I’m trying to make sense of this VL and WL HDB stuff that was usuallly ignored by many. This is in response to some Facebook questions. I don’t own a flat, I am not well verse in this. Just trying to take some time and sort it out in the head. If there are any mistakes, do let me know.

Financial Planner Wilfred Ling posted this video citing the risks that many home owners in Singapore are unaware of.

The prevalent mindset is that as long as my **monthly home loan payment** comes from CPF it is ok. What they are unaware of is that there are limits on how much CPF can be used such that you **will need to use cash to pay your home loans even if you have ample money in your CPF**.

The repercussion is that this occur a long time after you first purchase, and if you are a poor money planner, you could be in trouble.

The limits that he talks about are the Valuation Limit and Withdrawal Limit.

Per CPF these are the definition:

The** Valuation Limit (VL)** is the lower of the purchase price or market value of the property at the time of purchase, as assessed by the Board. You and your co-owner(s) may use your Ordinary Account (OA) savings up to the VL to buy the property and/or pay the monthly installments of the housing loan.

When the total CPF withdrawn by all the owners reaches the VL, every owner must individually set aside the half of the prevailing Minimum Sum in his OA and Special Account (SA) if he wants to withdraw more CPF to service the outstanding housing loan. Any owner who does not meet the above condition will not be allowed to do so.

The VL is not applicable to new HDB flats financed with HDB concessionary loan

The **Withdrawal Limit (WL)** is the maximum amount of CPF beyond the VL that you and your co-owner(s) can use for the property. Once the WL is reached, no further withdrawal of CPF by any owner will be allowed. If the housing loan is still outstanding, you and your co-owner(s) will have to service it fully with cash. The WL is not applicable to new or resale HDB flats financed with HDB concessionary loan. The WL is determined by the date of purchase or refinancing of loan as follows: 120% (1 Jan 2008 onwards)

When you purchase your home, an independent valuer will put a value on your home. This is the VL. Your WL will be 120% of that VL.

There are 4 scenarios that Wilfred identified:

### New HDB BTO Flat

If you have a new flat bought under BTO, you will be eligible for HDB concessionary loan and you have no worries but will be able to use ALL your CPF-OA for your housing loan.

Suppose you have John and Mary purchasing a new BTO flat for $350k. They put a down payment of $35k and loan $315k.

In this case, in total forecast at the end of 25 years, they would need to pay $427k. This is above the VL and greater than the WL (122%). Since it’s a new HDB, they won’t be affected by such limits.

### Resale HDB Flat

The VL comes into the picture if John and Mary decide that they want to sell off this flat and purchase a resale flat.

- They negotiate with the seller to purchase this flat at $650k
- The independent valuation (VL) comes up to $600k
- They can only apply for loan based on $600k valuation. this means that the $50k is somewhat the “COV” or cash over valuation that they have to pay by cash
- John and Mary use their CPF to pay for the 10% down payment or $60k and loan $540k from HDB at 2.6% interest
- The VL here is $600k

In this case the total payment can come up to $732k, which is higher than the VL of $600k. This would mean that $132k comes into contention.

Every owner must individually set aside the half of the prevailing Minimum Sum in his OA and Special Account (SA) if he wants to withdraw more CPF to service the outstanding housing loan. Any owner who does not meet the above condition will not be allowed to do so.

So according to this, the current CPF minimal sum is $148k and if John and Mary **EACH** have $74k in their CPF OA and SA, then they can continue to use their CPF to pay for their flat.

This to me is entirely possible considering my SA possibly have $30k odd after working for 10 years. So by 20 you could possibly hit $60. On second thoughts, if John and Mary pushes their CPF to the limit to pay for the mortgage, they won’t build their CPF OA, so from the looks of it CPF SA might not be enough.

So perhaps they will have to pay cash for that $132k

### Couple’s New or Resale HDB or Private Purchase using Bank Loan

In the case of that John and Mary decide to use bank loan to finance a $1,000,000 worth of Executive Condo (EC), both the VL and WL comes into the picture.

- The independent valuation (VL) comes up to $1,000,000
- John and Mary use their cash to pay for the 20% down payment or $200,000 and loan $800,000 from XYZ bank at 1.8% floating rate interest for 30 years.
- The VL here is $1,000,000
- The WL here is $1,200,000

- The couple pays a total of $1,033,852. This will exceed their $1,000,000 in VL by $33,852. The couple may not be able to pay this amount with their CPF. This depends on whether they have set aside half the minimum sum in their CPF OA. If they have, they can still tap upon their CPF OA
- $1,033,852 is still within their WL limit, which is $1,200,000

#### How would the Couple burst the WL Limit?

Banks are in the business to make loans.

They earn the spread between what they pay for deposits (their liabilities) and the loans they make. Since their cost on deposits are volatile based not just on what they offer to us but what is the market benchmark rates, **if they set the loan interest wrongly, they are in for trouble**.

For this reason, they tend to favor floating rates over fixed rates. They have more safety there.

