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Q: HDB Outstanding Loan vs CPF
By Derek  •  July 21, 2009
This is the first time that I received a query on personal finance issues from a reader. I'm pretty 'shocked' actually because I am not a qualified financial adviser but the average Joe facing the same day to day financial problems like man on the street. The reader has given me permission to post it my site and what's better than to open this question to people here whom I believe have more knowledge and real life experience than me. I will of course shed my 2 cents worth when  I get back home later.
Hi, Just want to check your opinion on my outstanding HDB loan. I have a 30 year HDB loan, now in the 10th year, and thus have serviced most of the interest. Was doing some calculations to determine if it is better to pay the principal to reduce interest on the HDB load, or to leave the money with CPF and earn interest. Status Outstanding HDB Loan: S$ 205,000.00 Interest: 2.6% per annum monthly rest Monthly: S$ 1,138.00 till end 2028. CPF Ordinary Balance: S$ 54,000.00 Interest: 2.5% per annum monthly rest Scenario 1 If I don’t touch the CPF: - Total interest paid for HDB Loan from now till 2028: approx. S$ 55,000.00 - Total interest gained from CPF based on principal of S$ 54,000.00 till 2028: approx. S$ 32,800.00 - That means net interest paid is approx. S$ 22,200.00
Scenario 2 If I use the CPF to pay the outstanding HDB loan: - Total interest paid for HDB Remaining Loan (S$ 150,000.00): approx. S$ 27,100.00 - This factors in shortening the loan period to 2022 using the same monthly payment value Net result: It is better to keep the money in CPF, as the net is a gain of approx. S$ 4,900.00 over the next 20 years vs paying the principal loan now. Would appreciate if you can provide some advice or correct my calculations. I’m using Excel CUMIPMT and FV formulas for calculations. You can publish this on your blog. Thanks, Yong Hwee
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By Derek
Derek is an investor who follows Peter Lynch style of investing. He prefers to use simple and straight forward information for stock analysis. He started TheFinance.sg with the intention to bring together all bloggers and professionals who are interested or already in the area of Finance and Investing, and to create a community where everyone is free to write and to share their articles, experience and opinions.
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5 Comments

5 responses to “Q: HDB Outstanding Loan vs CPF”

  1. la papillion says:

    I think it depends on whether you have any use of the CPF. If you intend to use the cpf for investment that can generate more than 2.5%, then it might be a better deal to not pay off principal using CPF. Or perhaps you need the CPF for education of child too?

    Based on your calculations, the difference of 5k is not much. However, the peace of mind of having settled the debt might be worth more than the 5k gained.

  2. anon says:

    Invest in some safe diversified ETF or Unit Trust that is still low is price (say less than 60% of peak value) and keep it for a period of up to 10 years, and you should be able to do better than CPF interest rate.

    However, you need to sell off before the next big recession to monetise the gains.

  3. upside says:

    There is the additional 1% on the first $20,000 in the OA, so you earn on this risk free spread by keeping the loan. The tricky bit is that the additional interest goes into the SA.

  4. Derek Lim says:

    Hi Yong Hwee,

    I’m not going to comment on your calculation because I believe what’s in your mind is the opportunity cost in investing the CPF against using it to pay your HDB loan. I guess your answer will be more straight forward if the difference is much more than $5K.

    I always believe that the HDB loan is probably the best loan one can get. Over a 20yr period, it’s not that hard to get decent returns of more than 2.5%.

    Hence, if I were in the same situation as you, I will most likely invest the money in my OA but not all. It’s important to leave a portion of it in the event of an emergency like retrenchment where I will have a hard time repaying my loan.

    Cheers!

  5. Yong Hwee says:

    Thanks Derek. i just want to get opinion from another person on my calculations, which i believe is quite accurate. you may not be QFA, but i think you definitely qualify to give a qualified opinion :)

    @la papillion i am aware of investing the CPF money elsewhere to get better returns. my objective of doing this exercise was to see the difference in paying the principal or keep in CPF. It came as a surprise to me that although HDB loan interest rate is pegged at 0.1% higher than CPF rate, there is no gain in paying the principal. Thus i wanted to get a second pair of eyes to see where the numbers may be wrong.

    secondly, actually i feel that having the money in CPF gives me better peace of mind. like a bird in hand is worth 2 in the bush kind of thing…

    @upside aiya i thought about this when in toilet but forgot to include that part in before sending to Derek :)

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