Why I Think CPF Accrued Interest is a Feature, Not a Downside

CPF Accrued Interest has to be one of the most misunderstood things about CPF and homebuying in Singapore, and much ink has been spilled on it. There are many articles written about it and I’m tossing in my hopefully unique two cents on why I think CPF Accrued Interest is a feature rather than a downside.

What is CPF Accrued Interest?

Our CPF Ordinary Account can be used for buying residential properties, and when we do so, we accumulate CPF Accrued Interest. CPF Accrued Interest is the amount of interest that could have been earned if your CPF savings were not withdrawn to pay for your housing.

When you sell your property, you have to refund the amount you used from your CPF, plus the Accrued Interest.

For example, you purchase a $1 million property with $200,000 CPF funds and the rest with cash and a mortgage. After 5 years, when you decide to sell the property, $226,281.64 ($200,000 + 2.5% p.a. Accrued Interest compounded over 5 years) from your sale proceeds have to go back to your CPF.

A tale of two investments

It is understandable why some people think that this is a cost of some sort since having to pay back a higher amount does feel like one is incurring interest. Heck, it is even called interest.

However, let’s consider two hypothetical situations to put things in perspective. In the first scenario, we are buying a property with $200,000 of CPF funds as mentioned above, and in the second, we are investing the same $200,000 in equities through something like a unit trust or ETF.

After 5 years, both have appreciated at 3% p.a. (an arbitrary number to illustrate a point and may not be entirely realistic for both scenarios).

	Scenario 1 (Property)	Scenario 2 (Equities)
CPF invested	$200,000	$200,000
5 years later at 3% p.a. return (A)	$231,854	$231,854
Amount refunded to CPF at sale (B)	$226,281	$231,854
Amount cashed out (A) – (B)	$5,573	$0

Any return, whether capital gains or dividends, derived from your equity investment cannot be withdrawn from your CPF. On the other hand, there is potential to cash out on capital gains generated by property investments made with your CPF. In fact, this ability to cash out capital gains from CPF money seems to be unique to property buying, even without taking into consideration things like rental income.

CPF Accrued Interest doesn’t seem so much like a downside now, isn’t it? In fact, I think many would quite love to invest in equities with our CPF funds with the ability to pocket returns above 2.5% p.a. as cash.

What if property values stagnate or plummet?

If the property value remains stagnant or decline, things are less rosy. If the property sells for around the buying price of $1 million, there is likely a stronger perception that CPF Accrued Interest is a cost. The homebuyer would have paid $800,000 cash and $200,000 CPF, but would receive only $773,719 ($800,000 minus $26,281 Accrued Interest) in cash, and $226,281 in CPF.

In a downward market, the cash loss seems even more serious: a $900,000 sale of the property would result in the homebuyer only getting back $673,719 in cash (with $226,281 back in their CPF).

In short, your cash returns will see the impact of a property investment that did not turn well while your CPF is preserved.

So should I use my CPF for housing?

The short story is that, unless one is cash rich, most people are going to be using their CPF anyway to finance their homes, accrued interest or not.

For those who have the option to choose, I think it boils down to a simple question: are you putting your cash to work for at least 2.5% p.a. and above? If your cash is just idling around (something you should probably fix), perhaps using cash is better.

Conclusion

Given that you are free to use your CPF including the Accrued Interest you have for either buying your next property, or for your future retirement needs, it is a stretch to consider CPF Accrued Interest a cost.

Rather, CPF Accrued Interest is designed to protect and maintain your CPF savings. It remains yours, albeit for its intended purposes. In an upward market, you enjoy the benefit of cashing out capital gains beyond the 2.5% p.a, and in a downward market, you feel more brunt on the cash side. In any case, the CPF money remains yours to use, and I don’t think it’s accurate to consider it a cost or even a downside.

But hey, feel free to let me know if I have left out anything in my evaluation of CPF Accrued Interest in the comments or in our Telegram group.

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