Take your time to pay down your HDB housing loan.

In the guest blog by Klein recently, he offered his reasons why we should not repay our HDB housing loans too quickly. One of the reasons is that we would be losing more in interest income from the CPF-OA than we would be saving by avoiding the 2.6% HDB home loan interest rate.

Now, this is unconventional thinking, at least to me, which seems to make sense. This was another reason for me to share it here in ASSI with everyone. Of course, it does not mean that I think it is the way to do things but it does offer an alternative which is worth considering.

In my reply to a reader on this matter, I have offered some numbers which could make things a bit clearer, I hope.

Let us assume that a person had an outstanding HDB home loan of $100,000 which was meant to be repaid over a 10 year period and let us assume that he chose to pay down this $100,000 in loan using money in his CPF-OA in one lump sum. How much would he be saving in interest payment?

Using an amortising calculator, $13,670. This would have been the total interest payment of the loan over the 10 year repayment period.

Now, if this person had not repaid the $100,000 loan in a lump sum but instead chose to leave the money in his CPF-OA to earn 2.5% in interest income per year, how much would he be able to accumulate over a 10 year period? Compounding 2.5% a year, $28,008.

Of course, I am assuming that this person stays in active employment over the 10 year period and that his monthly CPF-OA contribution is able to cover the monthly repayment of $947.25 to HDB.

Naturally, this person would not be receiving any interest income for this $947.25 that is paid monthly to HDB but he would still benefit from interest earned by that $100,000 in his CPF-OA that is left untouched. Isn't this a better arrangement than not having that $100,000 in his CPF-OA and having to start accumulating funds again in his CPF-OA at the rate of $947.25 a month?

This perspective offered by Klein, if I have understood it correctly, is an interesting one for me as I have never bought a HDB flat before and have never been faced with a choice like this.

When I bought a private property some years ago, I had to pay an interest rate of 5.1% on my home loan while money in my CPF-OA was earning only 2.5% and money in my savings account was earning 0.125% per annum in interest income. In my situation, it made sense to pay down the housing loan as soon as possible, of course.

So, does it make sense for you to take your time to pay down your HDB housing loan?

(Please read the comments that follow this blog to gain a better understanding of the issues involved here. In particular, please read comments by PSTan, kael1n and SnOOpy168.)

Related post:
Tea with Klein: HDB Housing Loans.

Sabana REIT: $90 million 4% certificates.

Someone asked me what do I think of the $90 million 4% certificates due in 2018 being issued by Sabana REIT. Well, it is a good thing. Why?

Sabana REIT has $100 million of debt due this year. So, the money raised will come in handy.

OK, there is another thing good about this and that is the cost of debt which is lower than the 4.5% paid on the $80 million convertible Sukuk due in 2017. Faced with the spectre of higher interest rates now and in the future, the fact that Sabana REIT is able to issue debt with lower cost is a good sign.

In fact, if we look at Sabana REIT's all-in average borrowing cost, it has been reducing. This was from 4.4% in Dec 2011 to 4.3% in Dec 2012 to 4.1% in Dec 2013. Seems like the management is doing a good job at least in this department.

Related post:
Sabana REIT: Buy but remember the Sukuk.