fbpx

Sold House: Why I’m investing my CPF OA

Reading Time: 13 minutes

Hello everyone! Today I have a life update to make. After deliberating this decision for a while, my wife and I have decided to sell our current house and buy a new place!

The current place has been great and we’ve really enjoyed living here, but it is rather small with just 2 bedrooms especially since we plan to have kids. As we’ve been planning the next stage of our lives, we felt that we’d likely need a larger place, to make way for potential children in the near future – and given that we’ve always planned for 2 kids, a 3 bedroom place will be much more future-proofed.

Therefore several months ago we started searching for a new place and put our current place up for sale – and I’m happy to say that we have purchased a new place as well as successfully sold our current home!

Of course, this big life decision comes with significant financial implications, considerations, and decisions to be made, which may be interesting and educational for some of you. So I’d like to walk through the financial implications of these transactions as well as any resulting financial decisions that I took as part of this journey for you.

Here are the things that I will cover in this post:

  1. Financial breakdown of the sale of the current place and the purchase of the new place
  2. What I’ll be doing with the net proceeds from the sale and purchase
  3. What I’ll do with the proceeds that will land in my CPF-OA
  4. What happens to the house gamble?

Financial Breakdown of the Sale & Purchase

First some details about the sale of our current home.

We were able to sell our current place for S$1,400,000 which was a huge surprise. The valuation of the property was just S$1,100,000 in 2021 when I took out a cash-out refinancing of the home, but the price shot up in the first half of this year due to the recent property market run-up post COVID-19. We likely sold at the peak of the current market – very lucky – as the market is looking to be softening slightly now.

While the sale was at the right time, our purchase of the new place was also equally at the peak of the market. This means that we’ve also ended up paying way more than the property was worth just a few months prior… so net-net, I think it was a wash or actually slightly worse for us because we bought a bigger place for S$2,180,000 when it was worth around just S$1.8m the year before (roughly S$380,000 more expensive) … sad… Plus the interest rate on the mortgage is also much higher now – on a much larger mortgage to boot.

Details on the Sale of the Current Property

Here are the financial breakdown of the current property:

Sale PriceS$1,400,000
Remaining Mortgage-S$516,000
Remaining Cash-Out Refinance-S$172,000
Agent Commission-S$30,240
Conveyancing Lawyer Fee-S$2,376
Net Proceeds After Mortgage & FeesS$679,400
Portion to Pay Back to CPF-OAS$160,000
Portion to Receive as CashS$519,400

So based on all the above, after paying back all the mortgage, cash-out refinancing, commissions, and lawyer fee, I’ll receive a total of about S$679,400 after the sale.

However, some portion of that will need to be paid back into CPF-OA as I used OA funds to pay for the mortgage as well as some down payment. That portion is roughly S$160,000.

The remainder of the proceeds I will receive as cash. Nice right?

Well, not so fast, this is only really nice if I didn’t also have to pay for another place to stay – especially when it is larger in size. Let’s take a look at the damage dealt from the purchase of the new place shall we?

Details on the Purchase of the New Property

Before we dive into the numbers, there are some nuance to how my wife and I decided to purchase the new property.

Due to the ABSD rules, it is more expensive to buy a new property if I still have another property under my name. So usually you’d need to sell your current property first before buying another to avoid having to pay ABSD. Of course, if I sold my property without another property lined up to buy, then I may be left in an awkward position where I have to give up my current home without another place to move into to stay in and we’d have to rent.

So usually you’d have to really line up and coordinate the timing between selling and buying a new property quite closely to make this work, which is quite stressful.

Fortunately (or unfortunately) our current home was only in my name instead of both mine and my wife’s name, so we had the option for my wife to purchase our new home completely under her name without triggering ABSD (since she has no property under her name yet.) This allows us to take our time to sell our current home without the stress and complexity of matching the timing between the sale and purchase.

However, the downside of this of course is that I cannot make use of my CPF-OA to pay for the new home and we can only make use of my wife’s CPF-OA as the property will be solely in her name.

