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4 ideas related to the repayment of housing loans.

Wednesday, February 3, 2016

A conversation on housing loan and the CPF:

Hi AK,

First of all, Happy New Year to you and your family. I’m a 36 yr old engineer who has been following your ASSI Blog for few years already and like the rest, have benefited from your valuable advise through your posts.

I would like to seek your advise or opinion on an issue that have been bugging me lately. Both me and my wife are working (married with a child, X yrs old) and our combined income is $14k per month. We do not own car and our only major loan is our home loan.

We live in a condo that has an outstanding loan amount of $600k with remaining loan tenure of 28 years. In 3 months time, the mortgage loan lock-in period is coming to an end and the current interest rate is 2.5% (Interest rate may be revised upwards after the lock-in period).

Both me and my wife have a combined amount of $120k (approx. $60k each) in our CPF ordinary account that can be used for loan partial capital prepayment. My concern here is whether to use our money in our CPF OA for loan partial prepayment and refinance the mortgage loan or just transfer the entire money in our CPF OA to CPF SA so as to hit the minimum sum early. I’m really confused on which is the best option to choose from. 

1st option:
Use our CPF OA money to reduce loan principal amount and refinance with a better loan package

2nd option:
Transfer all our CPF OA money to our CPF SA and just refinance with current outstanding loan amount of $600k and pay off the instalment with our monthly CPF contribution

Both of us are working for a very stable company and holding on to a very stable job so there’s no issue of disruption to our employment. Our lifestyle is simple and we don’t chase after luxury but looking forward to a loan-free life and a comfortable retirement. 

I would greatly appreciate if you could lead me to choose the best option for me. Thank you.

Best regards,

Hi C,

Idea 1:
Money in the CPF OA acts as a buffer for many people when it comes to home loan servicing (as not all have enough in emergency fund in their bank accounts). So, when people want to use the OA money to pay down their home loan, it makes sense to leave some money in the OA enough to continue servicing the loan for another 12 to 24 months in case they should be retrenched.

Idea 2:
As for whether you should transfer OA to SA or use the money to pay down the home loan, it depends on the opportunity cost. If your home loan attracts an interest rate of 2% and your SA gives you an interest of 4% to 5%, where should your money go? I believe that money should go to where it is treated best.

Idea 3:
If you are pretty sure that you have job security, you will be doing yourself a favour by giving your SA money more time to compound with a larger base now. Future monthly contributions to your CPF could be used for partial capital repayments on your home loan as interest rates go higher then.

Idea 4:
Finally, of course, if you are able to refinance your home loan to get a better deal with an eye on the future, you should consider seriously.

Best wishes,

Related posts:
1. Aim to pay off home loan and hit MS.
2. Buy the biggest and most expensive home.
3. Buying an apartment: Considerations.


RayNg said...

I am old school guy...

I think it is better to payoff the loan by age 55 instead of 65.

Do consider this option as C is able to payoff in 18 year using their CPF OA (combine) plus ~$358 per month basing on 3% mortgage interest rate.

The math:

Current loan $600K
Use OA $120K to reduce outstanding loan

New loan $480K @ 3% for 18yr = $2,878 monthly payment
Combine CPF OA contribution : $2,520 ($1,260 * 2)
Cash top up : $358

*** by age 55, C will be debt free.

relac1234 said...

Use at least some of the money in CPF during this bear market.
As good a time as any and best chance to earn more than CPF interest now.

Cory said...

14K monthly is above average household income. I think the option to choose is quite dependent on how much cash is in the bank doing nothing in the foreseeable future.

Unknown said...

sell condo and buy a resale HDB.
dumb all spare cash into CPF.
be debt free now and enjoy the feeling of flying free like a bird.

Li Di said...

Thanks for the sharing.

there're many modification approach that can be make from your sharing to benefit yourself


Anonymous said...

Hi AK,

Firstly, Happy New Year to you as well as all fellow readers!!!

Let me throw in my own 2 cents worth.

I was inspired by AK's decision to top up his SA and do one way transfers from OA to SA. Unfortunately, I did not do it then as I was planning to use OA to buy my first home.

Fast forward many years, when it became clear that I will not be buying any time soon due to the rich valuations, I finally decided to move OA to SA. (Essentially wipe out OA) Now, with the benefit of hindsight, I wish I had done it earlier.

For C's case, it is really up to their comfort level. The main question they should ask themselves is: Can they sleep soundly at night with the choice they made? That should point them to a better decison, rather than the official textbook solution.

Gong xi fa cai!


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