Asked on 13 Feb 2020
I will be collecting my keys very soon, and I was thinking if it makes sense for me to take up the max tenure loan.
I thought it makes sense to take up the max, because the monthly installment is lower and I can invest the "excess" to generate higher returns. However, as repayment is all using CPF and I am only investing out of CPF (haven't started on CPFIS/SRS), does it still make sense to go for the max tenure loan? Considering that I will be paying additional interest for long tenure.
You need to know your long-term outlook. Are you going to sell the place in the near future or will it likely be a permanent home?
By understanding your outlook, you will be able to plan for cashflow that works in the right direction. Let me give you an example based on $500k loan @ 2.6% loan rate.
For 25 year loan, our monthly instalment will be $2,269 and the total interest paid will be $180,504.
For 15 year loan, our monthly instalment will be $3,358 and the total interest paid will be $104,356.
For the first 15 years, our comparison will be the repayment outlay, which is a difference of $1,089 monthly. Now, the key question will be value of this $1,089 to generate a return that is higher than the difference in total interest payable over time. This will be the direct opportunity cost that we will face - e.g. are we able to afford to pay the additional $1,089 monthly? Is the approximate $250 monthly interest worth the stretch?
If you are using CPF to repay the house and wish to sell the house some time later, then it may make sense to reduce the accrued interest in your CPF account.
If you plan to stay for the long-term, then go back to the earlier paragraph to do a detailed breakdown to find the right risk-return point for your opportunity cost.
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First question to answer: Permanent home? Or will you move?
After you have considered that carefully, you can move on to decide whether you want to max the tenure loan.
For a large majority of people at today’s juncture, the regulatory measures have removed much of the lottery effect from purchase of a HDB home in Singapore. As such, the best recommendation I would usually give to young couples is to purchase the best home they love at a price they can afford.
Whether or not the interest affects you is relatively non-important if you decide to not sell because the 2.6% interest will only amount to an extra $2,000 after 25 years per $100,000 loan from the increment of 0.1% of the standard 2.5% from your OA. And whether you need to return the monies to OA will only apply when you SELL. If you hold on to it indefinitely, you do not need to worry about the interest owed. A better way to get a return would be to rent it out during retirement instead of depending on capital gains which might not come from the many numerous cases I have done for my clients. Lastly, a HDB loan unlike bank loans, does not have an early payment penalty should you decide to pay in full 10 years early.
The shorter term will mean you pay more principal in the beginning but you give up your ability to share the risk with HDB for asset valuation over 25 years.
Given my experience with hundreds of families, I would personally take the longest term available as I do not view the HDB as an asset. Most people do not profit from it over the long term after adding in the frictional costs. View your HDB as a home, not an investment.
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I like Zhe Liang's answer this time, because the examples show you the cumulative interest paid over the long term. It is usually a lot of money, and that makes your HDB more expensive than it looks right now.
Just to give a different perspective for you to think about...When you pay your housing loan with cpf, you are actually paying interest twice, once for the loan (2.6% for hdb), and once for your cpf interest forgone (2.5%), for a total of 5.1% per year (not mathematically correct, but its the principle).
Not many people can consistently invest and get better returns of more than 5% per year for 25 years.
Depend on how u view cpf too.
Personally cpf to me is illiquid. Like u I also want to invest my liquid cash. But I also do not want to take looooooong term loan as it means more interest paid. And it sure looks huge in $ values.
Some experts will indicate housing loan esp the bank housing loan are very low interest. So should utilize their money more while your excess cash to generate higher returns.
Do remember that generating higher returns are not guaranteed.
Do find out your personal risk profile. Personally I do not like to have a loan hanging on my head. Ppl can tell me many reasons to take long loan. Use other people money to make more money. At the end of the day, it's how comfortable I feel.
So for my part. I just fully utilize my cpf oa contribution to pay the installment. And then reduce further by capital repayment as and when cpf oa increase. Ppl will say oa can get 3.5% or 5%. But I think the base is too small to be significant compare to the loan size. Just like what the earlier answer mention. 180k in interest. If this amount is small to u, then by all means slowly pay.