Regardless, we elected to go with this option with me helping to pay the cash portion of the purchase.

Here’s how it ended up breaking down:

Purchase PriceS$2,180,000
Cash Downpayment (Wife)-S$109,000
CPF Downpayment (Wife)-S$200,000
Cash Downpayment (Me)-S$236,000
Buyer Stamp Duty (Wife)-S$78,600
Valuation Fee (Wife)-S$432
Lawyer Fee (Wife)-S$3,200
Renovation Cost (Me)-S$44,000
Total Wife CPF~S$200,000
Total Wife Cash~S$192,000
Total Me Cash~S$280,000

As you can see, since my wife is the only one that’s able to use her CPF, she pulled out most of her OA to pay as much as she can, then with the remaining amount in cash we decided to split roughly between the both of us with my covering a little more of the cash portion, while my wife still paid more overall as she was able to draw on her CPF to cover a large portion of it.

So bringing both the sale and purchase together, what does that leave me with?

Net Financial Position After Sale & Purchase

Since the sale gives some proceeds into my CPF as well as Cash, and the purchase of my new house will take some of the cash, here’s what that looks like:

Sale Proceeds into Cash~S$520,000
New Home Purchase Cost in Cash~S$280,000
Net Cash Proceeds~S$240,000
Sale Proceeds into CPF-OAS$160,000

Based on the above, after the sale and purchase is complete, I will have a total of S$240,000 in cash as well as S$160,000 being returned to my CPF-OA.

Which begs the question: “What should I do with the proceeds?”

via GIPHY

What I will be doing with the net proceeds

This is probably the part that I wanted to get to so I can share some of my thought process.

The first part which is the simplest is the cash.

For the portion that I will be receiving in cash into my bank account, I will basically immediately invest into VWRA in my brokerage account. I will likely put it all into the market immediately as a Lump Sum as soon as I receive the funds. I haven’t received it yet (will hope to receive the payment soon) and given the current market – and while I try not to time the market – we are probably at a reasonable time to put funds into the market anyway:

  1. The U.S. Fed has probably finished raising rates – they’ve paused the previous 2 times and will likely keep holding steady. This likely means from a rates perspective, there’s no negative catalyst I can see on the horizon. Holding rates and lowering rates are both good for prices.
  2. The immediate negative impact of the war between Israel and Hamas has probably been felt.
  3. The U.S. economy has continued to remain resilient but we already started seeing signs of softening jobs market – this is also a positive signal for the Fed to begin to pivot towards more dovish stance if the trend continues.

So I think once I receive the funds, putting everything into the market right away seems like a good idea.

What about the amounts in CPF-OA?

Ah, now we get to the more complex consideration, the portion that will land in my CPF-OA.

Once all is said and done, after receiving S$160,000 back into my CPF OA account from the sale, I will have a total of roughly S$200,000 inside the account.

Given that this is CPF we’re talking about and there are several limitations that are placed on what can be done with it, I thought it would be interesting to break down how we can think about what we can do with it.

Based on what I understand, here are the possible options that I have:

  1. Just leave the funds in CPF OA
  2. Transfer the funds from CPF OA to CPF SA and MA
  3. Invest the funds via CPF-IS in CPF OA

So let’s break each option down into their pros and cons.

Just leave the funds in CPF OA

Leaving the funds inside CPF OA will provide 2.5% p.a. which is currently lower than the rate of inflation in Singapore – so the funds would not keep up with inflation. So why would this be an option worth considering at all?

Well, the benefits of this option are:

  1. The 2.5% p.a. interest is guaranteed by the Singapore government so it is extremely safe.
  2. The funds will remain inside CPF OA which is important if I wish to eventually use the funds for a future purchase of another home or property. If the funds are moved to CPF SA or MA will permanently lock the funds away from being used for property purchase or education in the future.

In summary, this is the safest and most liquid option for the funds, but also the least potential return – losing even to inflation.

What if we transfer it to get better returns in SA and MA?

