To say that interest rates has been rising at a frightening pace is stating the obvious. Recall that the United States Fed Funds Rate started the year at 0.25% and is projected to peak at 4% by year end. Such a steep and fast rise has certainly thrown a spanner to some homeowner’s mortgage repayment plans. While some mortgagors may be locked into their financial agreements, they can still evaluate whether changing the mode of their payments will lead to a better financial outcome. With a rising interest rate environment, is it better to use CPF or cash to pay your housing loan? I review the pros and cons of doing so in this article.
Low interest rate environment
For the past 15 years or so, one could shop around and obtain a competitive mortgage loan package which cost less than what CPF is paying under the Ordinary Account (‘OA’). Today, shopping checking for refinancing eligibility have become easier with PropertyGuru SmartRefi. An expert is also available to provide unbiased and customised advice at no cost.
As shown in Diagram 1, 3-Month SIBOR was averaging 1% for a long period between 2008 to 2018 and never exceeded beyond 2% until this year. As such, it would make sense to use cash to service your monthly mortgage payments for the following reasons:
1) To minimise accrued interest in your CPF OA
According to the CPF website, accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing. This amount must first be refunded upon the sale of the said property before the homeowner can collect any cash. As aforementioned, home owners pay sub 2% interest on their home loans while funds in their CPF OA continue to yield 2.5%. Coupled with the fact that some homeowners who are unwilling to put their liquid cash into higher-yielding money instruments, it makes sense for this group to use cash to pay their home loans. This ensures the accrued interest in their CPF OA is kept to a minimum and maximise their cash proceeds upon sale of their houses.
To check the accrued interest in your CPF OA, head over to the home ownership section under the CPF website. Diagram 2 is a screenshot of the breakdown of money that must be refunded to CPF if your property is sold, which the accrued interest is a part of.
2) Best use of cash for those who are risk averse and not keen to invest
I know of some folks who are so wary of investing that the only “investments” they would consider is fixed deposits. Unfortunately, during a low interest rate environment, it is almost impossible for banks to reward depositors an interest rate that is higher than 2.5%. For another group of people, it is not a case of being risk averse but simply having little time or little interest to invest. Therefore, it might be better for them to pay their outstanding mortgages in cash rather than from the funds in their CPF OA. That is because cash in their hands earns less than 2.5% which is the floor rate under CPF OA. (Read this article to find out how CPF interest rates are computed)
High Interest Rate Environment
If we flip the situation around to reflect the current high interest rate environment, the converse would be true.
3) Risk-free instruments now pay higher than 2.5%
6-month Treasury Bill and Singapore Savings Bonds are currently yielding more than 2.5%. To me, this is a market signal that one should ordinarily favour using CPF OA than cash to service a mortgage for the following reasons:
- For the group who are risk-averse, T-bills and SSBs are considered safe havens. I would consider these instruments as relatively risk-free since they are fully backed by the Singapore government which enjoys a AAA credit rating. Even if these investment vehicles appear foreign, how about news of UOB offering 2.6% interest rate for their fixed deposits?
- For the group who have little time or no interest to invest, subscribing to T-bills and SSB take up less than 5 minutes and could be done conveniently online from the comfort of your homes! Therefore, the lack of time cannot be used as a reason anymore.
Quite frankly, the interest yields have gotten sufficiently attractive that even I have been getting into the act and participated in a couple of SSB auctions.
How to Change Payment Mode For Your Mortgage
Since most readers on Heartland Boy.com would already have existing mortgages, let me show you how to change the payment mode on your home loan.
Step 1) Firstly, login to your CPF Portal and head to Home Ownership. Look for Ways To Manage as shown in Diagram 3.
Step 2) Thereafter, scroll down and choose between “Usage for HDB Loan or “Usage for bank loan”. Since I have switched from a HDB loan to a bank loan with DBS since 2020, I will only demonstrate the latter as an example.
By the way, for those who are purchasing a resale or new BTO flat, I wrote an article to explain why a HDB concessionary loan is a superior choice in the current high interest rate environment.
Step 3) Choose revise monthly instalment as shown in Diagram 4.
Step 4). At the next page, you will find the name of the financier/lender as well as the currently monthly instalment already populated. Simply tweak the new amount that you want to be paid from CPF as well as the effective date that you want this to take effect. Click submit and wait for the CPF Board’s approval!
Of course, it goes without saying that for such an important personal finance decision, you may want to discuss it with your spouse first and run through some permutations on an online home loan calculator. Do note that married couples can service their mortgage obligations in different combinations – eg: one fully in cash and the other part cash and part CPF.
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With rising interest rates, I am sure home-owners are worried about their current mortgage plans, more so for those with fixed rates that are maturing in the next 6 months. My suggestion is to check your refinancing eligibility on PropertyGuru’s SmartRefi first. This allows you to understand any potential savings you may gain and I highly recommend completing this exercise as part of your decision-making process. The external interest rates are beyond our control but at least make the best decision with the given parameters.
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