If I have some Cash on hand and some CPF on hand, should I use my CPF funds for purchase of the property first or should I use my Cash first?
Understanding the returns that you will be getting from your funds
The first question I will ask myself before deciding on using cash or CPF monies is the returns that I can potentially get from both my CPF and Cash savings.
If I were to keep my cash in fixed deposits, my returns will be probably around 1% to 2% maximum per year. CPF ordinary account currently is giving 2.5% returns per year.
The Opportunity cost
The opportunity cost of using my cash savings in this case is the potential 1-2% that I can get from the bank, while CPF is the potential 2.5% that I can get. Therefore in this case, I may want to use my cash first for the property purchase.
The Maths worked out
Assuming that I have bought a property at $1M, and I have $200,000 in both my cash and CPF account.
What will be the difference over a 5 years period if I were to use:
the $200,000 in cash first in the downpayment first, then use the CPF for the instalment payment
VS
the $200,000 in CPF first in the downpayment first, then use the cash for the instalment payment
Assuming my property purchase
Buying price : $1,000,000
Loan : $800,000
Mortgage loan interest : 2.5%
Loan Period : 30 years
Monthly Instalment : $3,160.97
| Using $200k cash for downpayment first. CPF for instalment | Using $200k CPF for downpayment first. Cash for instalment | |
| Cash at the beginning after property purcahse | $0 | $200,000 |
| CPF at the beginning after property purcahse | $200,000 | $0 |
| Monthly mortgage instalment | $3,160.97 | $3,160.97 |
| Cash or CPF interest returns | 1.5% (cash savings returns) | 2.5% (CPF savings returns) |
| Years later | 5 years | 5 years |
| Remaining amount in account | $18,743 (cash in savings) | $24,802 (CPF ordinary account) |
In the above scenario, I will be better off using cash to pay first compared if I were to use CPF funds. As I will have more CPF funds left at the end of the 5 years.
The opportunity cost is:
$24,802 – $18,743 = $6,059 (opportunity cost)
Therefore, should I use up all my cash for the property purchase?
Of course NOT!
I may want to sent aside some cash on hand for rainy days and as an emergency fund in case of any unforeseen circumstances.
What if I can get higher returns from my cash savings?
Assuming if I am able to invest my cash and get a 5% returns per year, how will this scenario be like?
| Using $200k cash for downpayment first. CPF for instalment | Using $200k CPF for downpayment first. Cash for instalment | |
| Cash at the beginning after property purcahse | $0 | $200,000 |
| CPF at the beginning after property purcahse | $200,000 | $0 |
| Monthly mortgage instalment | $3,160.97 | $3,160.97 |
| Cash or CPF interest returns | 5% (cash savings returns) | 2.5% (CPF savings returns) |
| Years later | 5 years | 5 years |
| Remaining amount in account | $41,706 (cash in savings) | $24,802 (CPF ordinary account) |
In the above scenario, the I will be better off using CPF to pay first compared if I were to use Cash. I will have more Cash savings left at the end of the 5 years.
The opportunity cost is:
$ 41,706 – $24,802 = $16,904 (opportunity cost)
One more very important point to note
Just before you decide to use cash or CPF first, note that if you use CPF for property payment, there will be an accrued interest amount you will need to refund back when you sell your property. You can refer to my previous article on the details.
This accrued interest will not apply if you use cash for property purchase.
Conclusion
There are no clear-cut answer whether you should use cash or CPF for payment first. In fact, a lot depends on your current financial situation and the returns that you can achieved from your current investment instruments. Note that everyone’s situation is unique and different.
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