Is it better to wipe out our CPF when purchasing our first resale flat or keep our CPF to earn interest?
I’m taking out a bank loan with my partner for our first resale HDB house. This alone is going to need a 5% downpayment in cash. I would assume it’s always better to conserve as much cash as I possibly can.
Sometime back, an agent suggested that I don’t wipe out my CPF when purchasing my first flat. Instead, after paying all the necessary down payments and fees through CPF, I should keep my remaining OA balance and let the interest roll. To service the bank loan, I will only pay it with 100% of my monthly CPF contribution along with additional cash depending on my comfort. I can choose not to add any cash at all if I don’t mind it taking longer. After a number of years, when the CPF has accumulated enough to pay off the remaining balance of the loan, I will pay a lump sum from my CPF to the bank to clear off the debt.
The idea behind this is that I ought to let the interest on my CPF funds compound. If I had wiped out my CPF OA, not only do I not benefit from the 2.5% interest in my OA account, I will also have to pay back that interest to CPF when I sell the flat. Therefore, by maintaining my CPF OA, I am technically earning interest that will go toward paying off my debt in the long run.
This isn’t the first time I’ve heard of it. I recall seeing similar ideas on some YouTube videos. However, by doing so, I will have to take out a significantly larger loan than if I had wiped out my CPF. The total final interest for the debt might easily be 50% or more of the principal in the end should the interest rate remain at the current level or only slightly lower!
I did some very naive calculations, and I couldn’t see how this would work out better unless interest rates go below 1%. But 2023, and maybe 2024, is already looking at 4-5% loan rates. It will take at least 16 years for my CPF to collect enough interest to cover a larger loan, which is a long time for many things to happen. Moreover, after I initiated the lump sum payment from my CPF to the bank, wouldn’t I start incurring interest with CPF that I will still have to pay back when I sell the flat? I’m not sure whether I’m missing something here.
Is this really a good idea in today’s market? Has anyone accomplished something similar? What should I think about?
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