If this couple is taking a loan on floating rate, their interest for the first few years could be 1.8%.

However, their interest over the 30 years may raise over time.

Even if the refinance the loan, the rates will be higher.

- If the annual interest rate is 3.2% instead of 1.8%, the total payment changes
- The total payment paid is $1,238,270. This exceeds the WL of $1,200,000.
- Unlike VL, once WL is reached, you have to pay the rest with cash

### Why is the government being so anal about this VL and WL

The conspiracy theory is that the government needs our CPF money to make more money or that our CPF money is not there at all. I shall not go into conspiracy theories.

The CPF is suppose to not just provide “affordable” housing but also to ensure every Singaporean have enough for their old age.

Human beings are rather poor at planning how to deploy their money. They tend to make very poor decisions.

So the government have to “force” us to set aside this minimum sum.

If you use all your CPF for housing, how would you feed yourself when you are old?

### Paying a larger down payment

The grand scheme of things seem to be that: **Don’t expect to only tap your CPF for housing. You have to use cash.**

If you provide more down payment at the start with cash, no problems. If not you** pay for it later in life**.

### What if you Decide to Refinance Your Home Loan?

Someone post this question to me and my thoughts are, if you refinance, typically you would have to pay down a sum before re-finance can occur (correct me if I am wrong).

In this case, it is likely part of the objective of the government is achieved, which is getting you to pay in cash and trying to be prudent about it.

### Boundary pushers and floating interest rates

From the illustrations, I hope the bombastic scenario of 4% interest rates don’t come into the picture. Imagine if you push the boundary of what you can purchase, a 1 mil condo with floating rate, which is covered by your CPF just right.

If the interest moves up to that, you need to pay more interest and may be in for a shock later in life.

### Build up Wealth well and go in with eyes wide open

The ones being punish are the ones without a good plan. You can push the boundaries, but you better have a good contingency liquid cash holdings in case things go against you.

This won’t be a problem if you have **use your cash to build up wealth**.

PSTan says

The limit will actually reach faster than you thought. For CPF the presume amount that had been used is not just the actual cash that had been used to pay for the bank loan. It include compound interest that you “could” have earn if the $$ is part in the CPF itself.

For instance say you use 100K of CPF for down payment, and subsequently use cash to say serve your loan, you will still slowly inch up to the limit, as CPF will add 2.5% interest compounding yearly as the amount that you have used. (If my interpretation are correct). You might want to verify this part.

Kyith says

Wow, pstan thanks for telling me this. You are referring to the withdrawal limit isn’t it

Anonymous says

Not true. We are just looking at the principal amount of CPF that you use. For property purchasers, you would notice 2 items in your housing statement. A) Principal amount used and b) Accrued interest.

CPF board only use item A to compute whether the VL or WL is reached. The only time it becomes fast is if somebody goes to HDB or to the bank and do partial payment.

Kyith says

Thanks for the clarification

PSTan says

I remembered i hit the limit even before the total principal amount used hit the mentioned limit back in 2013 (unless i had remembered wrongly). I will try to verify again

PSTan says

OK i am not able to find the letter that CPF send me back then. However, i still cannot reconcile the above statement, that i would only hit the limit faster if i go to HDB or bank to do partial repayment. How could that contribute to hitting limit?

Unless that is due to the interest paid to bank. If this is the case, then the prudent thing to do is to actually do partial repayment ASAP so that we won’t need to fork out as much cash later on to pay the bank.

Kyith says

Hi there, was your partial repayment using cpf or cash. If it’s cash it does not make sense to hit the limit. How long was this into your home ownership. thanks

PSTan says

My partial repayment is using CPF. It take about 7~8 years to hit the limit

PSTan says

Btw, at the end of the day, we need to use about 20k cash to pay off the remaining balance.

Kyith says

Perhaps that’s why because you are still using cpf to pay. If you have used cash it might not hit.

PSTan says

If not mistaken, the CPF withdrawal limits is 120% of VL. Which mean that you will still hit the limit eventually. It is just a matter of when. This is especially dangerous for those who are not financially prudent.

Just imagine that a person who bought a HDB flat @ age of say 35 and thought that they can serve the loan using CPF and did not conserve much cash.

Say a person bought a HDB with VL of 225k with 45k down payment using CPF, loan 180k from bank and the did interest is fix at 3% yearly. Presume that the guy pay 800 monthly using CPF. To make the calculation simpler, we presume that the interest is calculated yearly and instead of paid the loan monthly, the amount is being paid at end of the year lump sum @ 800 x 12.

This guy will eventually hit the WL of 1.2 x VL 24 years later when he is 59 years old. If he never know about this, it could be very tough for him by then.

Kyith says

Think this is illustrated in the last example

Anonymous says

Imagine this scenario. As we know, the Valuation limit is the lower of the Purchase price or Valuation price. For illustration, i will use 300k as a valuation limit.

