CPF SA

[reddevil0728]

Not exactly. Even when you're currently on a HDB loan you usually have the future possibility of switching to a bank loan, and you also have the chance of "winning" the Home Protection Scheme lottery and for your survivor to get a free flat (or a portion of a free flat). If you pay down the loan ahead of schedule you're just reducing or eliminating your chance of "winning" that particular lottery. It's not enough of an interest rate gap to be attractive, in my view.

Even to change to bank loan?

 

[Trader11]

Why?

Psychological barrier. I can take more risks after mortgage is gone

 

[BBCWatcher]

Psychological barrier. I can take more risks after mortgage is gone

Probably the opposite, actually. You have to sell the flat to tap even one dollar of its equity. Both businesses and households get into financial trouble for one of both of the following basic reasons:

1. They encounter a solvency problem. "We're flat broke."

2. They encounter a liquidity (or cashflow) problem.

Accelerating repayment on a low interest mortgage doesn't help with #1 (assuming you're a reasonably financially responsible household) but potentially risks #2. HDB leasehold equity is highly illiquid. You cannot borrow against it. And, if you should happen to die prior to the natural end of the loan term, congratulations, you just lost a Home Protection Scheme payout, even a big one. You're dead, and your surviving household is less wealthy. Not good!

Of course you're under no obligation to stick with a HDB loan. For example, DBS is currently offering 1.40% fixed for 5 years. Low cost leverage is fabulous for helping you take prudent investment risks earlier. If you're paying down cheap money faster than required you're basically piling into bond yields (or even sub-bond yields) when you're young. This is not a great strategy for lifetime wealth expansion.

25% p.a. interest credit card debt is a completely different story. High cost debt is important to pay down expeditiously...except if you will experience problem #1, in which case you should default as quickly as possible and start afresh as best you can.

 

[Value.Matrix]

Psychological barrier. I can take more risks after mortgage is gone

I can take more risk when my SA/MA is bigger than my loan. I can repay my mortgage anytime. (after 55)

I can plan for my MA interest and cashflow to ensure my mortgage can be paid by OA.

While Still earning arbitrage income. (4% interest pay for 2.5% loan)

 

[Trader11]

I can take more risk when my SA/MA is bigger than my loan. I can repay my mortgage anytime. (after 55)

I can plan for my MA interest and cashflow to ensure my mortgage can be paid by OA.

While Still earning arbitrage income. (4% interest pay for 2.5% loan)

Can you help me to understand why? SA cannot be used to pay mortgage

 

[dork32]

Psychological barrier. I can take more risks after mortgage is gone

another peace of mind guy

 

[BBCWatcher]

Can you help me to understand why? SA cannot be used to pay mortgage

That’s correct, but try running these two basic scenarios:

1. You accelerate repayment of your low cost mortgage, maintaining a repayment buffer of 24 months worth of mortgage payments at all times (OA plus cash).

2. You maintain the same mortgage repayment buffer of 24 months in your CPF Ordinary Accounts (total, combined, with spouse) and cash, as before, but transfer all OA dollars in excess of that 24 month buffer into your Special Accounts where those dollars earn 4.0% interest. (Cross-spousal transfers as well, if/as necessary.) You pay off your mortgage at standard pace.

Which scenario will very reliably make you wealthier: #1 or #2? And if one of these scenarios very reliably makes you wealthier, shouldn’t that scenario give you greater peace of mind?

 

[Trader11]

That’s correct, but try running these two basic scenarios:

1. You accelerate repayment of your low cost mortgage, maintaining a repayment buffer of 24 months worth of mortgage payments at all times (OA plus cash).

2. You maintain the same mortgage repayment buffer of 24 months in your CPF Ordinary Accounts (total, combined, with spouse) and cash, as before, but transfer all OA dollars in excess of that 24 month buffer into your Special Accounts where those dollars earn 4.0% interest. (Cross-spousal transfers as well, if/as necessary.) You pay off your mortgage at standard pace.

Which scenario will very reliably make you wealthier: #1 or #2? And if one of these scenarios very reliably makes you wealthier, shouldn’t that scenario give you greater peace of mind?

I will do the calculation. But why choose 24 months?

How about paying the monthly mortage in cash and putting all OA to SA (for a few years) till FRS is reached?

 

[Trader11]

I did some calculation for 500K loan.

The better options are either pay early (not too early) or pay extremely late:

10 years loan tenure. Once mortgage is completed, invest free-up cashflow into 3% yield investment for 15 years. Final value = 1.08M (each individual about 504K)

25 years loan tenure with 3% yield investment on the extra cashflow (due to lower mortgage payment). Final value = 931k (each individual about 465K)

Note: The higher the investment yield, the greater the difference between 10 and 25 years.

