Advise on Home Loan

[cookieemonsterr]

I recently bought a bto and wanted to know if clearing the loan with my cpf monies make sense.

Initially, I had planned to take the max bank loan and let my money in CPF earn the 2.5% interest. But that was when bank loans were 1+ %. Wouldn’t make sense to do so now.

I understand alternatively, I can use CPF monies to invest and generate a return of more than the bank interest rates, but given the volatile rate environment, not sure if this strategy is necessarily good either - If Powell does a Volcker etc.

Appreciate any advise

 

[DevilPlate]

I recently bought a bto and wanted to know if clearing the loan with my cpf monies make sense.

Initially, I had planned to take the max bank loan and let my money in CPF earn the 2.5% interest. But that was when bank loans were 1+ %. Wouldn’t make sense to do so now.

I understand alternatively, I can use CPF monies to invest and generate a return of more than the bank interest rates, but given the volatile rate environment, not sure if this strategy is necessarily good either - If Powell does a Volcker etc.

Appreciate any advise

Max HDB loan
Why bank loan?

 

[cookieemonsterr]

I thought if I take HDB loan, cpf will be wiped out (I have no choice)

 

[sohguanh]

I thought if I take HDB loan, cpf will be wiped out (I have no choice)

The trick last time for my era is before the hdb first appointment shift the cpf monies out. For me I purchase ocbc fd using the cpf. On hdb first appointment they can only deduct that much. Look for short term cpf as much as possible. Your strategy is to avoid them wipe all out on first appointment. Similar concept like here I read shielding SA by invest so they deduct from OA instead.

Now not sure this strategy is workable or not.

 

[BBCWatcher]

I thought if I take HDB loan, cpf will be wiped out (I have no choice)

Nope. The CPF Board will only "wipe out" OA balances above $20,000 per person, so for a couple that's up to $40,000 you can keep in your OAs. You also have the option to transfer OA dollars to your (or a qualified family member's) SA or RA. And the CPF Investment Scheme (OA) is available (T-bills, OCBC's fixed deposit, Endowus, etc., etc.)

Lots of options!

Obviously if you qualify for a HDB loan you should take it, all of it, and for the maximum available term. The 2.6% interest rate is fantastic right now, and your down payment can be that much lower. Moreover, even 6 month T-bills are currently yielding about 3.85%. So there's absolutely no difficulty beating 2.6%.

 

[sohguanh]

Nope. The CPF Board will only "wipe out" OA balances above $20,000 per person, so for a couple that's up to $40,000 you can keep in your OAs. You also have the option to transfer OA dollars to your (or a qualified family member's) SA or RA. And the CPF Investment Scheme (OA) is available (T-bills, OCBC's fixed deposit, Endowus, etc., etc.)

Above must have changed after my time becuz I am very sure they wipe out to zero dollars as I take HDB loan. My spouse and me cpf was emptied to zero. Must be some tweak to the policy down the road due to complains I guess.

 

[dork32]

if you dont want them to wipe out oa, do some shielding lah.

 

[CoffeeDrinker8899]

if you dont want them to wipe out oa, do some shielding lah.

Can share what are some of the better ways to shield? Use CPF monies to invest first before they deduct?

 

[BBCWatcher]

Above must have changed after my time becuz I am very sure they wipe out to zero dollars as I take HDB loan.

Yes, those rules changed a couple years ago. When you take a HDB concessionary loan you're now allowed to keep up to $20,000 per person in your CPF Ordinary Accounts.

My spouse and me cpf was emptied to zero. Must be some tweak to the policy down the road due to complains I guess.

That was likely a choice (emptying to zero, meaning plowed into HDB leasehold equity), not a requirement. You were presumably able to invest CPF OA dollars above $20,000 via the CPF Investment Scheme (OA) and transfer the remaining $20,000 to your or qualified family members' SAs or RAs. Now borrowers from HDB have an additional choice: keep up to $20,000 per person in OA.

