Partial prepayment (bank loan) - Worth it?

[sohguanh]

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.

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.

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?

You need to know while I am paying off the hdb loan at the same time I am already taking my cpf out for investment. So the total amount of cpf monies are stretched very tightly. To do partial repayment I actually has forced myself not to do any cpf investment for quite many months so the sum is "good" enough based on the monthly cpf contribution. And luckily during this period no retrenchment. The retrenchment started after I pay finish the hdb loan lucky or not dunno.

 

[DevilPlate]

You need to know while I am paying off the hdb loan at the same time I am already taking my cpf out for investment. So the total amount of cpf monies are stretched very tightly. To do partial repayment I actually has forced myself not to do any cpf investment for quite many months so the sum is "good" enough based on the monthly cpf contribution. And luckily during this period no retrenchment. The retrenchment started after I pay finish the hdb loan lucky or not dunno.

I dont think u understand what he is trying to say….like chicken talk to a duck

 

[DevilPlate]

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!

If really duno what to do with the excess money, refinance to a 3yr fixed rate and reduce the loan amount lor….i think set aside 200k cash as E funds more than enough liao.

If yours is on floating rate now, no hurry to make partial payment now….just milk Tbills for as long as it make sense. Whahahaha

1.2M condo not siaokia lah….Dork is refering to those paying 1.4M for a HDB flat

 

[DevilPlate]

for me it is not the saikorlogy. i sleep with even with very large loans. There are a lot of uncertainties in rates

eg, how fixed is your 3.6%. it is really fixed for 3 years, or is it pegged to some funny numbers. eg this month t bills 3.9 vs your 3.6%, you very happy. next month sibor or sora go up, you rate become 4.3%, then xiao liao.

even with fixed loan rates, there are risk. eg now 3.6% fixed for years. tbills is 3.9%. you so happy. 6 months later your interest is still 3.6%, but tbills become 3%. then jialat

there are quite a lot of risk involved. this is the thing that will cause me sleepless nites, not when i owe a lot of money but have the ability to pay up

For floating rate vs 6 months Tbills only 6 months duration risk mah or maybe 3 months nia if he is on 3 mths SORA.

 

[reddevil0728]

With balcony cost 1.2m wow. Since it is private condo doubt you can use cpf to pay off. T-bill is a much attractive option for your cold hard cash which dork32 reader already shared. T-bill currently is about 3.5 - 4% so just do some simple maths. As for psychology reason like at night sleep keep thinking of the big loan affect your sleep, maybe some partial repayment is better. Sleep quite important for the health of a person.

Huh. Why cannot use cpf to pay-off because is private.

I think the sentence highlighted in bold is key for many readers. As long as one can pay off when the times call for it it is ok. It is the uncertainty that happen such that one cannot pay off which make one sleepless. For my case is hdb loan and I worry kena retrench no more cpf come in and I need to pay up in cash which cause me to decide half way through do some partial repayment. Retrenchment is a buzz phrase nowadays in IT sector that I am in but heng ah I pay off liao a few years prior to this year.

Different people different risk appetite. Low risk low return, high risk high return

 

[BBCWatcher]

You need to know while I am paying off the hdb loan at the same time I am already taking my cpf out for investment. So the total amount of cpf monies are stretched very tightly. To do partial repayment I actually has forced myself not to do any cpf investment for quite many months so the sum is "good" enough based on the monthly cpf contribution. And luckily during this period no retrenchment. The retrenchment started after I pay finish the hdb loan lucky or not dunno.

But your CPF Investment Scheme assets don't disappear. Those dollars are available too if your bout of joblessness (or other family emergency) is long. Indeed, if you're just shifting OA dollars into T-bills — and T-bills currently beat the 2.6% HDB loan rate by a lot — then that's the CPF Investment Scheme, too.

The fact you've invested fewer dollars via the CPF Investment Scheme and instead paid off a 2.6% HDB loan faster than required means you've traded whatever your CPF Investment Scheme could be doing (could be T-bills!) for the equivalent of a ~2.6% return AND reduced your resistance to joblessness and other family emergencies. Not a great combination, but "water under the bridge" in your case.

