Part 03: How using CPF monies can be work for or against us in a property investment

Having use your CPF monies when you purchase a your property comes with an opportunity cost.

So what is the opportunity cost?

Here we will explore how the use of CPF can work for you or work against you and hence affecting the profit you can get when you sell your property.

 

First, Understanding what is accrued interest

When you use your CPF money in the purchase of your property, you are “borrowing” the CPF monies from your CPF account to buy the property.

Therefore when you sell the property, you will have to return what you “borrowed” from the CPF account (the principal amount) plus the interest the you would have earned if the money has not been take out of your CPF account (the accrued interest). These two amount is then return back to your own CPF account (the total amount).

For example:

If Mr Tan has withdrawn $150,000 from his CPF account to pay for his property in this year, the Principal amount withdrawn is $150,000.

After 1 year, the amount of accrued interest will be:

$150,000 x 2.5% (OA interest rate) = $3,750

 

If Mr Tan were to sell his property the total amount of CPF amount to be refund back to his CPF account will be:

$150,000 (principal amount) + $3,750 (accrued interest) = $153,750 (total amount)

How will this accrued interest looks like over a period of 20 years?

As the total amount to be refunded is computed on a compound interest calculation, the total CPF amount that will be required to be refunded over the years will be increasing at an exponential rate.

Below is a table that illustrates how much CPF total refund and the accrued interest incurred in that year will look like, over a 20 years period (with an initial withdrawal of $150,000).

End of year	Total Amount	Interest Rate	Interest accured for that year
0	$150,000	2.50%	$3,750
1	$153,750	2.50%	$3,844
2	$157,594	2.50%	$3,940
3	$161,534	2.50%	$4,038
4	$165,572	2.50%	$4,139
5	$169,711	2.50%	$4,243
6	$173,954	2.50%	$4,349
7	$178,303	2.50%	$4,458
8	$182,760	2.50%	$4,569
9	$187,329	2.50%	$4,683
10	$192,013	2.50%	$4,800
11	$196,813	2.50%	$4,920
12	$201,733	2.50%	$5,043
13	$206,777	2.50%	$5,169
14	$211,946	2.50%	$5,299
15	$217,245	2.50%	$5,431
16	$222,676	2.50%	$5,567
17	$228,243	2.50%	$5,706
18	$233,949	2.50%	$5,849
19	$239,798	2.50%	$5,995
20	$245,792	2.50%	$6,145

 

Therefore an inital amount of $150,000 withdrawal initialy will balloon to a $245,792 to be refunded finally on the 20th year.

 

Here we can also observed that the interest accrued for that year will increase as the years passes.

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So how does it affect me?

Keeping in mind that if you sell your property, you will have to return the amount of CPF used from your account plus the accrued interest.

Lets explore the different scenairo here:

How much cash proceed can I get from selling

Assume a fully paid HDB 3 room flat. The initially CPF used is $150,000. After 5 years later, the total CPF refund (with accrued interest) is $169,711. Assuming the selling price is $280,000, the amount of cash proceed that the seller can get is:

$280,000 (Selling Price) – $169,711 (CPF refund with accrued interest)

= $110,289 (cash proceed)

The cash you can get after selling the flat is $110,289.

Note: the cash proceed calculated here did not include the transactions cost, i.e. Agent’s commission, legal fees etc

 

What if the property price goes up by $200k in 20yrs?

$480,000 (Selling Price) – $$245,792 (CPF refund with accrued interest)

= $234,208 (cash proceed)

If the property price increase is more than the accrued interest, you will be able to get more cash from the selling.

 

What if the property price stays the same?

$280,000 (Selling Price) – $$245,792 (Total CPF refund with accrued interest)

= $34,208 (cash proceed)

If the property price stays the sames, the increased in the accured interest over the year will result you in having less cash proceed from the selling.

 

What if the property price decreases?

$200,000 (Selling Price) – $$245,792 (Total CPF refund with accrued interest)

= – $24,792 (Negative sales)

If the property price stays decreases, the increase in the accrued interest may be more than that of the selling price, resulting in a negative sales situation.

This is will be the effect of holding on to a property for too long (with no capital appreciation).

Do note that the above situation applies to both private and HDB properties when you use CPF in your property purchase.

 

Why is this important?

In this scenario we talk about opportunity cost. Lets look at the accrued interest incurred each year. This is the money you are supposed to earn from your CPF account if you have not used it to purchase any property.

Therefore if you purchase your property using your CPF monies, if the property value is appreciating or the rental returns are higher than the accrued interest, then it make sense to use your CPF to invest in the property. If not, you would rather leave the money in your CPF account to earn the interest.

If you like to find out how you can select a property that will appreciate or will have a good rental returns, just fill up the form below to arrange a meetup and I can explain more to you.

 

In my next article I will discuss, if you should use cash or CPF for your property investment.

 

To read the my previous writing on CPFs:

Part 01: Should We use CPF for Our Property Purchase?

Part 02: Restriction on CPF OA Usage for Property Purchase in Singapore