Partial prepayment (bank loan) - Worth it?

[lucky_]

That's exactly backwards.

If for example you have $50,000 in your Ordinary Account ($30,000 of which might be invested via the CPF Investment Scheme) and a $1,700/month HDB loan payment then you can pay your HDB loan for at least 29 months using nothing but your Ordinary Account dollars. In other words, you have 29 months of buffer. You have as many as 29 months to find a new job.

Alternatively you could take that $50,000 and pay off your 2.6% HDB loan faster than required. Then, if you're retrenched, you now have...ZERO months of buffer! You have to start paying cash right away. If you want to keep your HDB flat, at least.

Anything in between — taking $30,000, for example, and paying off your low cost HDB loan faster than required — means you have fewer than 29 months to find a new job. Otherwise you have to dip into cash that much sooner.

Oh, but it gets worse. If you die too soon and have the Home Protection Scheme (HPS) coverage then congratulations, your survivors are poorer by whatever amount you used to pay your HDB loan faster than required. That's because the Home Protection Scheme would've paid off whatever the remaining loan is (your share of it). But no, you retired that portion of the loan, so no HPS payout for your survivors for that portion.

So how well are you sleeping now?

Hi BBCW,
Could you advise if the HPS coverage in event of death extends to bank loans, or is only limited to loans taken from HDB?
Thanks!

 

[yuppieboy]

Hi

i would like to seek some opinions here whether is it worthwhile to do a partial prepayment say 200k cash on my bank loan?

My loan is 880k ,interest rate at 3.6% . i have around 450k in cash and 200k OA.

is it wise to use 200k cash to bring down my monthly mortgage?

Any inputs will be helpful , thanks in advance!

My take is that once your bank loan interests exceed your CPF OA rates of 2.5%, you should by all means do a partial repayment of loan capital to the bank using all your CPF OA.

One thing I realised and learned while many still may not realised is that any loan interests you paid off to the bank is forever gone to the bank, whereas paying accrued interests to CPF for using your CPF OA will eventually becomes your own money for your own use anytime especially when you turn 55.

 

[Dancedesire]

that is why i asked how fixed is the 3.6%. it is usually that at the end of the lock in that you can pay down a loan. you make a decision whether to paydown or nor, then reprice and lock in your loans for another 2 to 3 years.

and if it is already fixed at 3.6%, usually you are not allowed to paydown anymore

mine was previously on Sora and just gotten a repricing at fix 1 year ,lock in 1 year of 3.6%. Once i commit to this offer, am also able to do a partial prepayment at the same time without penalty

 

[Dancedesire]

My take is that once your bank loan interests exceed your CPF OA rates of 2.5%, you should by all means do a partial repayment of loan capital to the bank using all your CPF OA.

One thing I realised and learned while many still may not realised is that any loan interests you paid off to the bank is forever gone to the bank, whereas paying accrued interests to CPF for using your CPF OA will eventually becomes your own money for your own use anytime especially when you turn 55.

i see , so i should consider also wiping off my OA to bring down the loan ?

 

[yuppieboy]

i see , so i should consider also wiping off my OA to bring down the loan ?

Yes. If you managed to see and understand my point. Cheers.

 

[BBCWatcher]

Could you advise if the HPS coverage in event of death extends to bank loans, or is only limited to loans taken from HDB?

The Home Protection Scheme (or a substitute insurance policy) is required if you're paying your mortgage on your HDB flat using any CPF Ordinary Account dollars. That's whether you have a bank mortgage or a HDB loan. If you're using only unrestricted cash to pay your mortgage the HPS (or substitute) coverage is optional.

My take is that once your bank loan interests exceed your CPF OA rates of 2.5%, you should by all means do a partial repayment of loan capital to the bank using all your CPF OA.

OK, but that's just bad advice starting with these two reasons:

1. CPF Ordinary Account dollars above $20,000 are not limited to the 2.5% OA interest rate. You can invest OA dollars in excess of $20,000 via the CPF Investment Scheme. And you can buy T-bills if you wish. T-bills are yielding well above 2.5%. Exactly how much above depends on the size of your T-bill purchase and the fees your bank charges for the CPF Investment Account.

You should always evaluate any financial decision relative to the next best available alternatives. Keeping dollars in excess of $20,000 inside your Ordinary Account is not currently your next best available alternative.

2. If you use all of your CPF Ordinary Account to accelerate payment on your mortgage then you've wiped out your Ordinary Account. You no longer have any capacity in your OA to pay your mortgage if you lose your job, become disabled, or otherwise have an income disrupting family emergency. That means you're that much closer to being forced to sell your home to raise funds to eat.

There are other reasons too, but those are the top reasons.

 

[yuppieboy]

OK, but that's just bad advice starting with these two reasons:

1. CPF Ordinary Account dollars above $20,000 are not limited to the 2.5% OA interest rate. You can invest OA dollars in excess of $20,000 via the CPF Investment Scheme. And you can buy T-bills if you wish. T-bills are yielding well above 2.5%. Exactly how much above depends on the size of your T-bill purchase and the fees your bank charges for the CPF Investment Account.

You should always evaluate any financial decision relative to the next best available alternatives. Keeping dollars in excess of $20,000 inside your Ordinary Account is not currently your next best available alternative.

2. If you use all of your CPF Ordinary Account to accelerate payment on your mortgage then you've wiped out your Ordinary Account. You no longer have any capacity in your OA to pay your mortgage if you lose your job, become disabled, or otherwise have an income disrupting family emergency. That means you're that much closer to being forced to sell your home to raise funds to eat.

There are other reasons too, but those are the top reasons.

How is it bad advice? Did TS mentioned of seeking alternative investments? TS was asking whether to use cash /or OA to repay the bank loan.

I’m just advising from my own similar experience, and glad that it all work out for me to be able to retire and be debt free before age 55.

 

[maumu]

My take is that once your bank loan interests exceed your CPF OA rates of 2.5%, you should by all means do a partial repayment of loan capital to the bank using all your CPF OA.

One thing I realised and learned while many still may not realised is that any loan interests you paid off to the bank is forever gone to the bank, whereas paying accrued interests to CPF for using your CPF OA will eventually becomes your own money for your own use anytime especially when you turn 55.

thanks for sharing about the impact of paying interests to bank vs paying yourself via CPF. it is also one of the reasons why I chose to redeem early.

why pay banks when I can 'pay' myself instead.

 

[BBCWatcher]

How is it bad advice? Did TS mentioned of seeking alternative investments? TS was asking whether to use cash /or OA to repay the bank loan.

Precisely for the reasons I described. But if you want a (generally) higher risk of losing your house you're providing excellent advice.

 

[dork32]

thanks for sharing about the impact of paying interests to bank vs paying yourself via CPF. it is also one of the reasons why I chose to redeem early.

why pay banks when I can 'pay' myself instead.

i am willing to pay bank interest, provided i can earn more than what i pay.

 

[vitaminsmiles]

simple. if dont repay, can u use the fund for better opportunities and generate a higher return than ur loan ir?

 

[dork32]

I thought your maths very good one now I am disappointed. If 6 months later tbills become 3% then pay back 6 months later, not now. It never make any mathematical sense to pay back a 3.6% loan with money that is earning 3.9%.

ok you win. his 3.6% can redeem anytime. your solution is good.