 

[BBCWatcher]

The bottom line if that if you're concerned about household financial stamina in the event of unemployment or some other, comparable family financial emergency then you should be looking at the number of months (years?) you can keep your household afloat, in a non-lavish way (baseline needs), in that event. That's a liquidity-related benchmark. When you plow dollars into HDB leasehold equity you actually reduce household liquidity, meaning (other things being equal) you're more vulnerable to such unfortunate events. You reduce the number of months of financial stamina for your household, and you're that much closer to being forced to sell your HDB flat if/when there's an emergency.

To some extent liquidity concerns also apply if your mortgage is on a private sector home. In principle you can borrow against private home equity if you need to (and if there is equity to borrow against), but that's not guaranteed. And the cost of that borrowing isn't guaranteed either. You still have to clear the MAS's TDSR rules and the lender's guidelines if/when that future time comes. If you're unemployed when you apply you're much less likely to clear those hurdles and get a loan. Banks don't generally like to lend money to unemployed or disabled borrowers.

It might make financial sense to reduce your financial stamina (reduce the number of months of "buffer") if you're paying off genuinely high cost debt. As long as you still have a reasonable buffer after paying off the debt. But if the debt isn't genuinely high cost — and a 2.6% HDB loan surely is NOT high cost debt at the present time — then why would you voluntarily reduce your financial stamina?

 

[sohguanh]

For those that keep harping on using cpf for Tbill please try to understand back in the 2000s don't think have such instrument for cpf invest which is why I am into mutual fund and equities. Ppl of the same era as me will identify.

When Tbill have already I already finish paying my hdb loan. Always discuss based on the time of that era a specific reader is in for his experience.

Those that keep talking on those newer stuff not specific to Tbill for e.g ETF, options etc I believe in reality their actual age is much younger than me.

 

[DevilPlate]

For those that keep harping on using cpf for Tbill please try to understand back in the 2000s don't think have such instrument for cpf invest which is why I am into mutual fund and equities. Ppl of the same era as me will identify.

When Tbill have already I already finish paying my hdb loan. Always discuss based on the time of that era a specific reader is in for his experience.

Those that keep talking on those newer stuff not specific to Tbill for e.g ETF, options etc I believe in reality their actual age is much younger than me.

U still dont understand…..its about holding power lah….

make partial payment but reduce yr holding power good or bad?

Sure if you have accumulated or divest some investment and have 200-300k idle cash, paying down using half of that idle cash is OK.

The amt of Ecash to set aside depends on your family profile and age group etc liao.

 

[reddevil0728]

For those that keep harping on using cpf for Tbill please try to understand back in the 2000s don't think have such instrument for cpf invest which is why I am into mutual fund and equities. Ppl of the same era as me will identify.

When Tbill have already I already finish paying my hdb loan. Always discuss based on the time of that era a specific reader is in for his experience.

Those that keep talking on those newer stuff not specific to Tbill for e.g ETF, options etc I believe in reality their actual age is much younger than me.

what matters is now isn't it?

 

[hwmook]

for me it is not the saikorlogy. i sleep with even with very large loans. There are a lot of uncertainties in rates

eg, how fixed is your 3.6%. it is really fixed for 3 years, or is it pegged to some funny numbers. eg this month t bills 3.9 vs your 3.6%, you very happy. next month sibor or sora go up, you rate become 4.3%, then xiao liao.

even with fixed loan rates, there are risk. eg now 3.6% fixed for years. tbills is 3.9%. you so happy. 6 months later your interest is still 3.6%, but tbills become 3%. then jialat

there are quite a lot of risk involved. this is the thing that will cause me sleepless nites, not when i owe a lot of money but have the ability to pay up

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%.

 

[sglandscape]

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%.

think the other poster needs to understand interest rate risk, reinvestment risk, and liquidity risk.

tbills and mortgage payment terms are one of the simplest out there

 

[BBCWatcher]

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%.

I understood Dork32's point to be that you look at the next available decision when it occurs, so upon maturity of the 3.9% T-bill in this situation.

