Using cash to pay for housing installments

[kelvinyong]

Hi all,

Would like to seek your opinion on the following.

I currently own a private property and paying 2300 in installments (1500 from cpf and 800 cash). Since cpf OA is patting 2.5% while banks charge around 1+%, will it be more beneficial to pay via cash and accumulate savings in cpf OA to earn interest till a significant amount and make a lump sum cpf repayment subsequently?

Appreciate any inputs and thanks in advance.

Kelvin

 

[totoseow]

Re: Using cash to pay for housing installments

ur bank charges u 1% with possible coupon resets...after yr 1/2 etc u taking a view on rates for long term?

 

[kenntona]

Re: Using cash to pay for housing installments

Toto, please don't give advices as you have already paid up in full for both your Cove units. You wouldn't know the current market.

 

[Larry]

Re: Using cash to pay for housing installments

Kelvin,

I don't work in a bank...

If you choose to pay up cash upfront, you reduce your liquidity, or rather, your disposable income (unless that is not a problem for you...) As you accumulate interest in the Ordinary Account, and paying it upfront versus paying in as you are currently doing, when you sell your property, all interest accurred (and in lieu) will have to be paid back into that account.

You are better off to remain on your current payment plan, and use that disposable income to generate something that gives you a decent return (dividend or otherwise) which you can offset with your loan.

Bearing in mind that whilst interest rates are extremely low at this point in time, are you able to cope with increased installments when they go up?

 

[Oilman]

Re: Using cash to pay for housing installments

Toto, please don't give advices as you have already paid up in full for both your Cove units. You wouldn't know the current market.

It's Kovan, not (Sentosa) Cove... common mistake.

 

[kelvinyong]

Re: Using cash to pay for housing installments

Thanks all for the replies, greatly appreciated!

My idea is to pay in cash while I can and keep the cpf in the OA account to accumulate 2.5% interest. When bank I/r increased or cash flow has problems then revert to using cpf for installments?

To me, 2.5% seems like a decent return for risk-free,isn't it? I'm not in the finance sector ><

My current loan is stretched to 68 years old, but I'm hoping to retire at ard 50, hence thinking of ways to repay the loan earlier...

Once again, thanks all!

 

[detach8]

Re: Using cash to pay for housing installments

For those unaware, the common advise to use your liquid cash to generate similar or better interest rates ONLY APPLY if you invest the SAME AMOUNT as your outstanding loan, otherwise your interest yield will not cover. It's basic math:

Owe $1m @ 1.5% interest = Invest $1m @ 1.5% interest
Owe $1m @ 1.5% interest = Invest $0.5m @ 3% interest
Owe $1m @ 1.5% interest = Invest $0.1m @ 15% interest

So unless you have the cash to play, investing does not work. On the contrary I would say it is easier to save that amount, i.e. cut back your spending than to try to invest more money to cover the interests. Usually I see people earn more will end up spending more. Natural cycle.


BY THE WAY - If you pay housing using CPF, you incur an interest with CPF board. When you sell your property, you need to pay back the amount you took out from CPF *plus interest*. The interest rate if I am not wrong is same as the prevailing OA interest rate. If you want to know how much you owe CPF board, just login using your SingPass. There is a screen that shows you how much you took out, and how much interest you incurred.


As for the answer to your question, CPF money you cannot touch until almost going to die, so IMHO rather just use max CPF, min cash to pay your property and let your current installments plan roll. Until such a day you find that you have sufficient cash to completely pay off the property and still have enough liquidity in cash, then you go ahead and do so.

Otherwise, keep the cash in your bank. Some debts aren't bad, especially if it is going into an asset. Cashflow more important.


P.S. I am not a banker. I am an engineer. A banker won't tell you all these. They will tell you to invest, invest, invest. Invest until you lao sai and pok gai, still tell you to invest.

 

[ccc]

Re: Using cash to pay for housing installments

Cash on hand is always better. Cpf dunno can take out or not next time as min sum keep rising. Build up more cash on hand and grab opportunities when crisis strike or as a safety buffer.

 

[wobbles]

Re: Using cash to pay for housing installments

Thanks all for the replies, greatly appreciated!

My idea is to pay in cash while I can and keep the cpf in the OA account to accumulate 2.5% interest. When bank I/r increased or cash flow has problems then revert to using cpf for installments?

To me, 2.5% seems like a decent return for risk-free,isn't it? I'm not in the finance sector ><

My current loan is stretched to 68 years old, but I'm hoping to retire at ard 50, hence thinking of ways to repay the loan earlier...

Once again, thanks all!

Hi Kelvinyong,

I have the same aspirations as you do - i.e. pay off debt ASAP, and I feel that 2.5% in CPF is far better than some of the harebrained schemes that have made the news for the wrong reasons of late (i.e. Genneva Gold amongst many others).

So, I took out a mortgage deal that allows me to pay off the capital as often as I liked, and with no cap on the limit. With that, I've mostly left my CPF untouched (not like it has much left in it, because the first HDB was sold off at a loss of > $80K - don't ask, bad timing, still kneeling on durian shells for it until this very day), and whatever extra money at the end of every quarter gets dumped into the house repayments.

