So this is another thing that came to me quite immediately when I first bought my apartment many years back. It had to do with the decision on how much from my CPF Ordinary Account (OA) I wanted to use for payment of my housing loan – the alternative was to use my cash savings/leftovers from my salary for the loan repayment.
And this is something that many have asked me about when it came to their turn to make the decision. And my advice has always been the same: Leave your CPF alone if you can, and use cash. Why?
1) Financial discipline: In my view, this all goes down to budgeting and affordability. In every sense of what the CPF is meant for, it is your retirement savings. So if you absolutely require drawing on that pool to service a property purchase (mind you, you MIGHT lose money on a bad property), then you should reconsider purchasing that property. In short, buy only what you can afford, and by affordability, I would consider that your Free Cash Flow (FCF) out of your monthly income, and leave the CPF alone for other reasons I shall describe below further.
2) Returns and interest: Your CPF balances will receive higher interest from the government, ranging from 2.5% to 5.0% (https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-interest-rates) risk-free. Unless you are a much savvier investor and able to generate a higher return with your remaining cash (let’s not be duped by speculative investments into single stock names or projected returns from insurance contribution plans), the returns from the CPF allow you a pretty consistent safety net down the road should you really require it. Should you really feel that you are able to generate higher returns (double digits) and beyond (such as investing in NIO stock or BTC), do it with your remaining free cash flow after paying off your property instalments with cash. At this point in time, in my years of experience in asset management, fund house, banks, the world of stocks and assets is very simply related via a risk-vs-return relationship. The higher the potential return you think you can gain from a speculative investment, the higher the probability that you will lose it within the same period. I am not a stock investor here so my profile is considerably more conservative and I will share more about that sometime down the road.
3) Safety back-stop: So with the above considerations, I set my CPF property contribution to the property loan repayment at $1/mth for the better part of the 5 years I have held this first property for. Why $1? Well, simply because if and when should you decide you need to draw on your CPF for repayment, the process to raise the amount from $1/mth to say, $1,500/mth or $5,000/mth is a very quick and electronic process because CPF already has all the information they require. If however, you were not registered/set-up for CPF repayment for the property, in the event you need to, you will have to set up the entire process (with the bank, with CPF), provide documents and the whole works. So it is a lot easier to just set this up at the point of property purchase when the documents are signed, and I continue to have this $1/mth payment from my CPF till date. But I have digressed. Safety back-stop. So there was this point in time where I felt quite severely overworked and decided to just quit and take a break (for like 6 months). And so the thing is, when you have a monthly source of income, that payment helps offset tons of things, including your cable bills, phone bills, utilities, taxes (I chose the monthly payment option so it continued even after I quit my job), and so on. And these bills will come out of your cash savings now. Add that to the monthly mortgage/loan instalment payment (this usually forms the larger chunk of liabilities one has to pay), you will notice that your bank balance begins to shrink a lot faster in the opposite direction. And once again, if you can continue to manage everything via your cash balances, that is good. I was prepared for it, and it all went ok. That goes back to financial discipline – if I decided it was too much for me, I would head back to a job or work. But the point is, throughout the time I was not working and taking the break, I had at times, considered raising the CPF repayment amount just to ease the cash flow drain on my bank account quite a few times. And this is one of the few items/liabilities you can choose to repay using your CPF, which, assuming you didn’t draw on initially for the monthly repayments, it should have accumulated quite nicely some decent interest and balance, that should quite easily tide you through a few months.
And so that is why choosing not to use my CPF balances for monthly repayments was a quick and straight-forward decision to me. Of course, there is one additional thing everyone can do to further reap savings but that will probably be for another day, if anyone is interested. Let me know in the comments if so.
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