Introduction

The pension system varies greatly across the globe. In Singapore, we have the Central Provident Fund (CPF) in place for Singapore citizens and Singapore Permanent Residents. CPF is an employment-based savings scheme with the help of employers and employees contributing a mandated amount to the fund for their benefits. This scheme is managed by the Central Provident Fund Board (the CPF Board), which is a statutory board regulated by the Singapore government.

The CPF is split into the following accounts: Ordinary Account, Special Account, Medisave Account and Retirement Account. Of the various accounts, the monies in the Ordinary Account which (in general) forms the bulk of your CPF savings, can be used, inter alia, to fund for your housing. Most Singaporeans would have utilized their CPF in the Ordinary Account when purchasing a property in Singapore, given the significant funding required.

Selling The Property With Existing CPF Loan

If you have tapped into your CPF for your down payment or to service your housing loan, you will need to refund the principal amount you took from your CPF account plus accrued interest when you sell your property. This interest amount is equal to what you would have earned if you kept the monies in your CPF account. However, if the net sale price falls short and a person is unable to return the amount borrowed from his or her CPF account, he or she may or may not be required by CPF to top up the difference in cash, depending on whether the property was sold above or below market value. If the property is sold on or above market value, he or she is not required to top up the shortfall in cash.

However, not topping up the shortfall immediately may not necessarily be a good thing. While not having to top up the shortfall in cash may have short-term benefits, some buyers simply may not be aware of how quickly the accrued interest on CPF monies, and other loans, can accumulate. At 2.5% per annum, the accrued interest can be substantial if a considerable amount is borrowed from the CPF account and over a long period of time. Further, some older people may struggle with less CPF for future property purchases and loan payment.

Selling The Property After Age 55

It is important to note that you can only use funds in excess of the FRS to purchase your next property, should you wish to purchase another property after 55. Alternatively, you may opt to only set aside $96,000 (as at 2022) for the Basic Retirement Sum (BRS) instead of the FRS. However, opting for the BRS requires you to pledge your property. This will in turn affect the amount of CPF balance left for your next home purchase after 55 years old.

In addition, the recent measures introduced by the Singapore government to cool the property market also tightened the Total Debt Servicing Ratio (TDSR) threshold for property loans from 60% to 55%. For those who are unaware, TDSR refers to the portion of the borrower’s gross monthly income that goes towards repaying the monthly debt obligations, including the loan being applied for. A borrower’s TDSR must not exceed 55%. As such, buyers may have to turn to other alternatives to finance the purchase, such as CPF and cash (and HDB loan for public housing).

As mortgage loan terms usually shorten with the age of buyers, it will be more difficult for seniors to utilise their CPF monies to help partially finance their home purchases, as they would need to use more cash for mortgage loans. They may need to pay higher monthly debt services if their loan terms are shorter.

Voluntary CPF Housing Refund

The Voluntary CPF Housing Refund scheme (VCHR) allows those who utilised their CPF to refund the borrowings in advance and prior to selling the property.

Given that the refund is made in advance, you will reduce the total amount of interest incurred on the principal amount (which you need to pay back eventually). Moreover, this scheme allows you to subsequently gain interest of 2.5% per annum on the monies set aside in your CPF account. In this pandemic time, we note that there is a surge in the number of people making voluntary housing refunds as a means to stretch their savings amidst uncertain times.

However, for those who are actively investing, making a voluntary CPF Housing Refund might not be ideal since you can get better returns through active investments (e.g. investing in stock or property market) than the CPF interest rate. This is especially so for those who can stomach higher risk, higher return investments.

Another point to note of making a CPF Housing Refund is that you are unable to make advance withdrawals from your CPF account before the age of retirement in accordance with current CPF rules and regulations. As such, you will not be able to mobilise the monies placed in your CPF account under this scheme until you decide to buy another property or reach the age of retirement.

Refunding the CPF monies prior to the sale of your property may be a good idea if you have monies in excess that are not earmarked for any upcoming investments. However due to the inflexibility of the CPF system, you do have to consider and evaluate your financial situation before you proceed to make early refund.

Conclusion

To utilise your CPF, you must authorise your lawyer to submit a CPF application on your behalf. To process the CPF application, the legal fees payable to the law firm appointed by the CPF Board will be borne by you. As such, you may enjoy some cost savings if you appoint the same law firm on the CPF panel of solicitors to act in both the CPF application and the sale/purchase of the property. We are pleased to share that Sim Mong Teck & Partners is on the CPF panel.

Should you have any property related enquiries, please feel free to contact us for a consultation.