Paying house loan using CPF, is there a difference to our CPF-OA if we choose to shorten our loan tenure?
I grew up with the mindset (i.e. what our parents and society thought us) that the earlier we pay off our liabilities, the better it would be. But is the the case for my first HDB home purchase?
In this article, I would like to examine the difference between paying off my mortgage loan earlier vs later.
when using cpf proceeds to fund mortgage loans, we struggle with the following:
- how many years to borrow?
- do I offset the loan with the accumulated monies in my CPF-OA?
let us illustrate with some examples
Pre-Conditions
A couple both 30 years old bought a HDB valued $450,000.
Both capped out CPF contribution ceiling with $6,000 income each. So contribution to CPF-OA is $1,380 per pax. (CPF allocation and contribution changes with age)
Down payment $50,000 in cash and $50,000 CPF-OA wiped out. So $0 left in their CPF-OA.
Scenario A
CPF Loan $350,000 from CPF-OA for 30 years at 2.6% interest.
Monthly mortgage payment $1401.19 a month for 30 years.
At the end of 30 years,
amount owed to your their CPF-OA: $50,000 (down payment)+ $350,000 (loan amount) + $303,053.52 (accrued interest*, see interest amount in link) = $703,053.52
Cash balance in CPF -OA: $728,978.32
accrued interest: interest that would have otherwise be earn in CPF if money wasn’t used for mortgage.
Scenario B (same as A except length of loan)
The same couple now takes CPF Loan $350,000 from CPF-OA for 13 years at 2.6% interest.
Monthly mortgage payment $2646.48 a month for 13 years.
At the end of 30 years,
amount owed to their own CPF-OA: $50,000 + $350,000 + $94,586.20 (accrued interest* for first 13 years) + $261,593.47 (accrued interest for next 17 years) = $756,179.67
Cash balance in CPF-OA: $734,186.70 (1st 13 years compound $113.52, next 13 years $2,760)
Conclusion
Both examples at extreme, one stretches loan to maximum tenure, the other attempts to repay it earliest possible.
It seems that both scenarios does not really make a huge % difference to CPF-OA balance after 30 years. This will be less noticeable for lower home loan amounts. Accured interest in Scenario B is worse that A (mind boggling to me, since paying off loan earlier was always thought to be a “good” thing). But this is less of an issue if we have enough to meet the BRS needs at age 55.
There is no right or wrong between choose scenario A and B. However, scenario A provides us more flexibility as well as provide oppourtunities to make some extra CPA-OA monies.
