Sunday 11 June 2017

How to Avoid Cleaning Out Your CPF Balance When Taking HDB Loan

When you apply for a loan from HDB to buy a flat, it will take all the money from your CPF Ordinary Account (OA) before giving you the loan. This is to reduce the loan amount that you need to service. If you wish to avoid an empty OA account, you can temporarily transfer some of your OA balance out of CPF before you apply for the HDB loan. The pros and cons for either approach are discussed in Clean Out CPF Balance When Taking HDB Housing Loan?

A reader recently asked me how to temporarily transfer some of the OA balance out of CPF. Note that I am not encouraging you to do it, but if you have a real need for keeping some money in the OA to meet future financial obligations such as buying/ servicing insurance policies or financing your family members' tertiary education, below is one approach for doing it.

The approach I used is to invest in some safe investment instruments. As the objective is to temporarily park the cash outside of OA, the overriding principles are safety and liquidity of the investment. As there is a foreseeable use for the money in the future, it is of utmost importance that most of the money can be returned to your CPF account subsequently. Making a positive return on the money, although welcomed, is not crucial. Secondly, you also do not wish for your money to be locked-in in that investment for longer than is necessary. Typically, the aim is to withdraw the money 1 month before the HDB appointment date and return it 1 month after the HDB appointment, making it approximately 2-3 months of investment period. The longer the money is invested, the higher is the risk.

The instruments that you can invest 100% of your OA balance (note: you cannot invest the first $20,000 of the OA balance) are fixed deposits, government bonds, statutory board bonds, some insurance products and unit trusts. I chose short-term government bonds known as Singapore Government Securities (SGS). They have no credit risks and foreign exchange risks and have local banks providing liquidity as secondary traders. However, SGS are extremely difficult to trade. Before they were listed on the Singapore Exchange, I could only trade them by making a visit to the banks. Staff at the local bank branches practically never heard of them and had to consult their Treasury department at the headquarters every time I traded SGS. Moreover, bond trading is very different from share trading. There is the concept of clean price and dirty price. Clean price is the price that you see quoted on the market. Dirty price is clean price + accrued interest and is the price that you actually pay. It is complex enough, right? For this reason, I would not encourage this approach.

The simpler approach is to buy unit trusts that have the lowest risks and are eligible for CPF-OA investment. Suitable unit trusts are those that invest in (1) bonds, that are (2) short-term, (3) issued in Singapore dollars, and preferably (4) by the government. Bonds will reduce the price volatility compared to shares. Short-term (or short-duration) bonds will minimise the risk of interest rate going up and leading to a drop in bond prices. Bonds denominated in Singapore dollar will eliminate foreign exchange risks, and government bonds will avoid the risk of companies going belly-up. It is probably difficult to find a unit trust that invests in Singapore government bonds solely, so the next best is to have a mix of government and corporate bonds. Since most unit trusts invest in a lot of bonds, the risk of any one company going belly-up and affecting the price of the unit trust significantly is usually small. A good resource for finding suitable bond unit trusts is Fundsupermart.

So, after you have invested in the unit trust, complete the appointment with HDB, and 1 month later, after you have confirmed that HDB has completed its work, sell the unit trust and return the money back to your CPF account.

Lastly, please note that no investment is 100% capital guaranteed. There will be some transaction costs from buying and selling. And if interest rate rises during this period, some capital loss is unavoidable. But by choosing unit trusts that invest in short-term Singapore dollar denominated bonds, the risks are minimised.


15 comments:

  1. Would suggest A35 listed on SGX..Unit trust has high sales charge

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    Replies
    1. using OA, using which platform has the lowest sales charge?

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    2. SGDividends,

      No one unit trust/ETF is perfect. While ABF SG Bond ETF is 87% invested in SGS, its duration is 6.6 years. A 1% rise in interest rate results in approx. 6.6% drop in bond price.

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    3. Foolish Chameleon,

      Neither POEMS, Fundsupermart or DollarDex have sales charges or platform fees for CPF-OA investments.

      Delete
  2. a35 is good.. the fluctuations for a few mths is minimal.

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  3. There are platforms such as Dollardex & Poems whereby UT sales charge is zero. Even cheaper than buy/sell ETFs on SGX. And for the 2-3 months of holding, the higher expense ratios of UT is irrelevant. Good choice will be UOBAM SGD Fund or Nikko Shenton Short Term Bond. Too bad MMFs are not approved for CPF coz the yields too low. Funds like Philips MMF are super-stable --- no negative price drops even on daily basis in almost 20 years of existence; still chugging along at 0.5%-0.8%p.a. even during 2008-2009. Would have been perfect for temporary storage for this CPF exercise.

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  4. O.8% too low..time deposit higher

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    Replies
    1. You're just going to be using it for 2-3 mths before putting it back into CPF OA. That 2.5% will beat time deposits :)

      Although I'm getting 3%-4% p.a. using short-duration bonds for the past 7 years --- this one I use for my cash warchest. Useful for extra bullets to utilize during corrections like in 2011 & 2015.

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    2. SPR,

      Although Money Market Funds give low returns, this exercise isn't about getting higher returns. It is about not having an empty OA balance after applying for the loan from HDB.

      Delete
  5. Maybe you could buy a Singapore Govt Bond that is close to maturity. So you don't have to sell it, and capital return is guaranteed. The downside is you'll need a few hours to visit the HQ of a major bank.

    ReplyDelete
    Replies
    1. That's possible, but buying/ selling of SGS isn't for first-time investors.

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  6. Hi there!

    Can I check - for the first 20k OA that can't be invested to 'park' my funds so that HDB can't wipe it clean, it refers to first 20k of OA for both husband and wife? I.e. 40k in totality?

    ReplyDelete
    Replies
    1. Yes, the first $20K of OA for each person cannot be invested.

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