A	B	C	D	E	F	G	H	I	J	H
Loan Tenure (Years)	Principal	Total Interest paid (assume 2.6%)	Monthly Mortgage payment	Yearly Mortgage payment	Extra Yearly Cash (against 10 years tenure)	Future Cash Value after tenure (3% Yield)	Delta (minus interest [C])	Remaing years to 25 years mark	3% yield Investment of [E + F] (after mortgage is paid; till 25 years mark)	Final Value
25	500,000.00	180,504.26	2,268.35	27,220.20	29,615.04	1,112,134.85	931,630.59	-	-	931,630.59
20	500,000.00	141,745.66	2,673.94	32,087.28	24,747.96	684,936.56	543,190.90	5.00	310,798.39	853,989.29
15	500,000.00	104,356.16	3,357.53	40,290.36	16,544.88	316,948.30	212,592.14	10.00	671,098.90	883,691.04
10	500,000.00	68,351.93	4,736.27	56,835.24	-		- 68,351.93	15.00	1,088,785.95	1,020,434.02

 

[Trader11]

the key question is what is your investment yield if you didn't pay off your mortgage early.

If loan tenure is too long, then the interest rate will burn your returns. Unless you can perform much better than 4%.

And which cycle are we are right now? What if you invest after paying your mortgage early and we are in great depression for 10 years?

 

[Prof. Utonium]

I am average guy. I calculated I can reach FRS at 36 by transferring all oa to sa.....is this a wise move?

What I did before transferring my OA to SA was to calculate my forecasted FRS for my cohort when I am at 55 provided everything remains constant e.g. current floor IR/contributions & salary unchanged with no increments. So initially I only transferred sufficient amount to hit BRS in future (not opting for FRS), then I decided to just keep transferring so that I will hit the current BRS at the projected age of 30.

However if you intend to purchase a property in the near future, do keep sufficient amount so at least you can unlock your OA equity and use your cash for better returns instead of flowing to mortgage repayments.

Initially you may feel nervous but if you had made your calculations such as below, it should remove some doubts and it should be a rational move.

I did some calculation for 500K loan.

The better options are either pay early (not too early) or pay extremely late:

25 years loan tenure with 3% yield investment on the extra cashflow (due to lower mortgage payment). Final value = 1.12 Million (each individual about 556K)

10 years loan tenure. Once mortgage is completed, invest free-up cashflow into 3% yield investment for 15 years. Final value = 1.08M (each individual about 504K)

Note: The higher the investment yield, the greater the difference between 25 and 10 years (can be as great as 100K).

A	B	C	D	E	F	G	H	I	J	H
Loan Tenure (Years)	Principal	Total Interest paid (assume 2.6%)	Monthly Mortgage payment	Yearly Mortgage payment	Extra Yearly Cash (against 10 years tenure)	Future Cash Value after tenure (3% Yield)	Delta	Remaining years to 25 years mark	3% yield Investment of [E + F] (after mortgage is paid; till 25 years mark)	Final Value
25	500,000.00	180,504.26	2,268.35	27,220.20	29,615.04	1,112,134.85	931,630.59	-	-	1,112,134.85
20	500,000.00	141,745.66	2,673.94	32,087.28	24,747.96	684,936.56	543,190.90	5.00	310,798.39	995,734.95
15	500,000.00	104,356.16	3,357.53	40,290.36	16,544.88	316,948.30	212,592.14	10.00	671,098.90	988,047.20
10	500,000.00	68,351.93	4,736.27	56,835.24	-		-	15.00	1,088,785.95	1,088,785.95

HDB or bank loan?

If HDB, screw it and take the longest you can. Ignore the accrued interest after all it would be repaid to your account if you do sell your place. There is HPS which would remove some psychological worry you might have. In case you are out of job and unable to make payments, you can defer for a couple of years (thick skin, appeal and MP - such cases are not uncommon! HDB is very lenient).

the key question is what is your investment yield if you didn't pay off your mortgage early.

If loan tenure is too long, then the interest rate will burn your returns. Unless you can perform much better than 4%.

And which cycle are we are right now? What if you invest after paying your mortgage early and we are in great depression for 10 years?

As long overall inflow is net positive it is a good management. Yield%>Loan%

I think 4% is a tad pessimistic. I use 5% (though IWDA is 10% annual since inception) for future calculations but I am very certain others might find it very very low and would use >10% as projections if they are into S&P500/Ark etc.

