Why a Longer Private or HDB Loan Tenure is the Wise Choice for Home Buyers
February 15, 2023
Should you take a home loan with a longer or shorter home tenure? In a high inflationary environment like Singapore, I would argue it is
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Are you considering taking a debt consolidation plan? Are you worried about the recession? You are not alone. A recession triggered by the result of a pandemic is difficult to predict. With the recent cautious reopenings and easing of social distancing measures, you might be tempted to think an end to this global disaster is in sight.
The truth is, no one can predict the future. While many are hoping a vaccine is within sight, many are worried about the expected decline in economic activity. This has led to some property owners taking control of their debts and tightening their cash flow.
How we prepare ourselves financially will affect whether we emerge out of this downturn with minimal impact on our lives. For many Singaporeans, some have resorted to taking debt consolidation loans. While these are popular debt solutions, it might not be the best option out there depending on your financial situation.
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Do you know that there are several options that a property owner in Singapore can consider to improve their cash flow? Some of these options can also save you more money with their lower interest expense too.
If you’re looking to take control of your debt, consider one of these 4 alternatives to a debt consolidation plan.
One of the latest financial relief initiative by MAS. The main aim is to allow individuals to apply and defer their repayments for various loans.
These relief measures is to help ease the financial burden of individuals and businesses affected by COVID-19 pandemic.
Assuming you still have a remaining tenure of 20 years on your loan. The current mortgage interest rate is at 2%. With an outstanding mortgage loan of $1 million, you consider taking up the mortgage deferment option put up by MAS and defer your home loan by 6 months.
Before deferment, your monthly mortgage obligation is approximately $5,058.83. Let’s explore the differences between the following 3 options.
Tap on the 3 different tabs to see the cost breakdown.
| Updated Monthly Mortgage Obligation | $5,058.83 (no change) |
| Outstanding Amount After 6 months | $979,562 |
| Remaining Loan Tenure After 6 months | 20 years – 6 months |
| Monthly Repayment after 6 months | $5,058 (no change) |
| Total interest expense until end of loan tenure | $214,120 (no change) |
| Summary | There is no change in your monthly cash flow. |
| Updated Monthly Mortgage Obligation | $1,667 (lower) |
| Outstanding Amount After 6 months | $1 million (no change) |
| Remaining Loan Tenure After 6 months | 20 years (no change) |
| Monthly Repayment after 6 months | $5,058 (no change) |
| Total interest expense until end of loan tenure | $1,667 X 6 + $214,120 = $224,122 (higher) |
| Summary | Higher interest expenses |
| Updated Monthly Mortgage Obligation | $0 (decreased) |
| Outstanding Amount After 6 months | $1,667 X 6 + $1 million = $1,010,002 (higher) |
| Remaining Loan Tenure After 6 months | 20 years (no change) |
| Monthly Repayment after 6 months | $5,109 (higher) |
| Total interest expense until end of loan tenure | $216,261 (higher) |
| Summary | Interest accrue on the principal only. Monthly mortgage will ramp up at the end of deferment period |
Whether you should defer your principal payment or interest payments is up to you to decide. You should examine your expected cash flow needs and decide on which option to take.
Here are some helpful questions you should ask yourself before deciding which is a better option to take.
Remember, every dollar contributed towards your debt is a dollar you will difficulty accessing in times of financial hardship. This is especially important because once your savings go low, you will have insufficient income to pay your bills and essentials.
The funds kept in your CPF Ordinary Account account are accruing interest when you leave it in your CPF account. A typical debt consolidation plan typically charges about 4% to 5% effective interest rate. Rather than take up a debt consolidation plan, you can use your Ordinary Account savings to repay your monthly mortgage.
This option is open to not just Singapore private property homeowners but HDB owners too! Using CPF-Ordinary Account savings to repay your mortgage can be a less costly option.
However, if you are thinking of taking up this option, there are other cost implications you should be mindful of. Let’s examine them further.
Assuming you bought a private property with a valuation limit (VL) of $1 million using 5% cash, 20% CPF and the remaining sum using a mortgage loan. The current mortgage interest rate is at 2%.
Cash: $50,000
CPF Down payment: 20% x valuation = $200,000
Loan: $750,000
Loan tenure: 30 years
Monthly Mortgage Repayment: $2,772
Withdrawal limit: 120% x VL = $1,200,000
Valuation Limit: $1 million – $200,000 = $800,000
This amount is estimated to be used up in 24 Years 1 month
For a 30 years loan tenure, if you had opt to repay your mortgage using your CPF Ordinary Account, your total contribution after 10 years is approximately $485,648.
The total principal and interest expense from your loan will contribute to form part of your withdrawal and valuation limit.
To continue using your CPF-Ordinary Account monies to repay the loan beyond your valuation limit of $1.2 million (Withdrawal Limit), you will need to:
The current Basic Retirement Sum is at $90,500. Once the Withdrawal Limit is reached, the only option left is to service the remainder of your mortgage repayment by cash. When you turn 55, if your Retirement Account savings fall short of the Basic Retirement Sum (BRS), you will not be able to make any further withdrawals. The only money you can use from your CPF are the following:
Every dollar taken out from your CPF Ordinary Account and contributed towards your property principal debt payment will accrue interest. The principal and accrued interest will need to be returned to your CPF in the event of a successful property sale.
