Disclaimer: Not financial advice, just an idea.
A few years ago I was very upset that 100% offsets weren't available in Singapore.
This idea stemmed from observing many Singaporeans engage in unnecessary consumption because they have excess income, but few viable investment options. For example, the median household income is 5K/month, but one currently only needs about 3K/month (including housing) to live frugally.
In my experience, only a few commercial banks even offer bastardized versions of offsets. DBS has an FX-linked offering while HSBC features one with a separate interest rate. In my opinion both are unusable. The term "offset" remains only as a marketing gimmick, with the underlying mechanics modified to the bank's benefit.
However, I have belatedly realized that since the HDB mortgage rate is deliberately pegged to the CPF Ordinary rate (+0.1%), interest returned on your OA balance offsets that paid on your loan.
If you had a mortgage of 100K and 10K in your CPF OA, you would be effectively paying interest on only 90K of the loan. Of course with amortization the actual monthly payment would be larger as it would include part of the principal. You would have to top up your OA to replace this.
The main advantages of saving excess funds in an offset is that you reduce the interest payable on your current mortgage, while retaining (in this case, partial) liquidity. Without redraw facilities, additional funds paid into a loan account are locked up.
The obvious downside here - OA funds are less liquid than cash. Most people partially get around CPF restrictions by investing their OA funds in various assets. Still, certain regulations still apply - for example, the original sum withdrawn from CPF must be paid back from any investment profits, and half the CPF Minimum Sum must be set aside before you can use OA funds to purchase a second property. Not to mention the risk that these regulations may change in the future.
Of course, no one is suggesting you permanently park funds in the OA over the long term, where it will be decimated by inflation. But a medium-term strategy of saving excess income in the OA can be a useful low-risk stepping stone for upgraders or those planning future investments.
In short, this might be a viable strategy if:
1) You have a substantial interest bill. This could be because your current HDB mortgage is relatively large (think resale flats), or if the mortgage rate increases in the future. For smaller BTOs (less than 150K), the risk and trouble of locking up your cash in CPF is probably not worth it.
2) You have plenty of excess income but are not financially savvy, or have a low appetite for risk. Otherwise you would already be parking your cash in higher-yield investments.
It's amazing how Singapore provides all the tools and opportunities one needs to succeed.
A few years ago I was very upset that 100% offsets weren't available in Singapore.
This idea stemmed from observing many Singaporeans engage in unnecessary consumption because they have excess income, but few viable investment options. For example, the median household income is 5K/month, but one currently only needs about 3K/month (including housing) to live frugally.
In my experience, only a few commercial banks even offer bastardized versions of offsets. DBS has an FX-linked offering while HSBC features one with a separate interest rate. In my opinion both are unusable. The term "offset" remains only as a marketing gimmick, with the underlying mechanics modified to the bank's benefit.
However, I have belatedly realized that since the HDB mortgage rate is deliberately pegged to the CPF Ordinary rate (+0.1%), interest returned on your OA balance offsets that paid on your loan.
If you had a mortgage of 100K and 10K in your CPF OA, you would be effectively paying interest on only 90K of the loan. Of course with amortization the actual monthly payment would be larger as it would include part of the principal. You would have to top up your OA to replace this.
The main advantages of saving excess funds in an offset is that you reduce the interest payable on your current mortgage, while retaining (in this case, partial) liquidity. Without redraw facilities, additional funds paid into a loan account are locked up.
The obvious downside here - OA funds are less liquid than cash. Most people partially get around CPF restrictions by investing their OA funds in various assets. Still, certain regulations still apply - for example, the original sum withdrawn from CPF must be paid back from any investment profits, and half the CPF Minimum Sum must be set aside before you can use OA funds to purchase a second property. Not to mention the risk that these regulations may change in the future.
Of course, no one is suggesting you permanently park funds in the OA over the long term, where it will be decimated by inflation. But a medium-term strategy of saving excess income in the OA can be a useful low-risk stepping stone for upgraders or those planning future investments.
In short, this might be a viable strategy if:
1) You have a substantial interest bill. This could be because your current HDB mortgage is relatively large (think resale flats), or if the mortgage rate increases in the future. For smaller BTOs (less than 150K), the risk and trouble of locking up your cash in CPF is probably not worth it.
2) You have plenty of excess income but are not financially savvy, or have a low appetite for risk. Otherwise you would already be parking your cash in higher-yield investments.
It's amazing how Singapore provides all the tools and opportunities one needs to succeed.
