Most of us have used our CPF funds to make payment towards the purchase of our property. We may have use our CPF for payment towards the initial down-payment of the property, for payment towards the stamp duty or as monthly payment for the property’s loan instalment.
Whenever we use the CPF funds for such purposes, there is a cost of using the CPF fund. The interest that was supposed to accumulate in our CPF funds (if we did not use for property purchase purposes) must be returned to our CPF account if we were to sell the property in the future. This is called the accrued interest.
For example, if I have $100,000 in my CPF ordinary account. If this amount were to sit in my CPF account for 1 year, this amount would have grown to $102,500 because of the 2.5% interest I have earned in the CPF ordinary account.
If I have used the $100,000 of my CPF funds instead to pay towards my housing, after 1 year when I sell my house, I got to return to my CPF ordinary account $100,000 plus $2500. This $2,500 amount is called the accrued interest. The total $102,500 amount may look the same, but now, the interest instead of being given to you by the CPF board, now it must be returned by you when you sell your property.
As the years goes by, this amount of accrued interest may compound over time. If this $100,000 were to compound over a period of 10 years, the total amount that I will need to return to CPF ordinary account when I sell my property will be $128,008.45. The accrued interest alone will be $28,008.45 (28% of the initial amount of CPF used).
What if I don’t want this accrued interest to continue growing?
Some of us may not be aware of this. We can pay back the CPF funds used towards our property. Once you have repaid back all the CPF used for the property, the accrued interest will stop growing. By then, you will have all your CPF funds back into your CPF account and earning interest for you.
One easy way to do the refund is by submitting your application to refund the CPF funds used through the CPF website.
However, some of us may not have the cash amount to fully repay the total amount of CPF fund used. In this case, we can also choose to pay back a partial amount of the CPF used for the property. Do note that for partial repayment, the accrued interest will continue to roll, but now at a lower amount.
We may also be worried that if I have refund all my CPF funds used, what if I need to use the CPF fund again in the future to pay towards my property? For example, what if I lose my job, or the monthly property instalment had increased due to interest rate increase, or my family may need some funds now and I would like to use the CPF funds to tide over? The good news is, you can still use your ordinary account fund for your property after you have done the refund.
Should you make a CPF refund?
As the refund to CPF must be made in cash, one point to really consider before refunding the CPF funds is the possible returns you can make from your cash funds.
For example,
Full CPF housing refund: $100,000
You have Cash savings: $100,000
If I can invest my cash savings at a 5% return per annum, after 10 years,
Full CPF housing refund: $128,008.45
Future Invested Cash savings will grow to: $162,889.46
Here we observed that if I have invested my cash savings, it would have accumulated much more than if I were to make the CPF refund. In fact, if I were to make a refund after 10 years in this case, I still be able to make the full CPF housing refund plus a balance of ($162,889.46 – $128,008.45) $34,889.01 cash left.
However, what if my savings is only giving me 1% interest?
Full CPF housing refund: $100,000
Cash savings: $100,000
If I can invest my cash savings at a 1% return per annum, after 10 years,
Full CPF housing refund: $128,008.45
Invested Cash savings: $110,462.21
In this case, I would rather do a full CPF housing refund earlier as it would have saved me ($128,008.45 – $110,462.21) $17,538.24 of interest cost.
Meeting your retirement fund
Another reason why you may consider making the refund is because you can have more savings in the CPF funds to meet your full retirement sum, so that you can have more for your retirement.
Sometimes by having extra cash on hand now, we may be tempted to spend the amount. We may have the impulse to buy that latest car or whatever that comes along the way. With the money in the CPF account, it can “guard” against spending off the money.
However, do consider liquidity and safety buffer
Sometimes, it may not make any sense to do the full CPF housing at all. If after making the full refund will require you to empty all your cash savings, then you will be left with no cash buffer fund. If any unforeseen circumstances were to happen, for example, losing your job, sudden expenses crop up, or a sudden medical expense etc, you may not have any cash funds left to tide you over these difficult circumstances. Therefore, do consider seriously the amount of cash liquidity you will need before you do any amount of refund.
If you like to find out if refunding back to your CPF account makes sense for you, just fill in the form below. We will be happy to help you get certainty on your situation.