Starting from August 2018, we do not need to wipe out our CPF OA anymore when taking a HDB loan. Now, we can have the flexibility to leave up to $20,000 in our CPF OA when we take a HDB loan. For a couple, this means a total of $40,000 in their CPF OA ($20,000 each).
The question now will be should we wipe out our CPF OA or leave $20,000 in our account? Leaving $20,000 in our CPF OA means taking up a higher mortgage loan and paying more loan instalment and interest per month. This may not be a bad thing. Let's look into detail on this.
Setting out the scenario
Let's assume the following scenario for a couple who has bought a house and looking to take HDB loan:
- Bought a house at $400,000
- Has $100,000 each in CPF OA
- Wants to take HDB loan at 2.6%
If they leave $20,000 in their CPF OA each (total of $40,000) and take a loan of $240,000 for 25 years, their monthly loan instalment will be $1,089/month.
Looking at the above, most couple will choose to go for the lesser monthly loan instalment right? It seems like a logical choice but unfortunately logic does not always prevail.
Interest gained for $20,000 left in CPF OA
The decision now is whether to leave $20,000 in CPF OA. First, we must know how much interest we would have gained if we leave it in CPF OA. Here's a table to summarize:
The above is the interest we would have gained for leaving $20,000 in CPF OA for 15, 20 and 25 years at 2.5% interest. Doesn't look a lot but let's move on to how much more interest we would have paid if we take up a bigger home loan if we have not wiped out our CPF OA.
*Do note that CPF OA is actually giving 3.5% interest for the first $20,000 so the amount should be larger.Interest paid on $240,000 vs $200,000 home loan
In order to know whether it is good to leave $20,000 in our CPF OA accounts, let's take a look at the interest we would have paid on a $240,000 vs a $200,000 home loan.
The above shows the cumulative interest paid for a $200K vs $240K home loan for 25, 20 and 15 years at 2.6% interest rate. Now, let's calculate how much more interest we would have paid on a $240,000 home loan should a couple not leave $20,000 in each of their CPF OA.
Now, the additional interest paid on that additional $40,000 loan doesn't seem like a lot. Will the interest gained on the $20,000 each in a couple's CPF OA be more than the above interest paid?
Let's bring the numbers together.
Taking HDB Loan - Should I Wipe Out My CPF OA?
Now, with all the calculations, will we see higher interest gained for leaving the $20,000 in our CPF OA? The answer is yes. Let's look at the table below.
The verdict is that it is more worth it to leave $20,000 in CPF OA from interest rate point of view as the interest we would have gained will be higher than the interest paid if we wiped out our CPF OA. The main reason is that CPF OA interest is compounded while mortgage loans interest are amortized.
This simply means that the interest gained in CPF OA, the interest will be calculated on the original sum + interest while for mortgage loans, the interest is calculated on the left over sum thus for mortgage loans, we will always be paying lesser interest as our total mortgage loan sum decreases yearly.