I think there is no point worrying about great depression in the future. You may miss out the scenery by the side by solely focusing at the trail ahead.

 

[BBCWatcher]

Trader11: As I pointed out in the other thread you’re double counting mortgage interest. The monthly mortgage payments already include principal plus interest — otherwise the loan wouldn’t be paid off. So it looks like you’re about $100K richer paying your mortgage at standard pace versus the 10 year accelerated case, assuming 3.0%/year net returns. And you have better liquidity the whole way through at standard pace.

This shouldn’t be hard to understand. If you can take a dollar and earn 3% on it or pay off 2.6% (never mind 1.4%) debt, which is the better deal? The 3%, obviously. At every point in time your investment runs ahead of the money used to make it. You win. That’s exactly how banks make their money: accept deposits at X% and loan out at X+Y%. They keep the spread between these two rates. You should do the same!

 

[BBCWatcher]

As I mentioned in other posts, there was a government willing to loan me money at 0% interest with payments deferred for several years. Did I have “peace of mind” taking that deal and not making any payments until about a minute before they were due? Hell yes! Provided you’re reasonably financially responsible cheap loans are wonderful. Enjoy them, fully.

 

[Value.Matrix]

the key question is what is your investment yield if you didn't pay off your mortgage early.

If loan tenure is too long, then the interest rate will burn your returns. Unless you can perform much better than 4%.

And which cycle are we are right now? What if you invest after paying your mortgage early and we are in great depression for 10 years?

For me, I just use my MA interest to pay off the mortgage (or even better, after 55, i can drawdown my SA slowly after CPF SA Shielding at 55).

That's why i give a ceveat that once you reach 55, you will really feel a lot more safer.

The MA overflow interest (or even better, your salary OA contribution) can be used to pay off the mortgage slowly instead of using cash, which can generate better than 4% quite easily (since you are not restricted by CPF OA and SA when using them to invest).

If you can only generate below 2.5% returns using cash, then pay down the loan ASAP

 

[dork32]

I did some calculation for 500K loan.

The better options are either pay early (not too early) or pay extremely late:

10 years loan tenure. Once mortgage is completed, invest free-up cashflow into 3% yield investment for 15 years. Final value = 1.08M (each individual about 504K)

25 years loan tenure with 3% yield investment on the extra cashflow (due to lower mortgage payment). Final value = 931k (each individual about 465K)

Note: The higher the investment yield, the greater the difference between 10 and 25 years.

A	B	C	D	E	F	G	H	I	J	H
Loan Tenure (Years)	Principal	Total Interest paid (assume 2.6%)	Monthly Mortgage payment	Yearly Mortgage payment	Extra Yearly Cash (against 10 years tenure)	Future Cash Value after tenure (3% Yield)	Delta (minus interest [C])	Remaing years to 25 years mark	3% yield Investment of [E + F] (after mortgage is paid; till 25 years mark)	Final Value
25	500,000.00	180,504.26	2,268.35	27,220.20	29,615.04	1,112,134.85	931,630.59	-	-	931,630.59
20	500,000.00	141,745.66	2,673.94	32,087.28	24,747.96	684,936.56	543,190.90	5.00	310,798.39	853,989.29
15	500,000.00	104,356.16	3,357.53	40,290.36	16,544.88	316,948.30	212,592.14	10.00	671,098.90	883,691.04
10	500,000.00	68,351.93	4,736.27	56,835.24	-		- 68,351.93	15.00	1,088,785.95	1,020,434.02

i do admire your efforts in trying to proof your point using numbers

unfortunately , your calculation is rubbish.

i seriously do not know what you are trying to drive at for 20 and 15 years.

i just want use your 10 years and 25 years to proved that it is rubbish

For 25 years, you took 1 112k - interest to get your delta. the delta is meaningless.
it just means that you have 1112k at the end of 25 years. your interest is already paid for in the installment. y why do you have to add it in again?

for 10 years, you will have 1088k at the end of 25 years.
1112> 1088. so 25 years better than 10 years

or like what plutonium says, 3 > 2.6. Drag your loan for as long as you can

 

[dork32]

the key question is what is your investment yield if you didn't pay off your mortgage early.

If loan tenure is too long, then the interest rate will burn your returns. Unless you can perform much better than 4%.

