Flat buyers using CPF can retain up to $20,000 in OA when applying for HDB loans

In late August this year, it was announced that flat buyers are allowed to retain up to $20,000 in their CPF Ordinary Accounts when buying a flat, provided that they are taking a HDB loan.
Previously, flat buyers were not allowed to leave a cent in their ordinary accounts when buying a flat from HDB. HDB made it mandatory for them to flush out all the monies belonging to the flat buyers’ ordinary accounts, leaving none left.

So what does this change mean for future flat buyers?
Should they leave $20,000 in their flats?

To answer that question, let’s study the current interest rate of the CPF Ordinary Account.

For the first $20,000 in the ordinary account, the interest rate is 3.5%.
For the amounts above $20,000 , the interest rate is 2.5%.

So what does that mean?

There are 2 advantages to retaining up to $20,000 in OA.

1) Flat buyers enjoy the 3.5% of interest rate in their OA for the first $20,000. Although a higher HDB mortgage loan has to be taken, it’ll still be beneficial to the flat buyer. Since 3.5% of CPF-OA interest is greater than 2.6% of the accrued interest for HDB mortgage loan, flat buyers are able to make a 0.9% (3.5% – 2.6%) off their first $20,000 in their OA, if they were to take a HDB mortgage loan.

2) The second advantage is that by leaving the $20,000 in their CPF account, flat buyers need not worry about financing the mortgage during job transitions. Often times, when one is retrenched or in between job transits, one is left without an income for several months. Thus, by having up to $20,000 in CPF reserves, job transitions could be done without having to fork out cash to service the flat mortgage.

Having personally bought my new HDB flat, my spouse and I have utilized this strategy to ensure that we have zero cash outlay to service our flat mortgage.

So, unless you’re taking a bank loan to service your mortgage, it would be ideal to leave up to $20,000 in your OA, although you’re taking a higher HDB loan.

What do you think?

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