Tuesday, 17 January 2012

Property - HDB Loans

There are many schools of thoughts regarding paying up your loans for your housing. This post serve as a summary of what I heard about what people did with their HDB housing loans of 2.6% p.a.

(1) Should borrow as much as possible since it is only 2.6% p.a. It is the cheapest and safest loan around. If one has extra money, should not pay up, should use it to get investment return of greater than 2.6% p.a.

(2) Should pay up as soon as possible. Pay whenever you got lump sum so that you can be debt free as young as possible. A debt free person is a carefree person.

(3) Should pay up with anything in excess of 20k in your CPF OA account. Base on current CPF rules, you will earn 3.5% (2.5% + 1%) for the first 20k in your account, anything above it earn 2.5%. 3.5%-2.6%=1.9%. You are earning 1.9% p.a for keeping 20k in your account.

Which is your choice? Please feel free to suggest if you could think of other options!

Just to add, regardless of which option you take, please remember to keep at least few months of your installments money in your CPF just in case that you lose your job due to whatever reasons.  Example, if your monthly installments are 1000, please keep at least few times (6000, 12000) of it according to your comfort/risk level.


CreateWealth8888 said...

Are investors so confident that they can generate compounding return of more than 2.6% without any year of negative return for the next 20-30 yrs?

Calvin said...

Definitely option 1. Housing loans are the cheapest form of leverage, if you intend to use leverage to boost your returns.

2.6% is very to beat,

7-10 year corporate retail bonds are already yielding close to 3-4% currently with the recent CMA bond issuance. See


Dividend returns on defensive stocks alone can return 4-7% per annum

Capital appreciation on properties generally double every 10 years.

The list goes on and on, but 2.6% really doesn't cut it as it is almost the same rate as core inflation, while much lower than headline inflation.


CreateWealth8888 said...

Hmm... annual yield is NOT compounding return

AK71 said...

Ask yourself what are you comfortable with.

Although I understand the concept of good debt, somehow, I would prefer not to be in debt. My personal experience at a young age has left an indelible mark on me to avoid debt as much as possible.

Peace of mind is priceless.

OT83 said...

I prefer to be debt free too, but I would choose option 3, keep 20k as buffer just in case I lose job. The rest just pay up.

If got spare cash, maybe I do like what AK did, transfer to SA. But this option is unlikely.

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