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Old 26-03-2019, 05:31 PM   #1126
Arch-Supremacy Member
Join Date: Jun 2010
Posts: 10,524
Assuming that I am going to take on a HDB loan at 2.6%, for a tenure of say 20 years.

Would it make sense to:
1) Use my OA balance to pay off as much as possible first (Essentially wiping out my OA)
CPF/HDB will do this for you, mostly. Part of the deal when you take out a HDB loan is that CPF "sweeps" all but $20,000 of your OA into the HDB unit you're buying. (It used to be a total sweep of every OA dollar until recently, but the rules changed to allow you to keep $20,000.)

If you don't like that, then the simplest way to avoid the "sweep" is to transfer OA dollars above the $20,000 limit to your Special Account, assuming you haven't reached your 55th birthday and haven't hit the Full Retirement Sum yet. And I think there's a lot of wisdom in that maneuver. But you have to do it strictly before you pick up the keys if you're going to do it.

2) Subsequently use monthly CPF contribution into OA + Cash to repay the fixed monthly installment

Since the mortgage rate is 0.1% more than what I could earn in my CPF OA, I am technically not facing any opportunity cost correct?
This part is trickier.

Ordinary Account dollars don't have to stay as traditional Ordinary Account dollars. Also, it depends on what your other savings dollars are doing, or not doing. OA dollars can be transferred to SA (as just mentioned), up to the Full Retirement Sum. In SA they earn at least 4% interest, and that beats 2.6%. Also, there's the CPF Investment Scheme (OA), whereupon those dollars could be invested in (for example) the lowest cost Straits Times Index stock fund you can find (ES3 usually). If your time horizon is long enough, then you'll probably do a percentage point better than 2.6% that way, maybe more.

To pick another easy example, if you have a relatively huge (or huger) sum of cash rotting in a bank account earning 0.1% interest, and that's the best you can do (or want to do), obviously it'd be better to draw from those dollars to service your mortgage rather than to draw down OA dollars that are earning 2.5%. Yes, the OA dollars are restricted in certain ways, but 2.5% beats 0.1% so much that the cash would be the better source.

This question comes up a lot, and there have been lots of previous discussions about it. In my view you ought to give due, periodic consideration to OA to SA transfers in some amount since that 4% interest (never mind bonus interest) is darn attractive. And 4% certainly does beat 2.6%, which is a well anchored 2.6%. Once you've exhausted your OA to SA transfer opportunities (consistent with what you feel comfortable maintaining in OA as housing reserve if/when you need those dollars for some months to pay your HDB loan -- if you're out of work, for example), then you could take a look at whether the CPF Investment Scheme (OA) or accelerating repayment of your 2.6% loan makes sense. I'd lean toward the former if you still have a long time horizon ahead of you, but that's a closer call.
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