CPF Accounts Value thread

[SKenny]

It’s absolutely routine in many countries with larger automobile markets. Just as one example, Ford Motor Credit (Ford’s financing arm) in the United States was offering 0% APR — yes, that’s truly 0% — financing for 72 months on several 2018 model year new Ford vehicles plus the available cash rebates in full.

So, why does this happen from time to time? Well, it’s a combination of factors. First of all, the automobile manufacturers have their own credit arms with access to relatively low cost capital. Second, they can stimulate more car sales (to their vehicles) when they reduce the cash outlay, so they’re willing to share some of those higher profits with buyers. Third, some borrowers miss payments and incur penalties which are profitable. Fourth, the vehicle must be insured (to protect the lender), and the dealer also gets a commission if you buy automobile insurance from the dealer (but you don’t have to). The lender/car seller is willing to share some of that potential upside, too.

You don’t pay a higher price for the vehicle, though. If anything you pay a lower price for the car itself when you take 0% or low interest rate financing because of the kickbacks.

But let’s talk about Singapore. In Singapore we currently have low mortgage interest rates, still lower than CPF Ordinary Account interest. And I fully endorse enjoying that happy state of affairs for however long it lasts. And yes, that also means you should take the mortgage with the lowest possible monthly payment (i.e. longest term) that allows you to enjoy that free money however long it lasts, assuming you’re prudent, that there’s no prepayment penalty, and that the terms and conditions are otherwise identical. This is just simple interest rate arbitrage, and you become wealthier when you grab it. This happy state of affairs does NOT mean you should take out more principal than you otherwise would, or that you should borrow to buy a home beyond your means. But you should absolutely collect this bonus.

....What did I do with the cash that I didn’t use to pay for my 1.9% APR financed car? I directed it into my long-term savings according to standard, prudential, low cost investing principles. And that has proven to be a heck of a great deal. I am wealthier because of that sensible decisions and other decisions like it. I also made every payment on time, on schedule, using the equivalent of automatic monthly GIRO.

What has a car loan in the USA do with the discussion about CPF in Singapore??

 

[blue_line]

No retirees should take a long loan if they cannot afford to pay it off when needed.

Enough said.

If you are able to afford the 20 years loan, why wouldn't you be able to pay off the 30 year loan when you can get higher returns on your money as compared to your mortgage interest rate?

 

[BBCWatcher]

What has a car loan in the USA do with the discussion about CPF in Singapore??

The same interest rate arbitrage principles apply. The U.S. currently has comparatively cheap car loans and comparatively expensive home mortgages. In Singapore it’s the reverse, but (if you’re wise and prudent) you apply the same interest rate arbitrage principles to the sector where they’re currently available, as long as the arbitrage opportunity is available.

No, I don’t fully understand why so many little old men and ladies keep hundreds of thousands and even millions of dollars in low interest ordinary bank deposits and fixed deposits. But they do, and thus the mortgage interest rates are still low, for now anyway. Enjoy it while it lasts — and thank you to all the lovely little old men and ladies (and CPF) that are so heavily subsidizing this interest rate arbitrage opportunity.

 

[tangent314]

What has a car loan in the USA do with the discussion about CPF in Singapore??

It's an example of why if you can get a cheap loan, you should take as long as a loan period that you can. Cheap loan = free money.

 

[SKenny]

If you are able to afford the 20 years loan, why wouldn't you be able to pay off the 30 year loan when you can get higher returns on your money as compared to your mortgage interest rate?

Let's say you take a loan in your 40's and plan to retire in 10 years time. You can decide between a 10 years loan and a 30 years loan.

My main concern is the raising interest rate. Let say it go to say 5%

10 years loan case
You are still working, and hence has a higher chance to absorb the increased cost. Alternatively you can push back your retirement by a few years.

30 years loan case
You are happily retired in your 50's. Interest rate then shoot up to 5%. If you can absorb these cost, then it is still ok. (which is my point). However for retirees who has problem finding the money would have a very hard time maintaining their lifestyle then. Your option to work or delay retirement is no longer available.

 

[SKenny]

It's an example of why if you can get a cheap loan, you should take as long as a loan period that you can. Cheap loan = free money.

Currency risk?

Cheap is not free when there are other risks than you have to take on.

 

[blue_line]

Let's say you take a loan in your 40's and plan to retire in 10 years time. You can decide between a 10 years loan and a 30 years loan.

My main concern is the raising interest rate. Let say it go to say 5%

10 years loan case
You are still working, and hence has a higher chance to absorb the increased cost. Alternatively you can push back your retirement by a few years.

30 years loan case
You are happily retired in your 50's. Interest rate shoot up to 5%. If you can absorb these cost, then it is still ok. (which is my point). However for retirees who has problem finding the money would have a very hard time maintaining their lifestyle then. Your option to work or delay retirement is no longer available.

