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  • Writer's pictureWilliam Lee

CPF vs Cash - Which is Better to Finance a Home Loan?

For most people, getting a home symbolises a new stage in life – one where you will be away from your parents. It also comes with a huge responsibility on the finance aspect, such as renovation costs, utilities bills and home loan repayment.

This brings us to the question that many are curious about: Should homeowners use cash or CPF to pay off the mortgage loan? Before diving into the question, let us understand more about the basics of home loans.

As the name suggests, home loans are taken to pay off the home. It can be paid off monthly using CPF Ordinary Account (OA) or cash, regardless if it is a HDB loan or bank loan. The loan is currently pegged to Singapore Interbank Offered Rate (SIBOR), but it is expected that Singapore Overnight Rate Average (SORA) will be replacing it as the main benchmark for home loans.

HDB loans can only be taken up for up to 90% of the flat’s value. Down payment (10%) must be paid using cash or CPF. On the other hand, a bank loan can only be used for up to 75% of the flat’s value. Down payment (25%) has to be paid through cash for 5% and either cash or CPF for the remaining 20%.

By understanding the repayment methods, it can help you to save on quite a significant sum in the long run.

Advantages of Paying by Cash

Prevents Negative Cash Sale

Paying off the mortgage loan by cash is extremely helpful in preventing a negative cash sale when upgrading the property after a few years. This is mainly due to the requirement to “pay back” the amount that was used from the CPF OA to repay the loans. As a result, paying by cash will not leave you with the lack of cash on hand to pay the down payment and loans for the next property.

Let us illustrate this with an example:

Down payment of $80,000 was made using CPF OA for a $400,000 flat. A home loan with a monthly repayment of $1,500, over a period of five years, was taken up. It is paid using CPF OA as well.

This comes up to a total of $170,000.

Moving on to five years later, you decided that it is time to upgrade your flat. However, using CPF to pay off the loans would mean that you will have to put back the same amount + interest. At an interest rate of 2.5% p.a., the total amount to be credited into your CPF OA will be $192,339.40.

After selling your current flat and paying off all the loans and fees, you might be left with a sale proceeds of around $200,000. Yet, this amount will not go into your wallet; it will be credited into your CPF OA to pay back to CPF.

The first important thing to note is that this applies to both HDB and private property owners (as long as you have used CPF to pay for your home, you are required to top it back up after selling off the property). Second, if the sale proceeds are lower than the amount needed to repay CPF, it is possible to apply for an outstanding amount waiver through a lawyer.

Returns on CPF

By paying off the loan using cash, the CPF OA account can continue to grow and earn a risk-free interest of 2.5% per annum. Compared to holding onto cash, which brings a 0% interest, or putting the cash in a bank, which earns around 0.1% to 0.2% interest, it is definitely better to leave the CPF OA untouched so that it can accumulate interest for retirement.

If you are looking to earn a higher rate of returns than 2.5% p.a., you can consider transferring the amount in OA into the Special Account (SA). It will give you a risk-free return of 4% p.a.

Using another example, let us look at how much interest we can get from using cash to pay off the mortgage loan.

$192,393.04 - $170,000 = $22,393.04

Within five years, you could potentially save $20,000 if you leave the CPF OA untouched and pay the loan using cash. Compared to using the cash on other forms of investments, CPF OA is very much risk-free and the returns are guaranteed. This will better prepare you for your retirement journey.

Downsides of Paying by Cash

The lack of cash flow is a major downside of paying the mortgage loan by cash. A huge portion of your monthly income will go to the monthly repayment and it would mean that you have less to spend on daily expenses or to save up.

Additionally, when an opportunity comes up for you to invest the cash, you might not be able to do so as your cash is tied up with the monthly repayments. Even though the CPF returns are risk-free, there might be other investment vehicles which may bring you a higher rate of returns.


When it comes to taking on a loan, it is wise to borrow as less as possible. As to using CPF or cash to pay off the monthly repayments, it will depend on what you are planning to do with the sum of cash (if paying by CPF).

For those who prefer a stable rate of return (2.5%) and are not willing to take risks, it is advisable to go with the cash option to pay off the loans. The stable rate of returns on CPF and negative cash sales will be advantageous in the long run as you do not need to top up your CPF account after selling off the flat.

However, if you are a risk taker and want to get a return that is higher than the CPF interest rate, you should go ahead with using the CPF amount. The cash can then be channeled into other investments that gives an interest above 2.5%.

To sum it up, you should use cash if you are happy with a return of 2.5% on your CPF OA; use CPF if you need some cash to tide you over or want a higher rate of return.

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William & EIleen

William Lee / Eileen Au

Ideal Home is well-liked by both local and international clients for their friendly yet professional approach in the way it goes about helping them with their real estate goals in Singapore. They welcome the opportunity to have a no-obligation chat with you to see how they can help you to achieve your real estate goals in Singapore.

Contact us today @ +65 8666 4333 (William) or +65 8686 4333 (Eileen).

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