Transfer the funds to CPF SA and MA

Transferring the funds from CPF OA to CPF SA and CPF MA would allow me to increase the rate of return from 2.5% to 4.04% which is better and will at least break-even with inflation (but not really beat it, based on the most recent inflation value of 4.1%.)

This is another safe option since the interest on both SA and MA are also guaranteed by the Singapore government, however given that SA and MA are much more constrained, there are a lot of limitations.

  1. I will not be able to use the funds for property purchase or education costs in the future.
  2. I will not be able to gain access to the funds until age 55.
  3. If I top up the CPF MA to the Basic Healthcare Sum (S$68,500) and the CPF SA to Full Retirement Sum (S$198,800) to maximize the amount of interest earned, this will prevent me from manually topping up CPF MA and SA in the future for the purposes of income tax reduction.

As you can see, while this option provides relatively decent interest rates (even then it’s slightly losing to inflation), it comes with quite a number of downsides which makes this option also not as attractive. The most I will probably do here is to top up my MA to hit the Basic Healthcare Sum but not transfer anything to CPF SA.

So are there other options to get better returns with more reasonable downsides?

This brings us to the more complex option of investing the funds.

Invest the funds

While leaving the funds in CPF (OA, SA, and MA) provides safe returns, the returns are not very high – especially when inflation is 4%.

So what other options do we have if I wanted better returns? We could invest CPF OA funds instead. Here are some options:

  1. Buying Singapore Government Securities (SGS) Bond
  2. Buying Singapore Government T-Bills
  3. Buying equities / UT / Mutual Funds

For more information on SGS and T-Bills, this is a good Seedly article that gives a good overview.

SGS Bonds and T-Bills are a great alternative to transferring funds to CPF SA since they provide higher interest rates than the baseline CPF OA rate while also providing security and keeping your funds within CPF OA in case we want the option to use the funds later to purchase another property. However, the currently interest rates will still be lower than CPF SA.

If we are looking to get higher returns, then the only available option is to invest the funds into equities via UT / Mutual Funds.

Investing in equities

Investing in equities will be our highest risk and highest return option. In the long run, we can expect a conservative 6% real return (above inflation) or up to 8% if we’re lucky – much better than the other alternatives we considered so far.

Of course, with the higher returns comes higher risk and volatility. It is possible to lose money (and a lot of it) in the short term, so it’s not ideal if we think we’ll need to use the funds within 5 or even 10 years.

In terms of investment options, in order to achieve that type of long-term expected returns of the stock market, we’ll have to invest in the broad global market and pay the lowest possible fees to the fund managers.

Given that requirement, at the moment the best option that I have found is to invest in Amundi MSCI World Fund via Endowus. The other available investment options available via CPF-IS are either too conservative, too costly, or too actively managed or a combination of the 3 which isn’t ideal.

With Endowus, if we invest in just a single fund (Amundi MSCI World Fund linked above) using CPF, their platform fee is 0.30% (Fund Smart, Single-Fund with CPF-OA) and the fund-level fees for Amundi is 0.10% making the total annual expense ratio just 0.40% – probably the lowest fee we can get with a passive index fund approach via CPF.

So which option will I choose?

After considering all of the above options, in my case, my preferred option is to invest the CPF-OA funds into Amundi MSCI World fund via Endowus.

This is probably not super surprising if you’ve been reading my blog. The biggest consideration in my mind is “How soon will I need to access this fund?”

Basically the less likely that I will need the funds in the near term, the better investing the funds in equities will be compared to going with the safer options. So what are some of the other uses for this fund that could potentially cause me to need the funds?