On edit: The $20,000 OA retention option was introduced in mid-2018, more than a couple years ago now. But even before that the CPF Investment Scheme (OA) and OA to SA/RA transfer options were already available.

 

[sohguanh]

Can share what are some of the better ways to shield? Use CPF monies to invest first before they deduct?

That is correct. Look for safe instrument to invest the cpf monies. FD is one of them but choose shortest tenure. But if rules has changed they will not deduct your first 20k is ok. Last time is empty to zero what if lost job no cpf contribution how to pay the monthly loan while you are jobless? So I shift some out, first hdb appt deduct finish, I shift back in.

 

[BBCWatcher]

Look for safe instrument to invest the cpf monies.

That's not a requirement. If some or all of your OA dollars above $20,000 are long-term dollars (destined for drawdown in retirement) then you should prudently invest them in long-term vehicles, not short-term ("safe," i.e. predictably comparatively low yielding) vehicles.

One simple option: transfer some or all OA dollars to CPF SA or RA, where those dollars are upgraded from 2.5% interest to 4.0% interest. (Possibly a bit higher than 4.0% later this year, but we'll see.)

 

[dork32]

Can share what are some of the better ways to shield? Use CPF monies to invest first before they deduct?

it really depends on what your risk appetite is..

i got no balls one. i will use tbills to shield.. based on current rates, i will win some money

if you got bigger balls than me, you can try some of the unit trust.

 

[BBCWatcher]

it really depends on what your risk appetite is..

Yeah, about that.... It's also taking a risk to put long-term dollars in (currently) 3.X% yielding short-term vehicles. The risk is you'll most likely be poorer by retirement.

I'm all in favor of prudence. It's one of my favorite words. But prudence should be calmly, holistically assessed in balanced fashion.

 

[dork32]

That's not a requirement. If some or all of your OA dollars above $20,000 are long-term dollars (destined for drawdown in retirement) then you should prudently invest them in long-term vehicles, not short-term ("safe," i.e. predictably comparatively low yielding) vehicles.

One simple option: transfer some or all OA dollars to CPF SA or RA, where those dollars are upgraded from 2.5% interest to 4.0% interest. (Possibly a bit higher than 4.0% later this year, but we'll see.)

we have been through this, and the day has come. you were talking about transferring to sa to get that 4%. at that time bank loan was 1.xx%. i was saying that if the interest rate were to go beyond 4% then you xiao liao. your monthly installment go up like xiao. your money all kena trap in sa, cannot come back to save you. for those that listen to you and did the oa to sa transfer then, good luck to them.

and who knows, maybe in the near future hdb loan go up to 5%. i really want to see how your sa can save you then

 

[BBCWatcher]

we have been through this, and the day has come. you were talking about transferring to sa to get that 4%. at that time bank loan was 1.xx%. i was saying that if the interest rate were to go beyond 4% then you xiao liao.

Not really, but let's continue....

your monthly installment go up like xiao. your money all kena trap in sa, cannot come back to save you. for those that listen to you and did the oa to sa transfer then, good luck to them.

I think you're conveniently forgetting that when MA=Basic Healthcare Sum and SA=Full Retirement Sum then the portion of your compulsory contributions that ordinarily flows into MA bounces into your OA. That is, your cashflow into OA increases. That means you have more OA dollars arriving that you can use to service your mortgage. And this day comes sooner the earlier you transfer dollars to SA and the more dollars you transfer to SA.

Some households can play this particular game very, very well. You'll find several posts in this forum of individuals who've been able to do this quite successfully, who have lots of dollars arriving in OA every month and plenty of mortgage payment stamina — more than enough.

