I was asking around for advice regarding the financing of my upcoming HDB flat. This will likely be one of my lifetime's biggest purchases and it would take a rather long time to fully pay off the loan. Unfortunately, there are many viewpoints and differing opinions about how to go about paying off the loan.
While it is generally agreed that both you and your spouse should have sufficient combined income to take the full 25 year loan, be it a HDB loan or bank loan, but should you really take that long to pay off the loan?
"Don't worry and take your time to pay off the loan."
Assuming that you are employed for the full 25 years of your working life, taking the full 25 year loan typically means that your monthly CPF contributions would be able to cover your installments, leaving you with full amount of your net pay to do stuff with.
Usually, the people who advice this reason that since it is money you cannot see or touch, why not use it to the max? I would agree if they are able find good investment instruments that give good dividends to beat the 2.6% HDB loan interest, but most would stop short there.
This pessimistic view of CPF will only backfire when one gets to retirement age only to find out that they have nowhere near the minimum sum. After all, CPF money is still your money even though you may have little control over when it eventually gets returned to you.
Let's do some math.
A typical 4-room BTO in a non-mature estate would cost about $330k.
Taking 90% of the entire cost as loan, which is the loan ceiling, would work out to be $297k.
Instinctively, the longer you take to clear your loan, the more interest you end up paying. Let's compare two couples.
Couple Relac takes the entire 25 years to pay it off.
The monthly installment will be $1,347.40, which is a rather comfortable sum to repay per month for a couple (i.e. each person pays $673.70). It is possible that their CFP would be able to pay off the installment without the need to top up in cash
By the time they complete their repayment, they would have paid $1,347 x 12 mth x 25 yrs = $404.1k.
They would have spent $107.1k in interest alone.
Couple Quick-e pays off the entire loan within 10 years.
The monthly installment will be $2,813.34 (i.e. each person pays
$1406.67). This couple would have to top up some cash on top of their monthly payment and slightly more frugally than Couple Relac.
By the time they complete their repayment, they would have paid $2,813.34 x 12 mth x 10 yrs = $337.6k.
They would have spent $40.6k in interest alone.
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Couple Quick-e would have saved $66.5k more than Couple Relec from their housing loan by the end of the 10 years. Albeit this $66.5k is likely to be saved in the form of the untouchable CPF, it would go a long way in helping the couple beat the ever increasing CPF minimum sum so that they can actually afford to pamper themselves a little when they retire or help ease their children's study loan burden.
The point of this article is to point out that while the full 25 year loan makes it sound easy to own and pay for a flat, it actually hurts you in the long run. If you are someone who does not invest at all, it would be very prudent to pay off all the loan as fast as possible to patch up this liability.
But what about if you are investment savvy and able to take some risks? Depending on how you do it, you just might be better off going the way of Couple Relac. I shall discuss this in my next write up.
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