1. No saving left in your CPF (Central Provident Fund) Ordinary Account
Before you are allowed to take a HDB loan, it is mandatory that all the balance (after setting aside an amount for the miscellaneous fees of the flat purchase) in your CPF Ordinary Account up to the valuation limit (the lower of the purchase price or valuation at the time of purchase) if applicable, be utilised first. After that, HDB will decide on the loan quantum based on the outstanding amount to be paid for the flat. As the savings in the CPF Ordinary Account generate an interest, which has remained at 2.5% p.a. since July 1999, you lose this interest earning when you use the savings to pay for the flat. However, you save on the interest payable for the HDB loan which is 0.1% above the interest rate for the Ordinary Account. In other words, the loan rate is 2.5% + 0.1% = 2.6% p.a.. Had you not utilised the savings in the CPF Ordinary Account, you would have to use the loan. The below illustrates the loss:- CPF Ordinary Account Saving = S$50,000
- Interest earned at 2.5% p.a.= S$1,250
- Interest payable on loan at 2.6% p.a.= S$1,300
- Loss = S$1,300 – S$1,250 = S$50
- Interest Rate Loss
- Annual Loss
2. Possibly relatively higher interest and opportunity cost
During a high interest-rate environment, a financing institution will, in all likelihood, offers a loan with a lower interest rate as compared to a HDB loan. So the opportunity cost (best foregone alternative) for not using a private loan becomes higher. In addition, you also lose the 1% of additional interest on the savings (capped at S$20,000) in your CPF Ordinary account. Whether you decide on a HDB loan or a bank loan, do bear in mind that you are not allowed to refinance to a HDB loan once you have taken a bank loan.About Property Buyer http://www.PropertyBuyer.com.sg/mortgage We are a research-focused Singapore mortgage consultancy which helps you compare Singapore home loans either for new loans or refinancing. We use loan reports from Singapore's best loan analysis system (exclusive to us) at http://www.icompareloan.com/consultant/ to serve our customers. Our services are completely FREE to you as the banks pay us a referral fee upon loan disbursement. SMS: (65) 9782 8606 Email: loans@PropertyBuyer.com.sg
On surface, paying 2.6% when the bank loans at around 1.2 – 1.5% is indeed no brainier.
HDB loans have one very important feature, the Partial capital prepayment. This online service, enables one to put additional monies into the capital borrowed. That is monies that you can derived from end month surplus, bonus or other additional income sources.
With this, the amount borrowed will be lesser and the option of either reducing the duration of the loan or reduce the monthly payment amount. If top up is above $1k, there is also interest rebates for that month. This flexibility is not found in bank loan.
Sure, some will say that CPF monies are not cash but accounts transfer. Let it pay for the housing, while the cash can be used to do something else. Sure if you are able to find a better returns investment (note that market changes are returns are not guaranteed, whereas your loan is a must-settle monthly payment)
Personally, I took this route and making payments on the surplus cash that I have at the end of every month. Within 3.5 years, I had paid off the loan. Which makes me wonder if I should have bought a bigger apartment at a better location instead.