I would point out, however, that each decision is a little more complicated, or should be. You should still consider your overall liquidity position and the amount of "buffer" you have. You should also take a reasonable guess what'll happen in the future in terms of mortgage interest rates versus investment opportunities. Just because the mortgage interest rate is a little higher now than your best investment opportunity's yield doesn't necessarily mean you should rush to pay off the loan. The interest rate spread might flip back in your favor. If you think that's likely then patience is due.

 

[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%.

many of the fixed rates got lock in period. pay back kena penalty. because you fixed at 3.6% for eg 3 years. you suffer another 2.5 years for tbills yield below loan rate.

and in my example, you win 0.3% for 6 months and lose 0.6% for 2.5 years. anything wrong with this maths?

 

[dork32]

I think the sentence highlighted in bold is key for many readers. As long as one can pay off when the times call for it it is ok. It is the uncertainty that happen such that one cannot pay off which make one sleepless. For my case is hdb loan and I worry kena retrench no more cpf come in and I need to pay up in cash which cause me to decide half way through do some partial repayment. Retrenchment is a buzz phrase nowadays in IT sector that I am in but heng ah I pay off liao a few years prior to this year.

actually you dont what i meant. there is no difference whether i have the ability pay up your loan fully or not. it does not really matter whether i will kena sack or not.

case 1, i have 500k loan and 500k cash.
if i pay up the loan and fully, i have 0 loan and 0 cash. i can sleep well
if i use the 500k to buy tbills, i have 500k tbills and 500k loan, i can also sleep well

case 2, i have 500k loan and 200k cash.
if i pay down my loan partially, i have 300k loan and 0 cash. i cannot sleep well
if i use my 200k cash to buy t bills. i have 500k loan and 200k tbills. i also cannot sleep well

in fact bbc alway broadcast this especially for case 2.
if you pay down your loan and lose your job, you got no money to pay the next month installment. you hdb kena repo. you start to eat tree bark for carbo, grass for fibre and cockcroach for protein
if you dont pay down your loan, you still can use your 200k to tide you over till you find the next job. at least you get to keep your hdb and money to survive

to be whether to pay down the loan or not, does not really matter if i can pay down the loan completely or not, or whether i kena retrench or not. it depends really what i am going to do with the money if i dont pay down the loan

 

[hwmook]

many of the fixed rates got lock in period. pay back kena penalty. because you fixed at 3.6% for eg 3 years. you suffer another 2.5 years for tbills yield below loan rate.

and in my example, you win 0.3% for 6 months and lose 0.6% for 2.5 years. anything wrong with this maths?

I think we need to be clear here. TS is asking whether he should pay down a 3.6% loan using his cash which can earn 3.9%. He is not asking about taking new loans with 3 years fixed years etc. We can only do the proper maths if we know the different situations.

 

[dork32]

I think we need to be clear here. TS is asking whether he should pay down a 3.6% loan using his cash which can earn 3.9%. He is not asking about taking new loans with 3 years fixed years etc. We can only do the proper maths if we know the different situations.

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

 

[DevilPlate]

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

TS already said no penalty for partial repayment….so most likely on 3M sora now.

I personally would just continue with floating rate now and milk TBills for now.
If rates start to drop, then i will take a 3-5yr fixed rate at ~2.5-3% hopefully and use half of the idle cash + OA to reduce the loan.

Rates are projected to drop next year….so play by ear. That will be my plan.

 

[dork32]

TS already said no penalty for partial repayment….so most likely on 3M sora now.

i think floating 3mth sora cannot get 3.6%. 3 month sora is 3.6% for so many months already. i think you cannot find a home loan with 3mth sora+ 0%

i think only fixed rate can get 3.6%. it is before you sign for fixed rate that you paydown the loan

 

[razoreigns]

I am also thinking of paying down loan using CPF OA. Even with 6m T-bill rate at about 3.87%, the effective rate is only about 3.31% using CPF. This rate is at least 0.3-0.4% lower than 3m sora, hence repaying loan using OA should reap immediate benefits. Do it gradually and reassess rates before every pay down. This is assuming no longer in lock in period.