Moving forward, you took a HDB loan and your installment is $1000/mth. What happen is, the $1000/mth is inclusive of HDB’s 2.6% interest. This is transparent to CPF board, because on the board’s records, $1000 is disbursing out from your Ordinary Account. If no partial payment is done for entire year, the total amount of CPF used for 1 year is 1000 x 12 months = $1200.

So at end of year 1, the total amount of CPF used is $1200, and since the valuation limit is 300k, an individual would still have an remaining amount of $298,800 (300,000 – 1200).

Say next month, you claw back your investments and 100k goes back to your account and you decide to use this 100k to do a partial repayment to HDB. So the new figure would be $198,800 (300,000 – 1200 – 100,000)

Notice something here? You are hitting the valuation limit faster then usual, compared to someone who DOESNT do any partial payment. But the tradeoffs is you pay lesser interest to HDB. Why this phenomenon usually happens on HDB? This is because, HDB requires you do wipe out your CPF before the loan is disburse to you. It’s a double edged sword, because your installment is lesser, but your downpayment would allow you to bring yourself closer to the Valuation limit.

Kyith says

Hi there, what you say is a very realistic scenario. Let me correct you, i think you meant$12,000 instead of $1,200.

Let me try to model what you have said. Assume the VL is 300k, you downpay 30k or 10% and then you borrow 270k at 2.6% HDB interest. Your monthly payment is $1,220. The total payment after 25 years is $366,222.

At the end of year one, he would have left over, $261,538. He decides to partial repay $100k. This is essentially like a “refinance”. He would refinance a loan of $161,538 for 24 years (since you pay for 1 year). Your monthly payment becomes, $752.09. The total payment at the end of 24 years is $216,601

Your total payment in this scenario becomes 1220 x 12 + 100,000 + 216,000 = $330,640.

In this case you save about 36,000 in interest payments. You are still above the VL, It actually means if you save more interest by paying down, you may eventually not burst the limits

Anonymous says

My bad. Thanks for highlighting my silly mistake. What you say is right. Problem about HDB loan is when you downpay, i doubt you can reduce the monthly installment, but instead, the tenure will be reduced.

Kyith says

Ah ok. Pardon my ignorance let me try my best again:

Assume the VL is 300k, you downpay 30k or 10% and then you borrow 270k at 2.6% HDB interest. Your monthly payment is $1,220. The total payment after 25 years is $366,222.

At the end of year one, he would have left over, $261,538. He decides to partial repay $100k. This is essentially like a “refinance”. He would refinance a loan of $161,538 for 13 years. Your monthly payment remains, $1219.00. The total payment at the end of 13 years is $190,188

Your total payment in this scenario becomes 1220 x 12 + 100,000 + 190,188 = $304,818.

This looks close to the VL of 300k. It means partial repayment which shorten payment duration is closer to VL

Melvink2 says

I think PS Tan is referring to the “Accrued amount” and not the withdrawal limit. If you decide to sell your HDB Flat, CPF will 1st deduct the accured amount and principal amount used in CPF before you can take out any money from CPF.

However, I don’t think the “Accured Amount” relates to this article, only if you decide to sell the flat, then only does it matter.

—————————————-

From HDB:

“If you sell your HDB flat, you need to refund the principal amount you had earlier withdrawn for the purchase of the flat, including the accrued interest, to your CPF account. This interest

is the amount you would have earned, had the savings not been taken out.”

“If you are aged 55 and above when you sell your flat, the CPF refunds will be used to top up your Retirement Account up to your cohort Minimum Sum and your Medisave Account up to

the current Medisave Minimum Sum. Any excess CPF refunds will be paid to you within 5 working days from the crediting of the refunds to your CPF account.”

Kyith says

Thanks for the clarification

Anonymous says

The point from CPF board is, CPF monies are primarily used for retirement. Just that over the years, this viewpoint has change and most individuals highly leverage their CPF for payment of houses.

Kyith says

Hi there, thanks for adding. Yes you are right

Carol says

Can I pay off the full resale price of the hdb using my cpf? If so does WL or VI applies?

wong boon hong says

I understand that VL is easily reached if you are the sole owner or the only one paying for the housing loan. However, if you have a partner sharing the payment, VL should not be even near at all. Or do you mean The combined of 2 CPF usage cannot exceed VL instead of individual CPF account?

Kyith says

it is the combine. you can only use 120% of the valuation to service the housing loans. this is to prevent you from using too much.

thehashtaggg says

hi, was reading through and trying to understand this whole VL and WL. Appreciate your examples, but may I ask if there is a typo there for the loan amount supposedly $800,000 instead of $1 million? just doing some calculations and the total payments for $800k loan is about $905k with monthly repayment of $3,014.98 for 300 periods, if so, then won’t hit the WL of $1.2 mil eh?

Kyith says

hi thehashtaggg, you are right!perhaps when i was making this example up, i thought we are taking a 100% loan! which cannot be the case. I believe this is a matter of whether the interest rate rise high enough.I have rewritten and hope it explains better. Sorry for the error.