Question from an existing client (figures changed): I want to know how much CPF monies I can use for the mortgage with the aim to reduce amount of interest paid over time. I've done some calculation and I still am not really sure! On top of my $1987 monthly installment which is using CPF, can I make lump sum payments of perhaps $35K from the CPF? Will this cause my usage to exceed the CPF Valuation Limit (385K)? If it exceeds the CPF Valuation Limit, then there is some other consideration like if I'm <55, the remaining amount must meet the basic retirement sum (too confused by here to carry on).
This client of mine owns a resale HDB flat financed using a HDB loan. If the CPF Valuation Limit is breached, it will cause the borrower to be unable to use the CPF money to service the HDB loan. For those who are not aware, there is a limit which the CPF Ordinary Account can be used to service a mortgage loan. See this video to fully understand: Shocked that you cannot use your CPF for housing loan due to CPF Valuation Limit?
He is worried that he will not be able to use the CPF for mortgage instalment in the future because there will be a significant change in family’s finance in the next 5-10 years time. Currently he and his wife’s CPF-OA have positive balances of more than $30,000. He wonders whether repaying some of the loan from existing CPF-OA would breach the CPF valuation limit.
Your total amount of CPF already withdrawal for housing loan (husband and wife combined) is $123456. This is shown in your CPF statement when you login to CPF website using your SingPass.
Assumed Valuation Limit (VL): $385,000. The Cash-Over-Valuation (COV) of $73,000 is not counted.
Current mortgage instalment (all using CPF from husband & wife): $1987 per month for another 166 months at 2.6% pa.
Based on existing configuration, the number of months before you breach the VL is:
(VL - CPF already withdrawn)/(total monthly installment)
= (385000 – 123456)/1987
= 132 months
= 11 years
As your loan expires 166 months, you would have to pay your installment using cash in the final 166-132 = 34 months.
I estimate your current loan outstanding is $276543.
If you use say $35,000 of CPF to pay down the existing loan, the estimated number of months left assuming no change in monthly installment is given by the formula NPER(2.6%/12,-1987, 276543-35000,0,0) = 141 months.
You will breach the VL in:
= (385000 – 123456 - 35000)/1987
= 114 months
Thus, if you pay $35,000 using CPF to reduce the loan now, you will have to pay cash in the final 141-114 = 27 months of the loan period.
From this exercise it can be seen that the length of period which you need to pay cash has reduced from 34 to 27 months. This reduction is because of the lower total housing interest you have to pay.
Below is a graphical representation of the above description.
More details on the CPF Valuation Limit
If this is your first time you heard of the CPF Valuation Limit, I urge you to view this video to find out more: Shocked that you cannot use your CPF for housing loan due to CPF Valuation Limit?
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