Why is it not a good idea to prepay your mortgage using cpf oa balance?

Hello!

This is something that we advise on all the time.

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Firstly, I want to point out the same thing as Tan Choong Hwee.

He is right that many people simply see debt is bad.

This is not something that is right or wrong. Its whatever makes a person happy you know?

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However, from a purely financial standpoint, non-emotional advisory standpoint, this is how we advise, and maybe it will help you convince your friend.

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FIRST POINT THAT EVERYONE KNOWS - the second point is more interesting please read it too

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1) CPF OA money pays you 2.5% interest - meaning that when you leave $100,000 in there next year it becomes $100,000 + $2,500

2) CPF OA charges you 2.5% interest when you use the money. Meaning when you use $100,000 from CPF OA next year if you sell your property you return $100,000 + $2,500

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So taking this $100,000 as the example and the sale of the property next year as a scenario.

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I lose out #1 $2,500

I lose out #2 cash $2,500 when i see my property from my pocket it goes to CPF OA instead.

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Isn't keeping it in CPF OA better?

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SECOND POINT

we always advise our clients to - if possible keep 12 to even 24 months of your monthly installments in your CPF OA.

Yes yes it earns you interest.

But more importantly...

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Lets say something unfortunate happens.

• injury
• retrenchment

basically loss of income.

Now you have 12 months of installments meaning either

1 year to recover

or

1 year to find a job

or

1 year to sell your property and downgrade and plan for the future

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So think about it this way.

I am a nice guy - i would like to think so haha.......

If i lost my job, my friends and family can easily buy meals for me and my family.

But I am sure it is hard to ask them to pay for my mortgage right?

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Next.

You understand what a distressed sale is?

Imagine if you did not have that few months of mortgage installments. You will be forced to seel your property at a distressed state, and probably would be selling it cheap...

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So there you go. Two reasons to keep your $ in the CPF OA.

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Your Mortgage Doctor,

David Baey

Many people simply see debt is bad, and they can't stand owing the bank money and hate to continue paying interests if they don't pay off the debt. They want to be debt-free.

Your friend has enough CPF OA balance to pay off his outstanding mortgage, and the interests he earns in his CPF OA is more than enough to pay mortgage repayment. He is effectively debt-free because he is able to service the repayment and yet has the flexibility to pay off his debt any time.

You should probably understand what is his real concerns about holding on to the debt. Only then can you formulate a response to address his concerns.​​​