Thursday 16 June 2011

My aim is to have my cake and eat it – a 3 room HDB flat for free!

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)

CPF = 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.


  1. Nice illustration. I took a 30 yr HDB loan and after 9 years, I am thinking to stretch it further. That will reduce my monthly payment (i.e. more flexibility). The flip side is that once it crosses a certain threshold, CPF becomes ineligible for payment.

    Point 2 is directed to "investors". If one cannot be rational on HDB loan repayment, he/she shouldn't be investing.

  2. Hi SMOL,

    Thanks for sharing :)

    I intend to delay payment when my loan amt is smaller too. Doing this when my loan amt is 500k is just too uncomfortable for me. I need to reduce it to less than 1k before I can think of doing what you are doing - which is a sort of interest rate leveraging.

    Alternative viewpt indeed :)

  3. Hi SMOL,

    Interesting analysis of the HDB loan.

    Personally, I think one need to have the 100k in the first place to grow and net off the interest loan.

    Many of the young people will not be able to do so. Once they take up a flat, they will not have any cpf money left to grow.

    For example, someone need to pay 800 per month but the person only has 900 cpf money come in every month, thus the person will only have 100 net every month.

    It will take very long for 100 per month to accumulate to a decent amount to grow (currently only amt above 20k can be invested). By some simple calculation, will only reach 12000 after 10 years. Hence many will choose to pay off once they got few k in bank. This help to reduce interest paid.

    Most importantly, one should not overloan beyond your own limit and keep monthly payment as low as possible in case of retrenchment.

    my 2 cents worth:)

  4. Hello cif5000,

    Nice to see a familiar face here from valuebuddies!

    Yup, point 2 is more for people with ready personal investment track record.

    Ah! Youth is so nice. I am now "restricted" by my age and the 65 years age limit by banks. That means for my 2nd property purchase I have to use up more cash in monthly payments :(

    I started out "late". But I forever "young at heart". LOL

  5. Hi LP,

    I like your post on your financial goals. Yes, SGD 500,000 "anchor" would be too heavy for me too.

    But with your superior income generating prowers, you are showing an alternative to merely passively let things be (and complaining bank interests too much when interest rate is now at historical low. How can it be?).

    Growing our active earned income (working longer or taking a 2nd job) is another alternative to paying down our loans and reducing the bank interest payments.

    I love the sharing on diversity of views and journeys! We share and listen with respect. But we walk our own paths.

  6. Hello OT83,

    You are 100% right and perceptive! It's not blindly monkey see; monkey do.

    I agree on your last point. We have our own "sleep soundly" limit when it comes to loans(leverage) or investment/trading.

    All the best to your new challenge!

  7. This is indeed an alternative view, I'm enlightened by it.
    Thank you very much.

    Another factor that I believe is crucial is GUTS and FAITH.
    Even after exposing to a well-calculated plan like your's, many will still opt for the more traditional route of repaying debt asap to eliminate the "burden" without realizing they're increasing the burden on other parts of their life.

    Leverage is overgeneralized and presented as the devil by many smart people.
    Thus, it is often shunned without a second look.

    I feel for leverage, so under appreciated.
    It should get a second look, just like *ahem cleavage*. LOL.

  8. Hello yyt,

    Maybe I can work leverage and cleavage into my next poem?

    Thanks for the inspiration!


  9. Hi SMOL,
    I'm curious how you pay off your bank loans using capital gains from CPF, can withdraw just like that?
    Also will you still be subject to the returning of the 'lost interest' back to CPF when you sell your HDB?

    1. Hello RD,

      I am paying off my bank loan through CPF. $500 CPF deductions per month. Or $6,000 per year only.

      I make sure I have at least $30,000 in my CPF ordinary account ($20,000 to take advantage of the extra 1% and $10,000 as my fund for monthly loan deductions)

      The rest I invest in shares and mutual funds. I just have to make sure I take some money off the table every year for my CPF investment to replenish the $10,000 that's been depleted :)

      As you can see, $30,000 is around 5 years of bank repayments "backup" in case I don't make money for 5 years!?

      No such thing as only winners and no losers OK?

      And yes, the CPF rules still apply. When I sell my HDB, I still have to return the lost interest back to CPF.

      CPF don't care if your CPF money is from work, equities dividends, or investment capital gains ;)

      Caveat emptor:

      I have peace of mind because I am relying on my track record - I say this with humility. Please read "My Story" how I blew up the first time round.

      It's a lot more secure than relying on hope or wishes.


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