I think BBCW's point is that, you can take the longer loan first as there is arbitrage opportunity when you start your mortgage (specifically in the first 10 years as per your example).

You would be able to reduce your cost as you get more returns by investing the money that did not go into loan repayment into something that gives you a higher rate (could be OA). If the interest do happen to rise to 5% after 10 years, you can use the money you "saved" in the first ten years to pay off the remaining loan if there is no prepayment penalty.

And this would be similar to a 10 year loan and you being slightly better off.

 

[alfredteng]

I think BBCW's point is that, you can take the longer loan first as there is arbitrage opportunity when you start your mortgage (specifically in the first 10 years as per your example).

You would be able to reduce your cost as you get more returns by investing the money that did not go into loan repayment into something that gives you a higher rate (could be OA). If the interest do happen to rise to 5% after 10 years, you can use the money you "saved" in the first ten years to pay off the remaining loan if there is no prepayment penalty.

Yah, always check to ensure no prepayment penalty.

 

[SKenny]

I think that BBCW's point is that, you can take the longer loan first as there is arbitrage opportunity when you started your mortgage (specifically in the first 10 years as per your example).

You would be able to reduce your cost as you get more returns by investing the money that did not go into loan repayment into something that gives you a higher rate (could be OA). If the interest do happen to rise to 5% after 10 years, you can use the money you "saved" in the first ten years to pay off the remaining loan if there is no prepayment penalty.

Again I don't disagree. Provided there is a safe arbitrage opportunity.

Not everyone can (or would) put all their loan into their OA. For those who placed their loan into their OA, some may have part of their OA suck into their RA when they turn 55. Others may choose to invest. Investments can make you more money, or it may not. Some may choose to spend their loan away (I have seen many people in this category)

Whatever the case may be, as long as you can afford the higher cost should the interest shoot up, then it is OK to take the longer loan. Otherwise it is a risk you should avoid in your retirement years, especially in a rising interest rate environment.

 

[BBCWatcher]

And this would be similar to a 10 year loan and you being slightly better off.

Yes, or you can always turn a 30 year mortgage into a 10 year mortgage as long as there’s no prepayment penalty: just pay it off at the pace of a 10 year mortgage. A longer term mortgage is a perfect superset of all shorter term mortgages, as long as there’s no prepayment penalty.

Longer term mortgages are more resistant to temporary calamities, by the way. Let’s suppose you’re involuntarily unemployed for 6 months. Would you rather be required to pay $2,000/month or $3,000/month to service your mortgage at normal pace in that event? Obviously the $2,000/month option (not obligation — you can always pay more) is helpful. If you’re required to pay the higher monthly figure, then your risk of default is higher. That’s bad!

 

[kellogs]

BBC recommendation and strategy is safe and sound.

Thank you for the great advice and civil discussion.

Sent from Samsung SM-N960F using GAGT

 

[raychoy]

Provided there is a safe arbitrage opportunity. Some may choose to spend their loan away (I have seen many people in this category)

I think SKenny advice is also sound and prudent.
Its not straight mathematics.
Many a time the human emotional factor is at play.
As a retiree,when too much time,too much money lying around ,can get misspent ...mistresses ,cars ,casino..gifts..etc

 

[Nofear40]

Anyone considering ERS?

 

[Midlifecrisis]

Anyone considering ERS?

I think anyone with the required ERS amount in SA account should just opt for it.

 

[JuniorLion]

Anyone considering ERS?

I'm gunning for ERS.

 

[cal3135]

I be doing FRS & the bal OA/SA transfer/withdraw to spouse for her FRS.

Hence 2x FRS to survive on retirement

Anyone considering ERS?

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[yamakazi51]

Provided there is a safe arbitrage opportunity. Some may choose to spend their loan away (I have seen many people in this category)

I think SKenny advice is also sound and prudent.
Its not straight mathematics.
Many a time the human emotional factor is at play.
As a retiree,when too much time,too much money lying around ,can get misspent ...mistresses ,cars ,casino..gifts..etc

This. So many people have no discipline and just spend the money lying around

 

[cal3135]

Believe those whom spent time reading n understand this thread will be prudent on their hard earned spending

This. So many people have no discipline and just spend the money lying around

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[Nofear40]

I think anyone with the required ERS amount in SA account should just opt for it.

Care to share why? Thinking if i should opt for FRS and let the surplus amount remained in the SA and OA accounts so that interest can still be accumulated and I can withdraw anytime when there is a need. If I opt for ERS, the funds will be locked in. Believe that the goal post will be shifted when it comes to my turn

 

[LexusIS]

Care to share why? Thinking if i should opt for FRS and let the surplus amount remained in the SA and OA accounts so that interest can still be accumulated and I can withdraw anytime when there is a need. If I opt for ERS, the funds will be locked in. Believe that the goal post will be shifted when it comes to my turn

Yeah that’s my thoughts exactly....,