I would like to follow up on my previous post on "Are HDB flats affordable?" and share my experience in using the max 30 years loan when I don’t have to.
1. Numbers have been rounded up for simplicity’s sake.
2. CPF ordinary interest = 2.5% per annum (ignore the extra 1%
for the first SGD 20,000)
3. OCBC bank interest = 3.75% per annum (first 2 years’
promotional interest below 2% we ignore)
In late 2003, I bought my beloved 3 room resale HDB flat in Queenstown. Even though I have SGD 100,000 in my CPF ordinary account, I still took out a 30 years OCBC bank loan for SGD 100,000.
Why pay bank interest of 3.75% per annum when I can pay in full and save on all the interest payments? 3.75% times 30 years is paying more than double the principal!
Scenario A (pay in full up front; no debt)
SGD 100,000 1 x HDB No debt
Scenario B (max out 30 years loan period)
CPF = SGD 100,000 1 x HDB Bank debt = SGD 100,000
I chose scenario B for the below reasons:
1) By leaving my SGD 100,000 in CPF, it’s earning a risk-free return of 2.5% per annum. So the arrangement is like the interest offset loans by some banks. The reality interest I am paying OCBC is actually 1.25% (3.75% - 2.5%). It’s a small price to pay for the “flexibility” of having funds around when opportunity knocks!
2) I maxed out the 30 years loan period so as to make my monthly payments as small as possible – SGD 500. This way, even if I am retrenched or met with some unfortunate accidents, it’s not a heavy burden to service (and cheaper than renting). If I have to service SGD 2,000 or 3,000 monthly bank loan payments per month (now that’s an anchor!), would I dare to “quit” at age 44 end of this year?
3) I am confident to find CPF approved investments that can return higher than 3.75% per annum. It’s a sort of “carry trade”.
4) In the event that the bank interest rate goes up, and/or I can’t find any suitable CPF approved investments that can exceed my hurdle rate of 3.75%, I can always make early full payment of the bank loan any time after the initial 2 years lock-in period. So it’s minimal risk. Best of all, I have the flexibility to decide (or I think I do)!
OK, that’s the plan and theory. Show me the money you say! Let’s see below for the current status 8 years later:
Scenario B - 8 years later in 2011 (max out 30 years loan period)
CPF = SGD 130,000 1 x HDB Bank debt = SGD 75,000
Note: The SGD 30,000 growth in CPF and reduction in bank debts were all paid out of realized capital gains from the original CPF SGD 100,000.
Nothing fantastic compared to those who doubled or tripled their investments during this time. But my plan is to repeat this “carry trade” till 30 years later when I reach 65 years young.
This way, I would have a fully paid-up 3 room HDB flat, and my CPF ordinary account will be like if I never bought a HDB flat at all – earning the full CPF interests.
I have my cake and eat it!
Putting things in perspective:
- This is nothing new. It’s like those people who bought a 2nd rental property and using the rental to pay off the bank loan. X years later, you would have a “free” 2nd property too! (I monkey see, monkey do)
- For those who own private property, you are luckier! You can pay in full or shorten the bank loan without fear of losing this “flexibility”. You can easily take out a home equity loan if an opportunity drops from the sky! HDB does not allow home equity loans. That’s why I have to “work harder” to by-pass the official rules… And avoid early bank repayment whenever possible!
- My bank loan amount is chicken feet to many of you. It’s probably just an equivalent car loan…
- I am just sharing my reality experience for those who may be interested to compare it with alternative journeys by others. I am not selling or promoting my way – which is nothing new at all. I am a believer of using OPM (other people’s money). And after 44, I will be tapping OPT (other people’s time) too. Wink, wink.