Should I get maximum HDB loan?

[NoTimeToWaitAr]

Hi all, we are thinking of getting a resale after we sold our current one and was thinking should we go for option (1), (2), or (3)?

Thanks in advance.

Assuming resale HDB at 1m, combined OA at 300k, cash at 300k (sales proceed)

**edited**
-option (1) not applicable since we need to use 50% of sales proceed to finance the resale.
-option (2) use half of OA and remaining half for investment

Our concern is whether should we use cash to pay for monthly mortgage, and if we are not really savvy with investment, should we still go ahead with max loan?

option (1):
HDB loan 700k Max
OA 300k
cash from sales proceed to keep
- more cash in hand for reno and for contingency
- monthly mortgage need to topup by cash
* need to use 50% of sales proceed to finance the resale, therefore this option is not applicable.

option (2):
HDB loan 700k
OA 150k
cash from sales proceed 150k (50% by HDB policy)
-some cash on hand for reno and contingency
-monthly mortgage need to topup by cash
-use 150k OA for investment before HDB wipe out the entire OA

option (3):
HDB loan 400k
OA 300k
cash from sales proceed 300k
- need to use our own saving for reno
- little to no cash topup for monthly mortgage.

 

[Mephist0pheLes]

Of cos max loan. Its not hard to find investments that gives more than 2.6% today.

 

[BBCWatcher]

Absolutely the maximum HDB loan allowed, assuming the home is not too expensive in the circumstances. The same government itself is currently paying interest >2.6% on its T-bills, Singapore Savings Bonds, longer tenor Singapore Government Securities, and CPF Special, MediSave, and Retirement Accounts. That’s a license to print money for yourself.

 

[NoTimeToWaitAr]

Thanks @Mephist0pheLes and @BBCWatcher. Just realized that option 1 is no longer applicable since we need to use 50% of the sales proceed for the resale.

If we look at option (2) and (3), option (2) will be a better option since we can use half of OA for investment?
Thanks

 

[BBCWatcher]

If we look at option (2) and (3), option (2) will be a better option since we can use half of OA for investment?

Absolutely. The government is willing to loan you money at 2.6% interest. The same government is also willing to pay you >3% interest when you loan money back to the government. Take that deal! All of it, as much as allowed, as long as allowed.

How you choose to invest your dollars is a somewhat separate question, but the question of whether to take the maximum available HDB loan (for the longest tenor allowed) is a VERY easy decision in the current and similar market environment.

Note that you’ll need to make sure both of your OA balances are $20,000 or less (after accounting for the OA you use for your down payment) when you pick up the keys. That’s because HDB will sweep any excess above $20,000 into the home, effectively reducing your HDB loan amount. So make your initial CPF Investment Scheme decisions (and OA to SA/RA transfer decisions) before you pick up the keys.

 

[NoTimeToWaitAr]

Thanks @BBCWatcher.

Sorry just one more question.

Actually our main concern would be the cash topup which if we get the max loan, the monthly cash topup would be around $1.2k. As we are not really savvy with all these financial thingy, we can't really get over with the fact that we need to topup so much if we get max loan.

Can I say that:
if we go with option (2):
- half of our OA will be under investment which will generate more than 2.6% of interest. At the end of the day, all these investment will be going back to OA
- more cash will be going back into OA too since we need to topup cash every month, therefore we will have less cash on hand.

if we go with option (3):
- zero OA will be used to generate more than 2.6% interest.
- less cash will be going back into OA since we dont have to topup a lot. We will have more cash on hand.

If we do not have the intention to change our HDB anymore, option 2 is still no brainer?
Thanks for your help!

 

[8zaoyu]

Thanks @Mephist0pheLes and @BBCWatcher. Just realized that option 1 is no longer applicable since we need to use 50% of the sales proceed for the resale.

If we look at option (2) and (3), option (2) will be a better option since we can use half of OA for investment?
Thanks

My kiddos about to get keys to their BTOs too. They do not have sale proceeds like you have. They will not listen to parents, They have amassed a little in the OA after 5-6 years of waiting TOP. Hope their BTO chatgroups "give the good advices", not spend on only group buys advices, haha

 

[dork32]

Thanks @BBCWatcher.

Sorry just one more question.

Actually our main concern would be the cash topup which if we get the max loan, the monthly cash topup would be around $1.2k. As we are not really savvy with all these financial thingy, we can't really get over with the fact that we need to topup so much if we get max loan.

this is wat i meant that some people just look at one side of the story. wah monthly installment go up by 1.2k, xiong man.

but you conveniently forget that you have 150k cash on hand. that you be enough to last you more than 10 years of cash payment if you put your 150k under your pillow. you kiasi, just put this 150k into some high interest savings account.

