CPF Accrued Interest: The Real Reason Why You Shouldn’t Rent Your HDB

CPF Accrued Interest: The Real Reason Why You Shouldn’t Rent Your HDB

Photo by Eugene Lim on Unsplash

Are you thinking of upgrading your home? After fully paying your first flat, it makes sense that the next thing to do is buy a new property. I mean who doesn’t want to move out from their HDB flat to a bigger and better condo if they had the chance right?

Purchasing a private property after completing your HDB flat mortgage has been one of the biggest aspirations for Singaporeans. 

If you’re interested in learning more about how you can upgrade to private property, click here to schedule a call back with me and get a FREE Property Assessment. 

But when it comes to purchasing a property, there is always a misconception about the right thing to do. A majority of Singaporean HDB flat owners think that renting out their old flats in order to pay for their new property is the best option— but this may not be correct, here’s why… 

First, you will have a payable additional buyer stamp duty (ABSD). ABSD is a tax that buyers have to pay when they purchase a property. It’s based on the selling price of the property or its valuation—whichever sums higher. Its value will also vary depending on the number of properties you own and your residency status in the country. This system was first introduced in 2011 in order to prevent land hoarding by wealthy landlords. 

So assuming you’re a permanent resident in the country and subjected to 7% ABSD, if you want to buy a $1.2 million worth property this means you will pay an additional $84k. This is the amount of tax you have to pay to the government. 

Another thing to consider is the cash flow you’ll get from renting your HDB flat: Is it even enough to pay for your new property? If you’re renting out your flat for $1000 per month, it will take you 84 months or almost seven years to get back your 84k.  

If you’re going to ask us, that’s a lot of wasted time and money on tax. If you really want to make the most of your money, renting is probably not the wisest option. 

The Real Reason Why Renting HDB Flats isn’t Good for Your Financially

Three words: CPF Accrued Interest. 

Your CPF Accrued interest is the primary reason why you shouldn’t rent out your HDB. When you sell your flat, the sales proceeds actually go to refund the principal amount used as well as the accrued interest in your CPF OA.

So if you pay off your flat for $500k using your CPF, on the 10th year, you will need to return back $640k. What this means is that you will have to sell your house for a higher price, return the accrued interest, and only then can you keep cash proceed. For more information about this, click here to schedule a call back with me and get a FREE Property Assessment. 

It’s true that the money will still belong to you as it will go back to your CPF account but the interest will wipe out all the cash gains you’ll have for the property. The main reason for this is because the government wants HDB housing to be for owner-occupation and public housing, rather than investment. 

What happens if you don’t sell and keep your HDB for rent?

For many people, renting their HDB seems like a good option. You get money every month, plus you can keep the flat for the long term. However, they’re forgetting their accrued interest. 

Still based on the example above—in 30 years, the accrued interest will amount to $539k. Realistically, in order to gain profit from your flat, you will need to sell it at $939k or higher. That just isn’t realistic in most scenario.

Photo by 贝莉儿 DANIST on Unsplash

The lesson here is that the longer you’ve used your CPF to finance your property, the fewer cash will get back to you when you finally decide to sell your flat. This is fine if you’re not planning on owning multiple income-generating properties, but if you do, you might want to do it right in the beginning. To succeed in investing, you have to start early in order to build a better and larger portfolio. 

And unless you’re someone who can manifest cash at a higher rate than you would gain from the interest in your CPF OA account, it’s never a wise move to use your CPF to pay for your mortgage. 

Sadly, there seems to be a higher percent of HDB owners that do not understand CPF accrued interest than those who are knowledgeable about it. 

The CPF grant is by far the best system that allows cash strapped Singaporeans to afford to buy a home. However, it’s also important to know the risks involved when signing up for it. In order to have a healthy bank account when you retire, you have to understand the system and use it to your advantage. 

What to do? Ask for Help. Make a Decision Today!

Over the past months, I’ve been helping people understand their current situations and give them advice with all the options they have. If you’re currently stuck paying accrued interest or know someone who does, please do not hesitate to contact me. I am offering consultation services for people who want to make the most of their CPF grant and improve their property portfolio. 

As a real estate agent and expert, I can give you property wealth planning advice and financial analysis. So if you need advice on buying or selecting units for your upgrade, don’t hesitate to contact me. Click here to schedule a call back with me and get a FREE Property Assessment. 

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