As a rule of thumb, it is always advisable to pay off your high interest mortgage loan as soon as possible. But when you are taking a HDB loan at 2.6% interest per annum and if you have the extra capital, many are divided over whether to pay off the loan early or not.
Let us see how much savings you can make if you are to pay off your loan early. Thanks to fellow sgfunds forummers, and after a fruitful discussion there, I can compute and show the net interest expense that is actually incurred over two different options. Here is the direct link to that discussion.
The first option, a home buyer who has $100k in CPF intends to purchase a $290k flat but decides not to touch his CPF savings (if possible). He takes up a $290k loan from HDB at 2.6% interest per annum for 30 years. The net interest expense turns out to be $18199.64
The second option, a home buyer decides to make use of his $100k from CPF to deposit at the start of his HDB purchase. He takes up a $190k loan from HDB at 2.6% interest per annum for 30 years. The net interest expense turns out to be $13627.36
Option 1: No deposit, CPF savings $100k
Balance loan $290K
Monthly payment = PMT(2.6%/12,360,290000) = $1,160.99
Total payment after 30 years = $1160.99 x 360 = $417956.4
Loan interest expense = $417956.4 - $290000 = $127956.4
CPF after 30 years = FV(2.5%,30,0,100000) = $209756.76
CPF interest earned = $209756.76 - $100000 = $ 109756.76
Net interest expense = $127956.4 - 109756.76 = $18199.64
Option 2: Deposit $100K, CPF savings $0
Balance loan $190K
Monthly payment = PMT(2.6%/12,360,190000) = $760.65
Payment difference from option 1 = $1160.99 - $760.65 = $400.34
Total payment after 30 years = $760.65 x 360 = $273834
Loan interest expense = $273834 - $190000 = $83834
Assuming monthly $400.34 deposited into CPF at 2.5% interest
CPF after 30 years = FV(2.5%/12,360,400.34) = $214329.04
CPF interest earned = $214329.04 - (360 x 400.34) = $70206.64
Net interest expense = $83834 - $70206.64 = $13627.36
Conclusion: Interest savings with $100k deposit = $18199.64 - $13627.36 = $4572.28
As you can see, the final interest savings over the two options is merely $4572.28 after depositing $100k into the HDB purchase. Personally for the second option, I don't see a significant in savings amount and on top of that you lost an investment opportunity from your $100k in CPF savings. Furthermore if you were to be out of job and don't have any CPF contribution, you can end up paying cash to service your loan.
The illustration above is to show on the impact of paying off your HDB loan early. You can also apply the same concept if you choose to settle the loan towards the end or middle of your tenure. Alternatively you can try to input your own numbers with this HDB calculator (which I got from a friend) to see the impact on loan portion.
Friday, December 28, 2007
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4 comments:
the excel file in your link is no longer available. could you please make it available? thanks.
thank you for the alert. you may try to download again :)
This is only true PROVIDED you don't sell your flat and live there for 30 yrs. The interest is higher during the first few years.
it is still the same whether you intend to stretch your loan for 30 years or pay off in the beginning years.
your net interest expense will be the difference between loan and cpf interest rates. ie 0.1% in this example
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