Moreover, a 3.75% mortgage interest rate (today's fixed rate it looks like) is certainly not an emergency. It's still below 4.0% SA/RA, still below 3.85% T-bills (incredibly), still way below reasonable forecasts of long-term investment yields.

and who knows, maybe in the near future hdb loan go up to 5%. i really want to see how your sa can save you then

See above. Moreover, SA/RA interest rates would spike (with a lag) in that event. The SA/RA/MA interest rate looks like it could unpeg a bit from the 4.0% floor rate. Your long-term SA/RA dollars are going to do great in that event, and you still need to retire at some point. Age 55 will come.

You don't have to beat your mortgage interest rate every month, or even every year. You just have to beat it. And the odds are overwhelmingly in your favor of beating your mortgage via SA (never mind long-term vehicles), plus you've got the OA spillover behaviors. The tortoise wins this race practically every time.

 

[reiser]

Nope. The CPF Board will only "wipe out" OA balances above $20,000 per person, so for a couple that's up to $40,000 you can keep in your OAs. You also have the option to transfer OA dollars to your (or a qualified family member's) SA or RA. And the CPF Investment Scheme (OA) is available (T-bills, OCBC's fixed deposit, Endowus, etc., etc.)

Lots of options!

Obviously if you qualify for a HDB loan you should take it, all of it, and for the maximum available term. The 2.6% interest rate is fantastic right now, and your down payment can be that much lower. Moreover, even 6 month T-bills are currently yielding about 3.85%. So there's absolutely no difficulty beating 2.6%.

I am trying to decide if I should take max HDB loan and take the longest tenure. Hope someone can shed some light on it.

Just about everyone tells me I should. However, I don’t really get it. My outstanding loan would be $400k+. My original intention is to reduce the loan using $200k cash so that my loan is $200k+.

If I have $400k cash, I can understand that my interest yield will be greater than my loan interest if I leave it in the bank. However, I only have $200k to generate interest so my interest yield will not be more than the housing loan interest.

I would like to ask why everyone is saying I should take up max HDB loan at max tenure. When I do my sums, even though in total (principal + interest) the monthly payments are similar, I find that I would be paying $900+ monthly interest for a longer tenure compared with $500+ monthly interest if I pay $200k cash to reduce the loan. So exactly how is taking max loan and max tenure better?

 

[BBCWatcher]

Let's try some actual numbers, shall we? Let's suppose you and a spouse are each earning $6,000 per month plus a traditional 13th month bonus ($6,000), so that's $78,000 per year per spouse. And we'll assume both spouses are in the age 35 to 45 bracket.

Without MA to OA "spillover" each spouse will receive $16,383.82 per year into OA (per spouse). Not bad.

With MA to OA "spillover" each spouse will instead receive $23,402.57 per year into OA (per spouse). That's over $7,000 per year more cashflow into OA. Nice!

Depending on when you buy a home this MA to OA spillover could be terrific. It depends on your situation.

The "1M65" dude says the same thing: take a look at whether you need to keep all OA as OA and, if not, consider transferring some or all OA to SA. (Or to a family member's SA or RA.) There's no particular reason to believe the CPF Board's default allocation rate is 100% correct for you and your household. It's just the default. The default was/is incorrect (suboptimal) for our household, so we adjusted it via OA to SA transfers. As the CPF Board provides/allows. That's why the option exists.

 

[BBCWatcher]

I am trying to decide if I should take max HDB loan and take the longest tenure. Hope someone can shed some light on it.

Just about everyone tells me I should. However, I don’t really get it. My outstanding loan would be $400k+. My original intention is to reduce the loan using $200k cash so that my loan is $200k+.

If I have $400k cash, I can understand that my interest yield will be greater than my loan interest if I leave it in the bank. However, I only have $200k to generate interest so my interest yield will not be more than the housing loan interest.

Whatever amount you have the same government that's willing to loan you money at 2.6% is offering ~3.85% interest even on 6 month T-bills. TAKE. THE. DEAL. All of it, as much as you can, for as long as you can.

