HDB loan

Much ink has been spilt over our housing loan in Singapore, which is not surprising considering that the housing loan is probably the singular largest debt most Singaporeans will get into in their lifetimes. Most Singaporeans would simply max out the amount of CPF money they can draw on to pay for the house, leaving the OA basically near flat zero for thirty years. This includes yours truly.

There are also those that would question using CPF to pay for housing.

I was giving this some thought when I realized that this housing loan is not as cheap as commonly thought.

1. Considering that the HDB loan is currently pegged at 2.6%, the interest on the total loan is at minimum 2.6%.
2. By drawing the money out of CPF OA, this portion of money does not earn the baseline 2.5% (or 3.5% for the first $20k!) interest. Instead, at the point of selling the property, one would have to put back the principal + supposed accrued interest back into CPF. With the assumption that the money in CPF is still mine, and the money is safe, we can take it that the accrued interest paid is effectively paid to ourselves. However, this does not negate the fact that for this portion of money, I will have to pay the interest to myself instead of the government paying it for me.

Compared to person A who uses his current capital to pay off the mortgage, I am effectively paying a minimum of 2.6% + 2.5% = 5.1% additional interest! If I take into account the addition 1% for the first $20k of CPF, this percentage would go even higher!

In order to avoid making a huge loss here, whatever I invest in will need to grow by a minimum of 5.1% in order for me to simply break even!

Since signing the papers on the fateful day last year, I have the impression that the loan was only 2.6% interest rate!

Of course, there are advantages to keeping cash on hand. Appropriate investment will grow in a compounded manner while the interest on the debt will not as long as payment is made regularly.

Oh dear...

On a side note, I started on the book "The Intelligent Investor" by Benjamin Graham. It is proving to be an interesting read.