I'm starting to have the idea that one should as best as possible pay off the loan as soon as possible with CASH.
Using CPF to pay for the HDB MIGHT not be a great idea.
*Special thanks to Robin for highlighting this*
Think about it.
Every year we pay $10,000 using cash for our mortgage. We lose $200 to interest. Assuming 2% interest rate.
And if we use CASH. The story ends here.
But assume we use CPF to pay, like most of us do.
We use $10k CPF to pay our mortgage.
We lose $200 to interest.
BUT, we have to pay $10,250 BACK to CPF when we sell!!! Cos we have to pay ourselves the CPF interest.
Some may say, "Oh but your property will increase in value when you sell it."
And my response to this will be... Then where will you stay?
You'll again need to buy an expensive place to stay right?!
Don't believe me?
Let's do a simple simulation of 1 year.
Cash : $10,000
CPF : $10,000
House Equity : $0
Total asset : $20,000
You use your CPF to pay your 2% loan, 1 year later this is the asset profile.
Cash : $10,000
CPF : -$250
House Equity : $9,800
Total asset : $19,550
You use your CASH to pay your 2% loan, 1 year later this is the asset profile.
Cash : $0
CPF : $10,250
House Equity : $9,800
Total asset : $20,050
That's a $500 difference in the above example.
Sure you can say you use CPF to pay and invest the $10k cash. Although I wonder how many people do that on a regular basis.
For me, I don't think about the home equity. Cos I'm still going to need a place to stay and even if I sell, I'll need to buy another place at current market prices.
The whole idea is... Even though you are paying 2.5% interest to yourself, it still needs to come from somewhere. Usually, for most people, it comes from their salaries. Not from other alternative investments.
By leaving the money in CPF, the government pays the 2.5%.
That's not to say my wife and I didn't use CPF to pay for our place. We did. But recently we've been trying to pay off the loan sooner using cash.
Although I still have a lot of concerns about the government changing CPF policies as the years go along.
IF someone has fully paid their HDB using a lot of cash, then they won't be "owing" CPF large sums of money usually this has been compounded for decades!!!
The loan to the bank is over but the loan to yourself is not!!!
And there may be trouble on the horizon for people who used their CPF to upgrade their homes when they were younger.
Imagine. A typical Singaporean changes homes 1-2 times in their lifetime. So by 50 years old, they may have fully paid for their HDB using their CPF, but their CPF is empty AND they owe themselves a whole load of interest.
Remember, most Singaporeans borrow at 2.6% using HDB loan.
Which also means they lose 2.6% of their CPF paying interest to the loan.
And they need to repay themselves 2.5%.
And so the question becomes...
Has HDB been appreciating at 5.1% year on year for the past 30 years.
In the early years of Singapore, I would probably say the returns probably far exceed 5.1%, but in recent years, I do wonder, after transaction costs and renovation, the returns of HDB year on year might not be very high.
Cos the true opportunity cost of buying a property using CPF is pretty much around 5.1%. maybe less if you using a floating rate loan, then it would be a bit lower.
The 2.5% you need to return yourself is real. And it needs to come from somewhere. Most people don't think about this. MOST not all.
More often than not, people ignore this and they don't use their free cash as investments, cos if you don't use the free cash to make up the 2.5%, means to return the 2.5% you will need to use your salary to "top" this up when retirement comes along.
Selling your home doesn't really work cos as mentioned in the previous few articles, you still need to buy another place to stay.
2.5% compounded over 30 years is A LOT of money.
There's a few ways to solve this
1. Use cash to pay for the HDB
2. Use CPF funds, and invest the cash on hand with more than 2.5% return.
3. Don't ever sell the HDB and rent it out to monetize the money.
4. Use your salary to "pay yourself" the 2.5%
Simply put. If you use your CPF funds, you need to pay yourself the interest, and that 2.5% needs to come from somewhere.
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