Doing it this way has saved us at least $10K per year in additional interest that would have been charged (calculated using any of the free Amortize apps available for Android or iPhone) yearly.

I keep the CPF untouched in case - touch wood - something happens to my business, and I can't work. Then, at least, I can use the CPF to pay the monthly installments so the family wouldn't have to sleep on the streets (at least until I get back on my feet again).

Just my 2 very conservative cents' worth.

 

[detach8]

Re: Using cash to pay for housing installments

wobbles brought up a good point. Keep some money in CPF for rainy days.

I did not max out my CPF either. Not that I want to, but because my flat installment is lower than the amount credited to my OA every month, so even with full payments I still got balance in my CPF for rainy days.

 

[Darth Vader]

Re: Using cash to pay for housing installments

for God's sake,keep the cash for the up coming S$200,000 COE, or forget it if you intend to take MRT.

 

[Darth Vader]

Re: Using cash to pay for housing installments

lol, even if tsunami come, you cant take it out until 55. lol rainy day.

wobbles brought up a good point. Keep some money in CPF for rainy days.

I did not max out my CPF either. Not that I want to, but because my flat installment is lower than the amount credited to my OA every month, so even with full payments I still got balance in my CPF for rainy days.

 

[wobbles]

Re: Using cash to pay for housing installments

lol, even if tsunami come, you cant take it out until 55. lol rainy day.

Yes, but you won't default on your home mortgage payment for the time that you're unable to cough up the cash mah...

 

[ccc]

Re: Using cash to pay for housing installments

Yes, but you won't default on your home mortgage payment for the time that you're unable to cough up the cash mah...

So better to keep more cash than paying cash to mortgage loan instead of cpf? Cash can be used for anything like medical etc etc.

 

[davidtch]

Re: Using cash to pay for housing installments

wobbles brought up a good point. Keep some money in CPF for rainy days.

I did not max out my CPF either. Not that I want to, but because my flat installment is lower than the amount credited to my OA every month, so even with full payments I still got balance in my CPF for rainy days.

Since i borrow from Ah Kong, i did not bother to keep for rainy in my CPF account. Instead, whatever excess is used to reduce principal sum. I m debt free either this or next yr.

 

[detach8]

Re: Using cash to pay for housing installments

Like I said, you pay off earlier you still owe CPF principal + interest. If I am not wrong, OA interest is 0.1% higher than prevailing HDB interest rates and certainly higher than bank discounted rates. In that sense, owe bank or HDB money is more "worth it".

What I am referring to as 'rainy day' is that in an event I am jobless I can kiao ka and let my CPF balance service my loan. Had I emptied my cash or reduced my loan tenure to reduce interest rates I may end up with a cashflow problem.

I say again, cashflow is more important than asset. Don't get too obsessed on being debt free.

By the way the correct way to reduce interests (IMHO) is to shorten tenure, not to dump lump sum cash.

 

[davidtch]

Re: Using cash to pay for housing installments

Like I said, you pay off earlier you still owe CPF principal + interest. If I am not wrong, OA interest is 0.1% higher than prevailing HDB interest rates and certainly higher than bank discounted rates. In that sense, owe bank or HDB money is more "worth it".

What I am referring to as 'rainy day' is that in an event I am jobless I can kiao ka and let my CPF balance service my loan. Had I emptied my cash or reduced my loan tenure to reduce interest rates I may end up with a cashflow problem.

I say again, cashflow is more important than asset. Don't get too obsessed on being debt free.

By the way the correct way to reduce interests (IMHO) is to shorten tenure, not to dump lump sum cash.

Actually, the so call CPF principal + interest is pay to yourself rather than paying to HDB or bank. I just checked. I owed myself $16k interest. In that sense, since i have pessimistic view of ever increasing min sum, i would rather owed myself the interest.

 

[Pinky]

Re: Using cash to pay for housing installments

By partially repaying lump sums, you effectively reduce your loan quantum. You can then chose to reduce installments or reduce loan tenor. The latter of course being more effective.

 

[ktnpl]

Re: Using cash to pay for housing installments

If you make a lump sum payment, most banks will by default reamortise your loan (reduce instalments) to maintain the same loan tenure. I had one bank manager who was kind enough to ask me for my preference but I suppose most do not bother as it is in the bank's interest to reamortise the loan. But you can issue the bank an instruction not to reamortise the loan so that you maintain the same monthly instalment. This will effectively reduce the loan tenure. Personally, the best approach is to pay off the debt as soon as practicable. You will be surprised how much you can save in interest payment through early repayment. I did a spreadsheet to do realtime calculations on the savings and it was a fun and rewarding way to manage and pay off the loan.

 

[wobbles]

Re: Using cash to pay for housing installments

Agree with the bros above with regards the lump sum payment and loan tenure. I leave instructions NOT to reduce the loan quantum, so more of the money will go towards the capital repayment. My one aim is to be debt free ASAP. Sick of O$P$ from the banks every month, KNS