4 ideas related to the repayment of housing loans.

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,
C.

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,
AK


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.

Unless we are rich, be pragmatic and not romantic.

A conversation with a reader:

Dear AK,

Finally, my husband and I have set aside $10K as emergency fund and will be contributing to this fund on a monthly basis. T

o us, this is a "giant" step as we never have any such funds before we got married.

We enjoyed reading on the couple who could save $100K in 18 months and valued their beliefs. 

The post got us thinking, if we continue saving $2000 for 5 years, we would have at least $120K in cash.

I grew up in XXXXX and my matrimonial home is also in XXXXX. We like the convenience to town and the amenities the area provides. 

However, respectively to frugality, even if we buy a new HDB 4-room flat in XXXXX, it will cost at least $500K. We felt guilty even at the thought of it.

Sell our flat in XXXXX and move to Punggol/Sengkang, maybe? That is when we will see a profit from the sale of our flat. 

However, our hearts could not bear to leave XXXXX.

Have you had such dilemma before?

AK's reply:

Hi A,

I stayed in XXXXX for many years of my life. In my mid 30s, I bought a condo in XXXXX, stayed there for almost 5 years. 

Price shot up. I loved the place but I sold it. I am a pragmatist.

Singapore is a small place. Nowhere is really too far especially with so many new MRT lines now and in the future.

Having more money earlier is a winning combination for the financially savvy. Money needs time to grow. 

The earlier we have more money, the better.

Best wishes,
AK


I know this is an emotive topic and there will be people who will disagree with me. Feel free to disagree.

I believe that only the rich can afford to have romantic ideas about their possessions. The rest of us are better off being pragmatic and ensuring that possessions (or the lack of) afford us a better future.

Related post:
New money habits led to $100K in 18 months.

"Aiyoh, people so sour grape to say you how lian!"

An email from a very regular reader:

Saw your post on CPF balance. 

Aiyoh, people so sour grape to say you how lian. 







But nevermind, I support you to be how lian, k?


SMOL's comments soooo hilarious. Really made my day! ROFL. 


Honestly, OA savings aside, I think growing the SA is quite achievable.








In Jan 2008, I only had $17,084 in my SA, accumulated through the course of my active employment. 

Was contemplating to do the transfer earlier but decided to keep the money in OA for investments. 








I first transferred some funds from OA to SA in 2009 and by end 2009, I had $52,893 in SA after earning $1670 interest for the year.  

In 2010 I didn’t do anything cos I resigned from XXX and took 6 months sabbatical to finish my Masters.


No income, so nothing much to transfer. :P







Then I resumed the transfer in 2011 to 2013 till I met the prevailing CPF ceiling. 

My CPF-SA now stands at $182,213.73 after earning $7,474 of interest last year.







This year there will be more contributions accumulated since the ceiling has been raised to $6K. Happy!

So, don't say it cannot be done.

Never try, why say cannot?

Don't sour grapes.

Grapes can be sweet.





I know because I am eating sweet ones now.


Related posts:
1. AK is showing off his CPF numbers.
2. 2016 changes to the CPF and SRS.

Know our goals, have the right conditions and patience.

Regular readers know that gardening is one area I am spending more time in and I am enjoying my little planter in the sky.

Gardening suits my temperament. 

Plant the seeds, give them good conditions for growth and wait. If everything has been done right, the plants will grow. Sounds familiar?

Here are photos of my Basil plant which seem to be in the initial stage of flowering!

See?

For those with failing eyesight like mine.

When I shared this development with my sister who also grows Basil at home, she was amazed. However, she shouldn't want her Basil plants to flower because it means that they are moving from growth to reproduction which means less yummy leaves for her cooking.

Depending on what a person is after, it is either a good thing that a Basil plant is flowering or not. When we draw parallels, a parallel might be where we ask what do we want out of our investments? Are we investing for growth or for income, for example?

We can all enjoy positive results as long as we do it right and have the patience to wait. However, whether the results are desirable would depend partly on what are our goals.

Gardening and investing aren't so different, are they?
-------------
Updated: 24 July 2016

Sunflower.
Grew this from a seed.
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Updated: 14 November 2016

"Gardening? I don't have the patience!"

I took a cutting from my Rosemary plant in May:

I transplanted it in September in a bigger pot (on the right):

And again today:

Having a bit of patience can be quite rewarding.

Moral of the story? Maybe, there is more than one.

(Oops. You saw more Rosemary cuttings growing in the background? Repeating a successful process? Believe it!)


Related post:
Investing or gardening, be ready to go to war!