 

[BBCWatcher]

I’m a little confused. If you have a smaller HDB loan then you will surely have less cash and/or less OA on hand. That will surely mean you have many fewer months of loan payments you could make if your income is interrupted. That’s riskier. (Dork32 is pointing this out.)

Moreover, you would be forgoing the >3% interest the government is willing to pay you on that +$300K. In other words, the government is willing to pay you free, guaranteed money to take the bigger loan. Which seems crazy (and perhaps is), but that’s the reality. Every month the money you didn’t plow into the HDB leasehold is earning more interest than the interest charge on the mortgage. It’s a money machine, government guaranteed.

Of course you should take this deal!

And it gets even better in the worst situation. Let’s suppose you pick up the keys and then one of you drops dead on the bus ride back from HDB in Toa Payoh. If this home is under the Home Protection Scheme (yes, usually) then the surviving spouse will presumably get at least half of the HDB loan immediately paid off. If that’s a $700K loan then that‘s $350K worth of free HPS money. But if that’s a $400K loan then that’s only $200K, a loss of $150K in free money in this scenario. Ooops, that’d be bad. The $150K just disappears, completely gone. The survivors are $150K poorer. Ouch.

 

[NoTimeToWaitAr]

Thanks a lot @BBCWatcher!

The max loan make sense, jus that we cant get through the mental barrier like what @dork32 said. Like what you have pointed out, if in the event one of us got retrenched, at least we still have cash on hand to settle the monthly payment for a while. The GG-ed scenario make sense too (touch wood).

 

[sohguanh]

Thanks a lot @BBCWatcher!

The max loan make sense, jus that we cant get through the mental barrier like what @dork32 said. Like what you have pointed out, if in the event one of us got retrenched, at least we still have cash on hand to settle the monthly payment for a while. The GG-ed scenario make sense too (touch wood).

The latest rule has relaxed as shared by bbcwatcher previously. No more at HDB first appointment they wipe out all your cpf. They will leave the 20K untouched. This is just in case like you say you kena retrenched still got monies to service the monthly hdb loan while you look for the next job. How I wish this new policy already exist during my times back in the 2000's era instead of me do the stupid shielding out and then back in.

 

[BBCWatcher]

The only general situation I can think of when you might decline the government's generous offer (an extra $300K at 2.6%) is if you're recklessly spendthrift — if you're directly or indirectly going to take that $300K (or a major chunk of it) and (for example) spend it on expensive escort services and liquor. Then I think you're probably better off not accepting the government's offer.

If on the other hand you're going to save and prudently invest that $300K, great! There are many reasonable choices that fit within "prudently invest." Buying $300K worth of cryptocurrencies, no, that wouldn't fit. But the key point here is that 2.6% money is very cheap money right now when the government itself is willing to borrow money from you (the same money) and pay >3% interest. What a deal!

Let's fast forward a bit. Let's suppose the interest rates on Singapore government bonds/bills fall, and so a 2.6% HDB loan looks a little more expensive in comparison to government bonds. You have choices:

1. Maybe you don't care very much about that because you've already found (and are satisfied with) investments that you expect will yield >2.6% at least over the long term. A simple example is transferring OA dollars to a parent's Retirement Account to boost their retirement income so that you don't have to spend as much (or any) cash to support that parent. Retirement Accounts earn at least 4.0% interest.

2. Maybe you decide that's the time to refinance with a bank loan. In the prior interest rate cycle bank loans were available as low as 1.4% for 5 years fixed, and some people are still paying only that 1.4% rate. (A 1.5%/5 year fixed rate was also common.) Even your Ordinary Account's 2.5% interest easily beats 1.4% or 1.5%. So you might be able to get at least another 5 years of free money generation.

3. Maybe you've sold the house, or will sell it, because you've got a terrific job offer in Vancouver. Or whatever.

4. Maybe you decide to accelerate repayment on the 2.6% HDB loan. Fortunately for you since you took a bigger HDB loan (and saved, and prudently invested) you have that much more cash and OA available to accelerate repayment since the interest/dividends/capital gains on your investments have run ahead of the cost of your HDB loan.

5. Maybe one of you died, and the Home Protection Scheme paid off half or more of the remaining HDB loan.

6. Maybe some combination of the above.

 

[BBCWatcher]

The latest rule has relaxed as shared by bbcwatcher previously. No more at HDB first appointment they wipe out all your cpf. They will leave the 20K untouched. This is just in case like you say you kena retrenched still got monies to service the monthly hdb loan while you look for the next job. How I wish this new policy already exist during my times back in the 2000's era instead of me do the stupid shielding out and then back in.

