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Do You Know the 4 Key Conditions for Using CPF?


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Conditions for Using CPF


Introduction

Most people are unaware of the conditions and obligations that come with using CPF. A lot of HDB owners would receive an unpleasant surprise after many years of ownership when they decide to sell their flats. Here are 4 things you should know before buying a property so that you do not have an unpleasant surprise later on.


#1 CPF Refund

CPF refund refers to all CPF monies drawn out plus accrued interest. During the sale of an HDB flat, owners are required to return all CPF funds utilized to their CPF Ordinary Account (OA). These funds include CPF amounts used to pay stamp duty, lawyer fees and subsequent monthly loan payments etc. In addition, owners will also need to return an amount equivalent to the accrued interest of 2.5% compounded annually for the amount of CPF savings withdrawn. Ultimately, the authorities want to ensure your CPF savings has the original amount that was not withdrawn in the first place, and it had earned the interest that it should have, so that your retirement fund is not compromised.

In case of an negative sale at market value or close to market value, and there is no sale proceeds left to return to CPF OA after paying off the loan, then there is no need to refund the CPF monies back into the CPF OA.


#2 Pledging Property to CPF Account

The owner’s property is automatically pledged as part of their retirement sum if they bought the house and are unable to meet the prevailing Basic Retirement Sum (BRS). It will be pledged with an amount up to the BRS, plus the accrued interest. If the owner is 55 years or above and they sell their property, the sale proceeds will be used to meet the Full Retirement Sum (FRS).

Factors like outstanding housing loan, share of property, co-owner (joint tenancy) CPF usage, and HDB quarterly average median resale price for all HDB flats can affect the amount of CPF to pledge.

If the owner wants to withdraw any amount in excess of the BRS in their CPF OA, they will need to pledge a property of remaining lease that covers them to the age of 95.


#3 Buying a Second Property

If you want to buy a second property, but have already used your CPF savings for the first property, there are two general scenarios.

If you already have a home that can last you to at least 95 years of age, then you can only use the amount of CPF savings that is in excess of the Basic Retirement Sum (BRS) from your CPF OA. If you are 55 years old or older, you can only use the amount of CPF savings that is in excess of the Basic Retirement Sum (BRS) from your CPF RA.

If you do not have a home that can last you to at least 95 years of age, then you can only use the amount of CPF savings that is in excess of the Full Retirement Sum (FRS) from your CPF OA. If you are 55 years old or older, you can only use the amount of CPF savings that is in excess of the Full Retirement Sum (FRS) from your CPF RA.


#4 Home Protection Scheme (HPS)

So long as CPF is used, Home Protection Scheme Insurance (HPS) must be bought to protect against losing home should the lender is incapacitated or passed away before the loan is fully paid.


Others

When there are any unfavorable factors acting against a person in relation to CPF, the person will not be able to apply for Contra Payment Facility. Unfavourable factors include, but are not limited to, infringement of any CPF rules, monies in the CPF account are subjected to charging orders by The Court, CPF mortgage/charge on the flat, mortgages that are in favour to any financial institutions.

If the transaction is conducted at market value and the sales proceeds are insufficient to repay the outstanding loan, plus making the necessary CPF refund in full, the client does not need to top up the shortfall of CPF refund with cash. However, the shortfall in outstanding loan will still require cash top up.


Conclusion

Real estate and CPF are bounded together as part of your financial and life planning; a decision made now could affect your future greatly when it comes to something of this price quantum. Consumers should consider their CPF retirement sum requirements and take note that there may be a reduction to CPF contribution as people gets older and leave the work force. Consumers need to take note of the changing housing interest rate as well. Consumers should seek the professional advice of reliable financial planners when it comes to CPF, and have a budget and how much CPF to use before making an important decision like purchasing a property. Real estate professionals can advise you on basic CPF matters too, but a financial planner will be the best choice.



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Conditions for Using CPF


Introduction

Most people are unaware of the conditions and obligations that come with using CPF. A lot of HDB owners would receive an unpleasant surprise after many years of ownership when they decide to sell their flats.


CPF Refund

CPF refund refers to all CPF monies drawn out plus accrued interest. During the sale of an HDB flat, owners are required to return all CPF funds utilized to their CPF Ordinary Account (OA). These funds include CPF amounts used to pay stamp duty, lawyer fees and subsequent monthly loan payments etc. In addition, owners will also need to return an amount equivalent to the accrued interest of 2.5% compounded annually for the amount of CPF savings withdrawn. Ultimately, the authorities want to ensure your CPF savings has the original amount that was not withdrawn in the first place, and it had earned the interest that it should have, so that your retirement fund is not compromised.

In case of an negative sale at market value or close to market value, and there is no sale proceeds left to return to CPF OA after paying off the loan, then there is no need to refund the CPF monies back into the CPF OA. Conversely, there is still a portion of the sale proceeds after repaying the loan, but not enough to refund the entire amount to CPF OA, then whatever is left will be refunded to the CPF. In both cases, there will not be any cash left from the sale proceeds. If the negative sale at market value or close to market value has more than enough to cover for loan and CPF refund, then everything goes normally. 100% of the CPF refund will be made and seller gets the remaining cash.


