performance bonus that I received. Our investment cash and cash on hand have increased by the same amount of S$4,000. Good to know this is becoming quite consistent.

The ETF and Other portfolios have risen slightly but the Share portfolio has dipped. There was a spike in the dividend income and a small increase in the interest income. This can be attributed to owning the ETFs and shares for a longer period of time that qualifies for the recent round of dividends and the recent build up of our cash positions.

That's enough talk about our assets. What I will try to do in this post is write about how we address our liability problem, specially the mortgage. I'm not worried about our personal and property tax liability because minimal changes indicate no significant drops in our salary income and apartment value.

As for the credit card liability, it should reduce slowly over time as we try to control our spending. However, I expect it to plateau eventually because it represents our costs of living and there is always going to be a minimum base level. Given how our savings rate is hovering slightly above 40% , I'm wondering whether this has already happened.

Anyway, these other liabilities pale in comparison to our housing loan liability. I have written related posts before on whether buying a private condo was a mistake and how we view our CPF  - OA to be used for housing instead of retirement.

The fact of the matter is we have a S$2,800 housing loan payment to be made for the private condo every month. No point debating whether we should have bought a HDB or whether the private condo is affordable. The key decision for us is what should be the split between CPF - OA and cash for the monthly housing loan payment of S$2,800. This is how we work it through.
1. What is our monthly allocation to the CPF - OA from the total employee and employer contributions?

S$6,000 (Individual salary) * 23% (Allocation rate) * 2 (Both of us) = S$2,760

As long as both of us continue to work, S$2,760 is credited into our CPF - OA every month.

2. Do we intend to rely on CPF - OA for retirement?

We intend to use the CPF - OA only for housing. This means that the funds in the account will either be fully used for the first residential property or a second property. Hence, we are not relying on the COF - OA for retirement.

3. Are we okay with a build up of CPF - OA as a form of emergency funds for housing?

Given how we were not working in Singapore for the first few years of our careers, our CPF - OA balances are small compared to our peers. Even if we use the entire allocation of S$2,760 to make the monthly housing loan payment of S$2,800, we would still have to draw down another S$40 from the CPF - OA. Over time, our CPF - OA balances will be wiped out, which is not good.

Therefore, we decide to build up our CPF - OA to have a buffer of about 1 year of housing loan payments (S$2,800 * 12 = S$33,600). This will require us to use cash in addition to the CPF - OA to make the monthly housing loan payment of S$2,800 for a while.

Besides,  if we are both retrenched, we figure it would take one of us about a year to find a new job to have new contributions flowing into the CPF - OA.

4. What is the current interest rate differential?

Interest rate on housing loan: 2% pa

Maximum interest rate on cash savings: 2.4% pa

Interest rate on CPF - OA: 2.5% pa

You can see how it would make sense to have the CPF - OA hold the 1 year emergency funds (S$33,600) for housing instead of a high interest savings account.

5. How should we split the cash and CPF - OA components of the housing loan payment?

The discussion above leads to this analysis of how much cash to use for the monthly housing loan payment of S$2,800.

We want to build up the 1 year emergency funds in the CPF - OA (S$33,600) quickly while we still have cash flow and no significant obligations.

Cash payment: S$1,800

CPF - OA payment: S$1,000

Total monthly housing loan payment: S$2,800

Monthly increase in CPF - OA: S$1,760

Estimated time to meet goal: 19 months (close to completion at time of writing)

Once we meet this goal, we are okay to adjust the proportion to use more of our CPF - OA for the monthly housing loan payment and just let the balance grow more slowly.

6. Is it okay to have the CPF - OA balances grow so slowly?

In our case, we are okay to have our smaller than average CPF - OA balances increase slowly because they are not meant for retirement. However, we do regular cash top-ups to our CPF - SA for tax relief and occasional transfers of the performance bonus from our CPF - OA to our CPF - SA.

This is to try and grow our CPF - SA at a quicker rate to make up for the slow growth rate of our CPF - OA. As you can see, we do quite a bit of analysis when it comes to using our CPF for housing as the considerations and actions can have implications down the road.


  1. Curious how you going to service the housing mortgage if both of you are retrenched?
    Or you already have a contingency plan for the worse case?

    When we were younger, i intended to buy a condo or a private freehold residence, but my wife was afraid of retrenchment.
    i was not.
    To me, the worse case, we downgrade lol; as long as we doesn't have to declare bankruptcy it's alright for me.
    (At that time, there was a semi-bungalow going for 800K only)
    Not for my wife.
    She was afraid of snakes, rats and crawling creatures.
    She prefer high-rise living.

    So still HDB and some cash in CPF as "paymaster" for our retirement now.

    Of late heard of a 58 units condo that the Developer is selling 2 room 800sq ft unit for about 900K.
    Now my wife get interested, while i am not so keen.
    Retirees shouldn't try to be more adventurous than necessary.
    Besides the equation of who are my "paymasters" will all change.
    And we also want to leave a legacy for our only son.
    And i think we may have to cut down quite a lot for our monthly spending.
    Deja Vu again to those younger days?
    That's why i am not so keen.

    What say you?

    1. Haha, I will be honest and say that we will be in trouble if both of us gets retrenched. We have a contingency plan but I never know how it will hold up in the worst-case scenario. It would make for good writing material on the blog though!

      Yeah, I reckon the time to purchase a private condo is long gone. If I could make the decision again, I wouldn't have gone through with it. If you are not in any rush, might as well wait for a good opportunity to come up.

      As for leaving a legacy for your only son, I can't comment from the perspective of a parent because we don't have kids. However, I always tell my parents to take care of themselves mentally, physically and financially. There is no point in taking any financial risks to pass down assets to us because we can take care of ourselves.

      That being said, I can understand the feeling to want to leave a legacy for your only son because my parents have expressed the same feelings as well. Hence, the accumulation of the Singapore and Malaysia real property although I did work with them on minimising financial risks by ensuring they did not take on any bank loans.

  2. Sorry,
    Got wrong info about the price of FH 800sq ft @ 900K.
    i checked on the internet this morning - confirmed wrong info about pricing.

    No wonder i was salivating when i first heard it, yesterday.
    Ha! Ha!