The funds in your Ordinary Account are accruing interest at a rate of 2.5% every year. This happens regardless of the market condition, therefore, property owners seeking to use such means to manage their cash flow may end up losing on the risk-free guaranteed interest provided by CPF.
Your Ordinary Account savings will eventually form part of your Retirement Account when you turn 55 years old.
I rarely recommend using your Ordinary Account savings to repay your mortgage for the long run unless the situation calls for it.
The last thing you want to do is hit the CPF Housing Withdrawal Limits before your loan tenure is up. This will leave you no other option but to pay cash during your retirement years. Remember, the more money you use from your CPF Ordinary Account, the less money you have for your retirement.
If you had withdrawn $200,000 for your property down payment, and sold your property 15 years later. At the current Ordinary Account interest rate of 2.5%, your total principal and accrued interest used from your Ordinary Account adds up to $289,659. The accrued interest is the money the principal amount would have earned if it was sitting in your CPF Ordinary Account and not used for your property purchase.
The CPF funds used or received (from grants) to finance a property must be repaid when the flat is sold. The repayment amount is made up of the principal amount used/received plus accrued interest.
While technically this money is still in your CPF Ordinary Account, you should be mindful that having money in your CPF can’t exactly put food on the table during financial hardship. However, having money on hand gives you a lot more options.
The Special Financial Relief Programme (SFRP) was one of the more recent relief packages provided by MAS. This is done in collaboration with the financial industry to assist individuals facing temporary loss or decline in income because of the COVID-19 pandemic.
If you are facing financial difficulties in repaying your existing loans, this relief programme gives you an option to convert your high-interest debt and revolving balance and replace it with a lower-cost term loan. It can assist you in minimising your debt burden and improve your cash flow.
The current interest rate provided by the Special Financial Relief Programme is at 8%, and you have the option to choose between a 3 or 5 years loan tenure.
You can find out more on the financial relief programme provided by the Association of Banks in Singapore by clicking the link here.
| Comparison | Credit Card | SFRP |
|---|---|---|
| Outstanding Debt | $20,000 | $20,000 |
| Interest Rates | 25% | 8% |
| Loan Tenure | Varies | 5 years |
| Monthly Repayment | $600 | $405 |
| Number of monthly repayments to be debt free | 328 | 60 |
| Total Payments | $62,874 | $24,331 |
Unlike a debt consolidation plan, SFRP comes with a different set of eligibility criteria.
It is important to note that even though SFRP offers a significantly lower interest rate than that of a credit card interest. The effective interest rate might be higher than the market rate for a debt consolidation plan. You should do a proper financial assessment before deciding which is a better solution. If you are not eligible for a debt consolidation plan, taking a Special Financial Relief Programme (Unsecured) can be a great alternative.
If you have a lot of consumer debt such as credit card loans, chances are you will have debt spread over multiple cards and loans. Each has its own minimum monthly payment amount.
The minimum payment can add up to quite a significant expense if you decide to repay the minimum sum over an extended period.
For such situations, you can consider taking a home equity loan. By consolidating all your high-interest debts such as your car, credit cards and/or student loans into a single loan backed by your property, you can substitute your high-interest loans with a lower one.
Editor’s note: Based on the latest announcement published on 6th October 2020, financial institutions can now use their security interests in Housing and Development Board (HDB) flats as collateral for liquidity from the Monetary Authority of Singapore (MAS). This is part of the Government’s plan to improve their access to funding from the central bank amid the COVID-19 crisis. For more information, check out the link here.
Assuming you have a total unsecured debt of $23,000 of credit card debt. Most banks usually allow a minimum sum payment of $50 or 3% of principal (whichever is higher).
| Outstanding Debt | $23,000 |
| Monthly Minimum Sum Payment | $50 or min 3% of principal (whichever is higher) |
| Interest Rate Charges | 25% |
| No. of Monthly Repayments to be debt free | 343 months or 28.58 years |
| Total Payment | $72,692 (Interest expenses $49,692.81) |
For a $23,000 credit card debt, should you continue repaying just the minimum sum, the total repayment will add up to almost 4 times your initial debt.
Assuming you take up a $23,000 home equity loan to repay all your existing unsecured credit card debt. Based on the current home equity interest rate of 1.5% and a 5 years loan tenure, your monthly payment would reduce from $690 to $398.13. You only need to take 5 years to be debt-free as compared to 28 years when you just make the minimum repayment on your credit card loan.
The categories of unsecured loans below are excluded from debt consolidation plans but eligible for home equity loans:
While there are more applications on how you can choose to use the cash from your home equity loan, you need to be mindful that you are not supposed to use the money to buy another property.
Please note that eligibility requirement is subject to change by MAS. For the latest information, kindly check for any notice by MAS in the link provided.
The flexibility to choose your preferred loan tenure allows you to plan your finances better. However, the higher upfront associated admin and legal fees of approximately $3,000 to $4,000 might make it less desirable than a debt consolidation plan. You should do a proper financial calculation to assess if it is worthwhile to take a home equity loan.
Unlike a mortgage loan which allows you to make repayment using your CPF savings, the cash you receive from a home equity loan can only be repaid by cash and not CPF.
There are many options available to help you tackle your cash flow issues during a downturn. Every client’s financial situation is unique, there is no one size fits all solution for every case. As a realtor myself, my job goes beyond just transactions, it is important to go beyond my duties and assist my clients to seek the best outcome possible for all property-related matters.
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