Pledging Property to CPF Account

The owner’s property is automatically pledged as part of their retirement sum if they bought the house and are unable to meet the prevailing Basic Retirement Sum (BRS). It will be pledged with an amount up to the BRS, plus the accrued interest. If the owner is 55 years or above and they sell their property, the sale proceeds will be used to meet the Full Retirement Sum (FRS).

If co-owner’s CPF usage is less than y% of the residual value, client can pledge an amount that is the lower of BRS and up to x% of the residual value, where x = client share, y = co-owner share

If co-owner’s CPF usage is more than x% of the residual value, client can pledge an amount after deducting co-owner’s CPF usage from residual value (residual value – co-owner’s CPF usage), where x = client share

Residual value is the valuation price (or purchase price, if purchase price is less than valuation price) less outstanding loan.

Factors like outstanding housing loan, share of property, co-owner (joint tenancy) CPF usage, and HDB quarterly average median resale price for all HDB flats can affect the amount of CPF to pledge.

If the owner wants to withdraw any amount in excess of the BRS in their CPF OA, they will need to pledge a property of remaining lease that covers them to the age of 95.


Buying a Second Property

If you want to buy a second property, but have already used your CPF savings for the first property, there are two general scenarios.

If you already have a home that can last you to at least 95 years of age, then you can only use the amount of CPF savings that is in excess of the Basic Retirement Sum (BRS) from your CPF OA. If you are 55 years old or older, you can only use the amount of CPF savings that is in excess of the Basic Retirement Sum (BRS) from your CPF RA.

If you do not have a home that can last you to at least 95 years of age, then you can only use the amount of CPF savings that is in excess of the Full Retirement Sum (FRS) from your CPF OA. If you are 55 years old or older, you can only use the amount of CPF savings that is in excess of the Full Retirement Sum (FRS) from your CPF RA.


Home Protection Scheme (HPS)

So long as CPF is used, Home Protection Scheme Insurance (HPS) must be bought to protect against losing home should the lender is incapacitated or passed away before the loan is fully paid.


Others

When there are any unfavorable factors acting against a person in relation to CPF, the person will not be able to apply for Contra Payment Facility. Unfavourable factors include, but are not limited to, infringement of any CPF rules, monies in the CPF account are subjected to charging orders by The Court, CPF mortgage/charge on the flat, mortgages that are in favour to any financial institutions.

If the transaction is conducted at market value and the sales proceeds are insufficient to repay the outstanding loan, plus making the necessary CPF refund in full, the client does not need to top up the shortfall of CPF refund with cash. However, the shortfall in outstanding loan will still require cash top up.


Our Opinion

There is always a problem of how much CPF savings to use (for buyers taking bank loan only) as the balance payment is difficult to reach for many people. Using too much will compromise your BRS later, and using too little may not solve the problem of having too little cash or loan amount. Some people may want to use as much CPF savings as possible so that they do not leave any money in the CPF account and some people want to save up their CPF for the CPF LIFE Scheme.

In our opinion, we would take an investment approach. If you are able to get an investment that has consistent returns of at least 2.5%, then you should use more of your CPF savings for the property. You should free up your cash for other investments that have a returns of more than 2.5%.

If you are not financial savvy and are unable to get consistent returns of 2.5%, then use more cash instead of your CPF savings. This is because the owners will be the one that pay the 2.5% instead of CPF Board when they use the CPF savings (the net effect is 5% difference between people who uses CPF and people who does not, and not 2.5 %!). With the bank loan interest plus 2.5%, owners are paying more than what they expect. However, if you do not use much of your CPF savings, not only CPF Board pays the 2.5%, you are actually paying much less in the net value (loan interest minus 2.5%, for a portion of the total amount).

Some people also argue that the capital gains from the property and rental income are not accounted for. Firstly, when you purchase the flat, you are required to fulfill the Minimum Occupation Period (MOP). MOP prevents you from renting out the entire flat for 5 years. It is difficult to predict returns of 5 years later. Neither it is able to tell if the rental market is going to be strong 5 years later. Just on room rental alone is definitely less than 2.5% returns. Secondly, for capital gains, it is difficult to predict how much your house will increase in its value after 5 years. It may even decrease in value. Although there are many reports that predict the prices of houses in 10 years, 20 years or even longer, we strongly suggest that you use these report as a reference only, as these reports uses mostly current circumstances to predict the future prices. Nobody can accurately predict what will happen in the distant future as there are many uncertainties. These factors lead us to exclude using property as part of the returns.


Conclusion

Real estate and CPF are bounded together as part of your financial and life planning; a decision made now could affect your future greatly when it comes to something of this price quantum. Consumers should consider their CPF retirement sum requirements and take note that there may be a reduction to CPF contribution as people gets older and leave the work force. Consumers need to take note of the changing housing interest rate as well. Consumers should seek the professional advice of reliable financial planners when it comes to CPF, and have a budget and how much CPF to use before making an important decision like purchasing a property. Real estate professionals can advise you on basic CPF matters too, but a financial planner will be the best choice.



Date first posted on 18 June 2019; Last Edited on 18 June 2019

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