Still don't believe it? OK, pretend the government is offering you a 0% interest loan, and then you can take the loan and deposit it into T-bills earning ~1.25% interest. Why on earth would you pass up that deal? You wouldn't. But guess what: it's the same deal!

I would like to ask why everyone is saying I should take up max HDB loan at max tenure. When I do my sums, even though in total (principal + interest) the monthly payments are similar, I find that I would be paying $900+ monthly interest for a longer tenure compared with $500+ monthly interest if I pay $200k cash to reduce the loan. So exactly how is taking max loan and max tenure better?

Try just comparing your net worth in both scenarios. Scenario #1: take $200,000 and borrow less. Scenario #2: take $200,000, put it in ~3.85% p.a. T-bills (for example), then pay off the $200,000 (plus 2.6% interest) 6 months later. It's really pretty simple. Scenario #2 is the clear winner. You will be wealthier with Scenario #2, guaranteed. And as long as Scenario #2 (or something like it) is true, you win. So keep winning, as long and as much as allowed.

There's also another problem with prepaying a cheap mortgage: in the unlikely but possible event you die tomorrow, congratulations, you've just wasted your entire prepayment if you have the Home Protection Scheme (HPS), as you usually do. That's because the HPS would've paid off your mortgage (or your share of it). But that doesn't happen because there's no more mortgage left (or less mortgage left). Dollar for dollar you've reduced the HPS payout. Ugh, that's ugly, but that's what'd happen for your survivors.

AND there's another problem: if you need the $200K for an emergency (or even $1 of it), oooops! You have to sell your HDB flat to get it back. HDB leasehold equity cannot be borrowed against or otherwise liberated without selling the whole flat. So you reduce your liquidity (and therefore your financial stamina against family emergencies) by $200K if you prepay this cheap loan any faster than required. That's not good either.

 

[DevilPlate]

I am trying to decide if I should take max HDB loan and take the longest tenure. Hope someone can shed some light on it.

Just about everyone tells me I should. However, I don’t really get it. My outstanding loan would be $400k+. My original intention is to reduce the loan using $200k cash so that my loan is $200k+.

If I have $400k cash, I can understand that my interest yield will be greater than my loan interest if I leave it in the bank. However, I only have $200k to generate interest so my interest yield will not be more than the housing loan interest.

I would like to ask why everyone is saying I should take up max HDB loan at max tenure. When I do my sums, even though in total (principal + interest) the monthly payments are similar, I find that I would be paying $900+ monthly interest for a longer tenure compared with $500+ monthly interest if I pay $200k cash to reduce the loan. So exactly how is taking max loan and max tenure better?

Cash gives u lots of option especially when you are young.
you can buy SSB and lock in 10yr rate >2.6% now for eg.

2.6% HDB loan is “cheap money”

 

[BBCWatcher]

Cash gives u lots of option especially when you are young.
you can buy SSB and lock in 10yr rate >2.6% now for eg.

Yes, although it might take a couple months (and a spouse) to vacuum up $200K worth of SSBs. And we're just using T-bills and SSBs as examples. Personally I'd look at long-term investment vehicles for at least some of that money. $200K is a very, very large number of mortgage payment months on a HDB BTO flat.

2.6% HDB loan is “cheap money”

Absolutely. Today it's very cheap money. (The same government will pay you ~3.90% interest — it's really that since the COY on the last T-bill was 3.85% — on its 6 month T-bills. How nice!) In the future 2.6% may not be totally cheap, but then you may have the option to lock in a 5 year fixed rate of 1.5% or even 1.4% from a bank lender. And that would be cheap again, presumably. The 1.5%/1.4% rates were the 5 year fixed mortgage rates available from banks (DBS at least) at the bottom of the prior interest rate cycle. (It was 1.5% with free repricing during the second 30 month period within the 5 year fixed rate period, and it was 1.4% with no free repricing within the first 5 years.) Some mortgage borrowers are still within their 1.4% or 1.5% fixed interest rate periods right now, and aren't they lucky.