POSB HDB loan: Peace of mind (for 10 years).

A friend asked me if he should refinance his HDB housing loan with POSB. He currently has the HDB Concessionary Loan which attracts an interest payment of 2.6% per annum.

Pegged at 0.1% above the CPF-OA interest rate, the HDB Concessionary Loan's interest rate is unlikely to increase, ever.

Having a floating interest rate of 3 months SIBOR + 1.38%, the new POSB HDB loan gives the assurance that interest rate will not go higher than the CPF-OA interest rate for the first 10 years of the loan. CPF-OA interest rate is currently 2.5%.

What happens after the first 10 years? Well, interest rate will be revised to 3 months SIBOR + 1.48% and there will not be any upper limit to the interest rate anymore.

Intuitively, I feel that this is a good deal for anyone who wants to enjoy a lower interest rate on his HDB housing loan which, given the current very low interest rate environment, represents rather substantial savings.

Without the guarantee of an interest rate cap at the prevailing CPF-OA's rate for the first 10 years, however, it would not have been as attractive. So, you can imagine what I am going to say next.

The attractiveness of the offer ends in the 10th year as the interest rate could be higher than the HDB Concessionary Loan's rate by then. Of course, if the low interest rate we see today should still be around 10 years later, no matter how unlikely the case might be, then, this would still be a good deal.

From the 11th year, however, borrowers would be at the mercy of the 3 months SIBOR. They could try to re-finance their loans with other banks but they can never go back to the HDB Concessionary Loan.

Older readers might remember stories of how many HDB home owners switched to bank loans when the market was first liberalised many years ago. Initially, the interest rates on those housing loans offered by the banks were lower but they gradually increased. Those owners were badly affected.

Interest rates will not stay so low forever and anyone who signs up for this new POSB HDB loan should do so only with a contingency plan to pay off the entire loan at the end of the 10th year. It is a contingency plan and this means that the borrower should have the ability to do so but he doesn't have to if circumstances remain benign.

Take the loan, by all means, but put aside some money religiously every month to do partial capital repayments or enough for a full payment of the outstanding loan at the end of the 10th year.

This is what I would do.

Update (25 July 2014): It is 8 years now.
"Save up to S$20,000 in the first 8 years when you switch to the POSB HDB Loan! Plus, get a S$1,800 cash rebate, on top of capped interest rates and more. T&Cs apply."

Update (29 May 2016): It is 5 years now.
POSB HDB Loan is the first HDB Loan to offer interest rates capped at the prevailing CPF Ordinary Account rate* for the first 5 years. Not only will you be protected from interest rate surprises, you could enjoy guaranteed savings too! Guaranteed 0.1% p.a. lower than HDB Concessionary Loan rate for the first 5 years. Enjoy savings from lower interest rates compared to HDB Concessionary Loan rate. No prepayment fee.


PLEASE SEE LATEST UPDATE ON HOME LOANS:
http://singaporeanstocksinvestor.blogspot.sg/2016/08/fixed-rates-sibor-fhr18-or-hdb-housing.html

CPF or SGS?

When I revealed that I did a voluntary contribution to my CPF account earlier today, someone told me he is scared of the CPF and would only contribute what is required by law.

I said that the CPF gives us relatively attractive, risk free returns. He then asked why not consider the 30 years SGS (Singapore Government Securities) with a 2.6% return and have some upside to boot.

Well, the SGS are quite different from the CPF, aren't they?

When we do a voluntary contribution to our CPF account, the contribution is apportioned to the OA, SA and MA. The OA pays 2.5% while the SA and MA pay 4.0%.

CPF money is actually long term savings, a very long term fixed deposit of sorts. The principal sum does not change. We can't actually lose money, so to speak.

When we buy long term SGS, we are buying bonds. We might get 2.6% per annum with the possibility of some upside but the possibility of downside exists as well.

Actually, a quick check over at MAS' website will show that the 30 years SGS which is supposed to pay a 2.75% coupon has fallen in price. See: Daily SGS prices.

As I believe that the very low interest rates we currently see cannot persist for many more years, buying long term bonds is a risky proposition. Why?

For bond prices to rise, interest rates have to continue falling. How likely is this? It is more likely for bond prices to fall in the coming years as interest rates once again start to rise. It is not a matter of "if it happens" but "when it happens".

I have money stored in four war chests. My CPF-OA and CPF-SA are two.

Money in these accounts earn relatively attractive, risk free returns while waiting for possibly more compelling propositions to be offered by Mr. Market.

Money in bonds is like money in equities in that they are not money in a war chest waiting to be deployed. Or am I mistaken?

Related posts:
1. Be cautious even as we accept higher risks.
2. Build a bigger retirement fund with CPF-SA.
3. If we want peace, be prepared for war.