  1. Unlikely Prospect of Additional Property Purchase: While I have the option to buy another property using my name, as a Permanent Resident (PR) in Singapore, I’m subject to a 5% Additional Buyer’s Stamp Duty (ABSD) on top of the normal Buyer’s Stamp Duty (BSD), according to IRAS. This extra cost makes the idea unappealing. Therefore, any future property purchase would likely be a joint decision with my wife, avoiding the ABSD.
  2. Not Flipping the Newly Purchased Property Any Time Soon: Having recently acquired our new home without utilizing my CPF OA funds, purchasing another property in the next three years isn’t feasible due to the Minimum Occupation Period (MOP) which includes seller stamp duty implications.
  3. We Have Long-Term Plans with the New Home: Our move to a larger home is driven by the potential expansion of our family. Additionally, the location of our new home, chosen for its proximity to preferred primary schools, suggests a commitment to stay for at least 7-8 years, especially if we have a child in the near future. This long-term plan further diminishes the likelihood of flipping the property soon after the MOP period.

Given the above, I’m unlikely to need my CPF OA funds for another 8 years at least and after that period it’s also unlikely that I would be in desperate need to access the funds. This means I’d unlikely be forced to liquidate the investments during bad market conditions.

This makes me much more comfortable with proceeding to investing the funds rather than keeping it uninvested.

The executed investments

Now that we’ve gotten that out of the way, here is how the funds are now deployed:

Funds in CPF-OA

After receiving ~S$160,000 in my CPF-OA, I have a total of about S$200,000 inside. Given that S$20,000 in CPF-OA cannot be invested, the total investable amount came to about S$180,000.

I deployed all of it into the above mentioned Amundi MSCI World fund via Endowus.

Funds in Cash

Of course I deployed all S$240,000 in cash to purchase roughly 1,600 shares of VWRA all in one go.

via GIPHY

What happens to the House Gamble?

Now, some of you may be asking: “Wait, didn’t you draw money out of your house and invested it to try to get better returns? What will happen to that and how has it done so far?”

You’d be right to ask! Well, obviously since I have now sold the house, that experiment will have to end for now. However, to not leave you guys hanging, I’ll give a brief recap of the results of that gamble up until today.

Here’s a quick table of all the figures:

Start Date16-Feb-2021
Initial Loan AmountS$180,000
End Date17-Nov-2023
Total Days of Experiment1004 days (2.74 years)
Remaining Loan Amount (A)$171,536.03
Total FeesS$1,200
Total Loan Repayment (B)$21,050.12
Total Interest PaidS$12,618.89
Total Capital Injection (Loan + Repayment)S$201,050.12
Total Investment Value (C)S$211,025.80
Net Gain/Loss (C + B + A)S$9,975.68
XIRR3.92%

While this table shows that the result was not bad and also it was not fantastic, it does misrepresent the journey a little bit. I want to emphasize that this was a pretty crazy and – especially – risky strategy and that I got lucky that we ended here with a positive result in such a short time.

What you see above is a snapshot of how the experiment started and a snapshot of how it ended – and I ended with a rate of return of almost 4% – but the ride was NOT smooth. Here’s a chart of the investment value changes:

Because I was invested in equities, the path from start to finish was quite turbulent given the exuberance of 2021 and the market crash of 2022, ending today where the market has sobered up and recovered a little bit.

Throughout the less than 3 years, the invested value rose as high as $217,499.49 in November 2021 (a huge gain) but also dropped as low as $171,989.73 in June 2022 (a huge loss.) So I wouldn’t recommend this approach to anyone if you are not prepared to weather huge turbulence and have the stomach & resources to keep holding on. It could turn out quite bad.

My final thoughts on the house gamble – for now

Since this was a rather short experiment and it ended (luckily) in my favor I’m inclined to maybe do this again next time if I have the opportunity. Here are the summary of my thoughts:

