CPF rule change for HDB loans: Less worry, more flexibility for flat owners

SINGAPORE — Besides improving retirement adequacy, the move to allow flat buyers to retain S$20,000 in their Central Provident Fund (CPF) Ordinary Account when taking up Housing and Development Board (HDB) loans would provide some relief and flexibility to homeowners who are retrenched or between jobs, said experts.

Before the change, which took effect on Tuesday (Aug 28), buyers had to first use up the entire balance in their Ordinary Accounts.

The rule change comes four years after concerns were raised in Parliament over the proportion of CPF monies spent on housing, and observers said it would also help young couples who are worried about the cost of starting a family and financing their mortgage loans.

The previous rule was to ensure that flat buyers exercise financial prudence and minimise the housing loan taken, said the HDB on Tuesday.

"While this objective remains relevant, some flexibility can be given to flat buyers to provide a buffer in their CPF Ordinary Accounts to pay mortgage instalments in times of need, or to improve retirement adequacy if the buffer is eventually not tapped," said a HDB spokesperson in response to TODAY's queries.

Mr Chris Koh, director of property firm Chris Koh International, said that the sum of S$20,000 should be able to tide a couple through housing installments of six months to a year, should either of them be retrenched or wish to switch jobs.

"In circumstances where people lose their jobs (and) get retrenched, they will panic if they don't have the CPF (monies) to pay their instalments," said Mr Koh. "(With the rule change), at least tomorrow when I get retrenched I won't panic, (because the S$20,000) can service another 6 to 12 months of housing payments," he said.

The rule change would also allow buyers to "take advantage of the higher interest rate" from having their first S$20,000 in their Ordinary Accounts, said Associate Professor Sing Tien Foo, director of the Institute of Real Estate Studies at the National University of Singapore (NUS).

Currently, CPF members can earn interest rates of up to 3.5 per cent per year on the first S$20,000 in their Ordinary Accounts — which Prof Sing noted could be why HDB is allowing that amount to be retained when flat buyers take a HDB loan.

Interest rates on HDB mortgage loans are currently 2.6 per cent a year.

However, other analysts questioned if S$20,000 would be enough for those who do not have a stable income.

The HDB may have encountered appeals from people who lost their jobs and had to let go of their own homes or downgrade, said OrangeTee & Tie's head of research and consultancy Christine Sun.

"Maybe they saw an increasing trend (and hence decided to allow for this change)," she said.

A risk is that some buyers may end up over-borrowing, taking up bigger loans and having to pay compounded interest as a result, she cautioned.

However, Prof Sing said the risk is "marginal" as those with HDB loans can use the interest gained from parking S$20,000 in the CPF Ordinary Account to offset the interest for the loans.

Flat buyers who wish to use all their CPF Ordinary Account balances for their flat purchase may continue to do so.

While the HDB did not comment on the timing of its rule change, Members of Parliament (MPs) raised concerns four years ago about the amount of CPF monies being used for housing.

Ms Tin Pei Ling, for instance, called for ways to provide higher returns on CPF monies to better withstand inflation and suggested allowing more flexible use of CPF funds to finance housing and education.

On Tuesday, Ms Tin, who is currently MP for MacPherson, a single member constituency, said such moves would be appreciated by most people. But the balance has to be struck between having CPF funds for retirement and healthcare needs, and the ability to draw on the funds in urgent situations, she said.