Chiong Housing Loan or Take It Slow?

I was chatting with a friend and congratulating him on getting his BTO a while back. I got a 4 room HDB for 430k while he got a 5 room HDB for 590k (both of ours are on the mature estate and what a huge difference!). One of our conversations was on how he plans to take up a 10 years HDB housing loan and repaid it ASAP. I was telling him that he should start investing and let the money compound instead but he was more comfortable paying everything off. He said that the interest saved is quite substantial which is definitely true. I told myself I would do some forecast/calculation and here it is.

Let's make a few simple assumptions:
- 500k HDB (4/5 room does not matter)
- 10 years vs 25 years (maximum loan period, housing loan @ 2.6%)
- BTO at Jan 2016 and it will be ready at Jan 2020
- First 5% down payment of 25k settled, 475k remaining
- 4k salary (to simplify the calculation, this fictional person and his wife will consistently draw 4k for the next 10/25 years. lol)
- Save 1k every month, no interest (simplify calculation and to discourage people from keeping so much cash on hand)
- Invest in STI ETF (assume a conservative return of 4% - find out more in this informative Dr Wealth guide)

Based on the CPF Contribution Calculator: OA $920.13, SA $319.97 and MA $239.90

Scenario 1:
- Empty OA during key collection and take a 10 years loan
- Will not manage CPF or make any investment

By the end of 2019, he would have an estimated amount of $46,371.26 in his OA. From my understanding, during the key collection period, the HDB personnel will wipe out both you and your wife OA account leaving you with the final loan amount (not sure if you will have a choice).

After deducting both their OA, their final loan amount would be $382,257.49.

Using the CPF Interest Calculator, the monthly repayment is $3,620.95 and total interest incurred over 10 years is $52,256.08. Assuming they split the repayment equally, the monthly repayment will be $1810.48 each ($920.13 from CPF OA and $890.35 cash).

After repaying everything, a simple projection of another 15 years shows that he would end up with $241,158.00 savings, $201,176.74 in OA and $219,016.19 in SA, a total asset of $661k! The couple would be a millionaire with a fully repaid house.

Scenario 2:
- Empty OA during key collection and take a 25 years loan
- Will not manage CPF or make any investment

The monthly repayment is $1,734.19 and total interest incurred over 25 years is $137,998. Holy! That is a 164% more interest one would have to pay! Assuming they split the repayment equally, the monthly repayment will be $867.10 each which can be paid in full using CPF OA.

At the end of 25 years, he would have $348,000.00 in savings, $24,786.13 in OA and $219,016.19 in SA. That is a total asset of $591k with more cash in hand too (still a millionaire).

Scenario 3 (How my friend plans to do it):
- Empty OA and his savings during key collection and take a 10 years loan
- Will not manage CPF or make any investment

By the end of 2019, he and his wife would have an estimated amount $96,000 in savings and $92,742 in CPF OA each. Upon key collection, everything would be used to pay off the housing loan. Hence, the loan amount would be around $286,258.

The total interest incurred is $39,132 with a monthly repayment of $2,711.59. Assuming they split the repayment equally, the monthly repayment will be $1,355.80 each ($920.13 from CPF OA and $435.67 cash).

At the end, he would have $247,719.60 in savings, $201,176.74 in OA and $219,016.19 in SA, with a total asset of $667k.

Scenario 4 (How I would do it):
- Transfer some money from OA to SA and let it compound. Ensure that there is sufficient amount for the down payment and loan such that cash would not be required to loan repayment
- Empty OA during key collection and take a 25 years loan
- Invest savings in STI ETF

By the end of 2019, he would have $34,297.57 in OA. The final loan amount after the down payment would be $406,404.

Total interest incurred over 25 years is a ridiculous $146,715! In comparison with my friend's plan, the amount of interest paid is 275% more! The monthly repayment is $1,843 which is about $921.5 each (let's just assume this can be fully paid by OA).

At the end of 25 years, he would have $0 in savings, $0 in OA, $254,350.50 in SA and $635,595.44 in investment with a total asset of $889k.

Scenario 5 (Assume my friend invest after chionging his housing loan):

- Empty OA and his savings during key collection and take a 10 years loan
- Invest savings in STI ETF

Keeping everything constant except that he starts to invest in STI ETF with those savings, instead of having $247,719.60 in savings, he would have $386,708.54 of investment and a total asset of $806k. That is a 21% difference! Do not underestimate the 4% compounded return from the investment.

The calculation can be found in this google spreadsheet.

Lots of assumptions have been made above to keep the calculations simple. The biggest assumptions made are your wife continues to work for the next 25 years (CZM keep saying she wants to retire and be a tai tai housewife) and the salary staying constant for 25 years (that is just so sad). Furthermore, having $0 savings is crazy too. On a side note, my friend wants to chiong his housing loan with the intention of getting a second property but not for myself and CZM. 

I am guessing someone might be thinking that the interest computed above is not the true cost of borrowing/paying loan using CPF OA. There is double interest when using CPF OA (2.6% housing loan interest + 2.5% CPF OA interest) and one will be paying a total of 5.1% interest. This is a huge misconception! At the end of the day, one must not forget that CPF is for retirement planning. You are only required to pay back the 2.5% OA interest if you sell your house before you are 55 years old. After 55 years old, one only has to top it up until it hits the minimum sum. My friend and I do not intend to sell our house, hence the above forecast/projection. Alternatively, one can always use cash to pay their housing loan but I believe the right investment in the long run will provide a return higher than 2.5%.

There are many many other possible scenarios and there is no one or right way to do it. The important thing is to sit down with your other half (if there is one) and plan accordingly. In my opinion, housing loan is a "good" debt that one does not have to repay quickly similar to how companies leverage debts to grow. It is not necessary bad but how it is being used.

Two other articles I found online discussing similar issues:

- Investment Moats: Should we repay more of our 2.6% HDB loan to save 0.1%?

- MoneySmart: 3 Reasons You Shouldn’t Pay Off Your Home Loan Early

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