My Experience with Mortgage Brokers - Redbrick and iCompareLoan

Regular readers will know that we are currently on an HDB housing loan (~1 year). The reasons were we didn't want to fork out any cash for downpayment and wanted to repay the loan as slow as possible. Had we taken a bank loan then, we would need at least 5% cash for downpayment and the remaining 20% in CPF/cash as compared to just 10% CPF for downpayment for an HDB housing loan.

Let me illustrate with some numbers:
Our BTO purchase price - $420k
HDB housing loan - $42k in CPF (downpayment) + $378k loan
Bank loan - at least $21k cash + $84k in CPF (downpayment) + $315k loan

Hence, it is very unlikely for young couples to take a bank loan for their first HDB purchase as the initial cash/CPF outlay is simply too large. For more information, you can take a look at this Seedly article - A Homeowner's Ultimate Guide: Bank Loan Vs HDB Loan Which Is Better?

Seeing how interest rates are pretty low and will likely remain low due to the current economy/COVID situation (my opinion), I was tempted by the possibility of paying lesser interest and refinancing out only if the bank is willing to loan me the full amount. What do I mean by that?

Existing HDB housing loan - $370k
Bank can only loan up to 75% of the purchase price - $315k

We do not want to pay this difference of $55k just to refinance out. Hence, I decided to try out these 2 mortgage brokers (Redbrick and iCompareLoan recommended by Google) to "test the water" since they do not charge any fee (they earn through the referral from the banks). Separately, I also contacted my RM and asked about SCB's housing loan.

Redbrick
Redbrick was the most efficient, someone (let's call him RBG - RedBrick Guy) was assigned to me the very same day. A call was made and he explained a couple of refinancing concepts/fees that were new to me, followed by a report on the possible savings.

Type of loan packages:
1. Fixed
2. Floating based on board rate (bank's internal rate e.g. DBS FHR8) + spread/margin
3. Floating based on SIBOR + spread/margin

Fees involved:
1. Legal fee ~ $1,500 - $2,000+
2. Valuation fee ~ $160 - $200+
3. Fire insurance with the bank

Depending on the loan amount, some banks will offer a cash incentive that can be used to offset the above fees to attract/entice you to take up their loan package. For instance, my RM recommended me not to refinance with SCB because there is no incentive for my loan amount (too small). The cash incentive has a separate lock-in period of 3 years and has to be paid back if one refinance out to other banks within that period.

As you can see, there are significant savings (~8k - 11k) on the interest in just 3 years which makes a lot of difference. A housing loan is an amortized loan where one pays off the interest first before the principal and one has to pay the principal to clear the loan. Assuming if we had stayed with the HDB housing loan, we would have paid $62k but only cleared $34k of principal.

The packages he recommended (all with cash incentives) were:
May Bank - 1 Year Floating @ 3M SIBOR + 0.48% ~ 1.308%
UOB - 3 Years Fixed @ 1.68%
DBS - 5 Years Fixed @ 1.80%

iCompareLoan
iCompareLoan (let's call this person ICL - iCompare Lady) reached out a day later, explained those concepts and fees, and offered almost similar packages:
May Bank - 1 Year Floating @ 3M SIBOR + 0.48% ~ 1.308%
DBS - 3 Years Fixed @ 1.70%

After discussing with CZM, we decided to submit an application for the DBS - 3 Years Fixed @ 1.70% loan package as we are using the Multiplier account too. In addition, there is no way of knowing how much the bank is willing to lend unless we submit an application. Most importantly, there is no commitment until we sign the LO (Letter of Offer) by the bank.

A few days later, RBG reached out and asked if I have any questions or made any decision to refinance and I told him about the 3 Years Fixed @ 1.70% with ICL. He asked if I am interested in UOB new package - 2 Years Fixed @ 1.60%. Of course, the lower the better! So I submitted another application to UOB too. Besides lower interest, it is important that the bank is willing to loan us the full amount.

This is where it gets interesting. I told ICL about RBG and his UOB package and she didn't seem too happy as though it is an extramarital affair. I guess the competition is pretty fierce as she tries to win me over by submitting for an exception/special application with DBS for 1.6% fixed rate too. RBG also tries his best to convince me that UOB is better. lol. Anyway, this makes things a lot easier since we just need 1 of them to lend us the full amount.

Surprise surprise! It turns out that the indicative valuation of our house is now more than $600k and both banks are willing to lend us the full amount. In the end, I decided to go with UOB because the 3rd year rate is better (both are based on their internal board rate + spread/margin) and DBS's spread/margin was much higher than UOB + ICL accidentally revealed her unhappiness/unprofessionalism during the negotiation. Those kinds where one bad mouth people in a private chat but it accidentally went into a group chat and had to be deleted quickly. lol.

The best part about RBG was even after he has gotten our business and UOB has already sent the LO. He kept us updated on the UOB new package - 2 Years Fixed @ 1.55% and took the initiative to get the banker to update the LO. Honestly, I thought that was very commendable since even if he had not done that, we would not have known. Anyway, all these happen in the last 2 weeks with banks launching new packages almost every week. Right now, we are serving the 3 months notice to HDB and our monthly repayment will decrease by about $200 every month after that!

Interestingly, these packages are not published on the banks' own website so I will recommend that you contact these mortgage brokers instead of going directly to the banks.

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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

Do like any of the following for the latest update/post!
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3. Click here to subscribe using email :)
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