That's $40,000 per couple. A 25 year HDB loan of $700K at 2.6% would have monthly repayments of $3,176. OA balances of $40,000 could handle 10 months of repayments.

But that's not quite right. OA dollars that have been invested via the CPF Investment Scheme (OA) are still available for mortgage repayment. You just have to sell some of those CPFIS assets (or let them mature), that's all. As a simple example if those invested OA dollars are in 6 month T-bills then that'll work since all 6 month T-bills mature before the 10 months is up (6 is less than 10).

And even that's not quite right either since additional OA dollars are streaming in every month. If the income interruption occurs 6 months after picking up the keys (for example) then that's 6 months more of OA. Plus one spouse is presumably still working (that it's a partial income interruption), still accumulating OA dollars.

Anyway, yes, the monthly mortgage payment is higher when you borrow more. But so are your (prudently invested) cash and OA reserves, much higher. That $300K of extra borrowing means $300K more of OA and/or cash on hand (to start). And $300K divided by $3,176 is at least 94 months of mortgage repayments. That's several years more repayments you can make because you borrowed more. (Borrowing more is safer??!?? I can keep my house for years longer if there's an income interruption? Yes, it is safer! It's because the borrowed money is so cheap relative to investment options and because you're preserving much more liquidity for housing payments.)

 

[sohguanh]

That's $40,000 per couple. A 25 year HDB loan of $700K at 2.6% would have monthly repayments of $3,176. OA balances of $40,000 could handle 10 months of repayments.

But that's not quite right. OA dollars that have been invested via the CPF Investment Scheme (OA) are still available for mortgage repayment. You just have to sell some of those CPFIS assets (or let them mature), that's all. As a simple example if those invested OA dollars are in 6 month T-bills then that'll work since all 6 month T-bills mature before the 10 months is up (6 is less than 10).

I have no time to check the history of SGS T-bill when it become available for public to subscribe. I remember back in the early 2000's there isn't. Even if have it is for corporate than retail ppl like us? Someone old enough to witness the birth of SGS T-bill care to share it's history? In particular when it is available for retail ppl to participate.

 

[BBCWatcher]

I have no time to check the history of SGS T-bill when it become available for public to subscribe. I remember back in the early 2000's there isn't. Even if have it is for corporate than retail ppl like us? Someone old enough to witness the birth of SGS T-bill care to share it's history? In particular when it is available for retail ppl to participate.

There's probably no one alive who remembers the birth of T-bills in Singapore since the "Treasury Bills (Local) Ordinance" dates all the way back to 1923. The legislative history of T-bills in Singapore is old.

As far as I can determine (from the historical records I can find) S$1,000 denomination T-bills have been available to the general public at least as far back as 2001. Back then 3 month T-bills were auctioned weekly. (There were also some 12 month T-bills, apparently.) Maybe you had to fill out a paper form (that your banker didn't tell you about as he/she tried to sell you something — what else is new?), but it sure looks like they were available.

It looks like there were S$10,000 T-bills available to individual investors prior to 2001. I'm finding some articles about that. Back then the banking sector was less consolidated, and there were evidently as many as 11 primary SGS dealers plus a couple dozen secondary market dealers.

 

[sohguanh]

As far as I can determine (from the historical records I can find) S$1,000 denomination T-bills have been available to the general public at least as far back as 2001. Back then 3 month T-bills were auctioned weekly. (There were also some 12 month T-bills, apparently.) Maybe you had to fill out a paper form (that your banker didn't tell you about as he/she tried to sell you something — what else is new?), but it sure looks like they were available.

Available but how to apply can retail DIY like now? Maybe like you say need to do the old fashioned way queue up fill form etc definitely not as convenient as now. Maybe that's why the retail interest not so great as cannot DIY easily.

 

[BBCWatcher]

I can’t find any evidence the channels were appreciably different in kind. Was anyone buying endowment plans online back then (for example)? Although it’s 2023 and most endowment plans still aren’t available for online purchase, so there you go.

 

[itedino]

Max loan would be better. Remember if u kick the bucket, your wife will have the hdb for free.

I got friend within 3 to 4 years pay finished. Got good got bad.

Depends what u want

 

[sohguanh]

I can’t find any evidence the channels were appreciably different in kind. Was anyone buying endowment plans online back then (for example)?

Endowment online not sure. But FD online I remember have becuz I place before. Finatiq was one before it close shop. It was deemed the first digital bank hmmm so long time ago.

 

[BBCWatcher]

Before the Internet options there was the telephone, including tone ordering. (“Please enter your account number followed by the hash key.”) I have a vague recollection of getting stock quotes that way, and I did find some mention of Singapore T-bill ordering by telephone.

….Let’s steer back to the original topic, OK?