  1. Utilizing Idle Equity: Tapping into the equity of my home offers a chance to grow these funds while retaining the property. This strategy is particularly appealing with low interest rates.
  2. Low Relative Interest Rates: Home equity loans typically have lower interest rates as they are secured by property. This is a key advantage.
  3. Inflation Considerations: With inflation, even a 2% loan interest effectively becomes 0% in real terms. This allows me to invest using today’s money but repay with future money, which is likely to be less valuable due to inflation – a beneficial deal.
  4. Market Returns vs. Loan Interest: The long-term average real return of the stock market is around 6-8%. If the real interest rate of the loan is about 2-3%, this presents a potentially profitable, albeit risky, arbitrage opportunity.
  5. Total Debt Servicing Ratio (TDSR) Importance: Maintaining a safe TDSR is crucial. Banks typically require that a new mortgage does not push the TDSR over 55%. In my case, the home equity loan only increased my TDSR from 13% to 20%, well below the 55% threshold, so it’s relatively safe.
  6. Risk Management in Worst-Case Scenarios: It’s essential to be prepared for adverse situations. If unable to service the loan, the property might need to be sold. With my other investments valued at over S$600,000, a 50% market crash would significantly reduce my portfolio. In such a scenario, it would be wiser to continue servicing the loan in anticipation of market recovery rather than liquidating investments at a loss. Therefore, having alternative income sources to cover monthly payments is crucial to avoid forced liquidation during market downturns.

Overall, I think I would consider pursuing another cash-out refinancing, provided that the amount refinanced is a minor portion of my overall liquid net worth, the additional monthly mortgage payments are comfortably within my monthly cash flow, and the real interest rate remains low. These conditions ensure a balanced approach to leveraging my property’s equity in the hopes of further juicing the returns.

Conclusion

So there you have it, a rather lengthy story about all the financial considerations that went into sale of our current home and the purchase of our new home. I hope this gives you a clearer picture of why I decided it was prudent to invest my CPF OA funds and also how gambling with my house came to an end (for now.)

Feel free to leave a comment, question, or feedback below in the comment section!

Until next time!
FPL

9 thoughts on “Sold House: Why I’m investing my CPF OA”

  1. Hello!
    The Amundi World fund seems like a great choice via Endowus for CPF OA funds for 0.4% expense ratio.

    Wondering if you managed to know about “LionGlobal Infinity Global Stock Index Fund Class C SGD” via FSMone? Its only 0.2% expense ratio and there is no platform fees on FSMone for CPF OA.

    Enjoy your new home and all the best planning for a bigger family!

    Reply
    • Hey! Thanks for reading and letting me know about FSMOne! I’ll take a look at it, plus the LionGlobal fund, and see what it looks like to switch! Since I invested SRS with Endowus, it was rather convenient to manage both SRS and CPF on the same, haha. Thanks for the tip and the well wishes! 🙏🏼

      Reply
  2. Hi FPL
    I chanced upon your posts & really appreciate yr generous, detailed sharing. I’m new to investing & hv unfortunately started really late . Your posts have been informative & educational for me. I’m planning to share with my child so she can start early. 🙂

    Thanks again for sharing.
    CC

    Reply
    • Hi CC! Thank you so much for your kind words and I’m happy to hear that you found my content and updates informative. Starting early is indeed very powerful as your daughter will have time on her side to let the investment compound over time! However it’s never too late to start planning and investing, so don’t be discouraged and I wish you luck on your journey as well!

      Reply
  3. Could you shed some light on why you didn’t choose to DCA into VWRA noting that its a significant sum – and any DCA strat that you would have adopted over the past few years would be “offset” by this lump sum investment

    Reply
    • Hey Hong! Thanks for reading! The simple answer is that if you look at all the analysis of Lump Sum vs DCA, you’ll find that statistically Lump Sum beats DCA 2/3 of the time. So it’s statistically better to invest everything all at once as soon as you have the funds ready instead of DCA. That’s why I’ve always try to put as much funds into the market as soon as possible. “Time in the market” beats “Timing to Market” after all, so the sooner you can deploy funds the sooner that the funds begin working for you. In most cases I’ve gone with Lump Sum rather than DCA in the past as well. Hope that helps!

      Reply
        • I currently use Standard Chartered Bank, not because they are the best specifically for investing, but because they offer other products that I use in conjunction with my investments so I went with them. I wouldn’t recommend to use them if you’re just looking for a brokerage for investing. The community recommendation is to use IBKR which I think is a good choice.

          Reply

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.