And which cycle are we are right now? What if you invest after paying your mortgage early and we are in great depression for 10 years?

the first sentence is correct. paying off my loan or not depends on the investment yield that i can achieve.

the second sentence is total rubbish. if i am confident of a 2.7% return, i would not pay up my loan

the third sentence is irrelevant to me. During the past 18 years, we have gone thru the dot com crisis, the us o$ dont p$ crisis. we also go the boom here and there. but throughout this period, interest rates have never climbed above 2.5%. so i just put my money in cpf oa. i am really in no hurry to pay up the loan.

 

[Trader11]

Okay where are your numbers to prove your point?

I have noted the feedback about my calculations for 3% yield:

If you think you can get 6% yield, then 25Y tenure will net you extra 300K. But how confident are you about 6% CAGR?

A	B	C	D	E	F	G	H	I	J
Loan Tenure (Years)	Principal	Monthly Mortgage payment	Yearly Mortgage payment	Extra Yearly Cash (against 10 years tenure)	Future Cash Value after tenure (3% Yield)	Remaing years to 25 years mark	3% yield Investment of [D + E] (after mortgage is paid; till 25 years mark)	Final Value	Delta (against 10Y Final Value)
25	500,000.00	2,268.35	27,220.20	29,615.04	1,112,134.85	-	-	1,112,134.85	23,353.50
20	500,000.00	2,673.94	32,087.28	24,747.96	684,909.99	5.00	310,797.08	995,707.07	- 93,074.28
15	500,000.00	3,357.53	40,290.36	16,544.88	316,948.30	10.00	671,096.07	988,044.37	- 100,736.98
10	500,000.00	4,736.27	56,835.24	-	-	15.00	1,088,781.35	1,088,781.35	-

 

[dork32]

Okay where are your numbers to prove your point?

I have noted the feedback about my calculations for 3% yield:

If you think you can get 6% yield, then 25Y tenure will net you extra 300K. But how confident are you about 6% CAGR?

A	B	C	D	E	F	G	H	I	J
Loan Tenure (Years)	Principal	Monthly Mortgage payment	Yearly Mortgage payment	Extra Yearly Cash (against 10 years tenure)	Future Cash Value after tenure (3% Yield)	Remaing years to 25 years mark	3% yield Investment of [D + E] (after mortgage is paid; till 25 years mark)	Final Value	Delta (against 10Y Final Value)
25	500,000.00	2,268.35	27,220.20	29,615.04	1,112,134.85	-	-	1,112,134.85	23,353.50
20	500,000.00	2,673.94	32,087.28	24,747.96	684,909.99	5.00	310,797.08	995,707.07	- 93,074.28
15	500,000.00	3,357.53	40,290.36	16,544.88	316,948.30	10.00	671,096.07	988,044.37	- 100,736.98
10	500,000.00	4,736.27	56,835.24	-	-	15.00	1,088,781.35	1,088,781.35	-

which part of my post says i am confident of 6% returns? what i am saying is as long as my returns is higher than the interest rates, that is enuf. i will drag my loan for as long as i can

 

[dork32]

Okay where are your numbers to prove your point?

I have noted the feedback about my calculations for 3% yield:

If you think you can get 6% yield, then 25Y tenure will net you extra 300K. But how confident are you about 6% CAGR?

A	B	C	D	E	F	G	H	I	J
Loan Tenure (Years)	Principal	Monthly Mortgage payment	Yearly Mortgage payment	Extra Yearly Cash (against 10 years tenure)	Future Cash Value after tenure (3% Yield)	Remaing years to 25 years mark	3% yield Investment of [D + E] (after mortgage is paid; till 25 years mark)	Final Value	Delta (against 10Y Final Value)
25	500,000.00	2,268.35	27,220.20	29,615.04	1,112,134.85	-	-	1,112,134.85	23,353.50
20	500,000.00	2,673.94	32,087.28	24,747.96	684,909.99	5.00	310,797.08	995,707.07	- 93,074.28
15	500,000.00	3,357.53	40,290.36	16,544.88	316,948.30	10.00	671,096.07	988,044.37	- 100,736.98
10	500,000.00	4,736.27	56,835.24	-	-	15.00	1,088,781.35	1,088,781.35	-

ok, i assume the installment is correct.

lets look at 10 vs 15 years

for 10 years if you pay an installment of 4736, you would have cleared up the loan after 10 years

if you choose of pay 3357 a month,you will have an outstanding loan of 189k if interest is 2.6%
but your savings of 1379 a month at 3% for 10 years gives you 193k
193>189. so it is better not to pay your loan? 10 years only earn 4k? this is because your 3% is slightly better than 2.6% . then again. this is free money, why not just pick it up

 

[dork32]

there is no turning points in this sort of calculations.

if 25 years is better than 10 years, it would mean than 25 better than 15 better than 10