For many of you, a HDB Loan is nothing new. Applying for a new flat? Get a HDB loan! The important question is, how many years of loan should you be taking?

Read my true story of buying a 4-room HDB with only CPF money

Taking myself as a case-study, my wife and I paid off a large chunk using all our CPF Ordinary Account money, and took up a 30-year HDB Loan. The max. number of years used to be 30, before it was revised downwards to 25. Based on the calculations then, our remaining obligations worked out to a SGD$340 repayment per month each, from our CPF Ordinary Account – no cash required.

This is a relatively stress-free situation and although we can afford to be much more aggressive with our repayment plan, we chose the most conservative option. Do note that the repayment plan via CPF can be amended (shorten/lengthen) as and when it is required, with the option for lump-sum repayment.

I know, many people would much prefer to be debt-free as soon as possible – myself included. However, I kind of stumbled a couple of reasons that eventually made me choose the 30-year loan. I’m not saying whether this is good or bad, right or wrong – just putting across my thoughts, that’s all.

HDB Loan Interest Rate : 2.6%

Currently, the HDB concessionary interest rate is pegged at 0.1% point above CPF Ordinary Account Interest Rate. It is revised quarterly in January, April, July and October each year, in line with the revision of CPF interest rate. CPF interest rate is 2.5% per annum, which means HDB Loan Interest Rate is now 2.6%.

Why the 0.1% difference? So that it will make more sense to take a shorter loan since the HDB Loan is more “expensive” compared to letting the money sit in your CPF account and earn 2.5% interest.

Or, is it?

Additional Interest of 1%

From CPF Board’s website –

As part of our efforts to enhance the retirement savings of CPF members, an additional 1% interest will continue to be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA).

I guess if you don’t have much money in your Medisave or Retirement Account, then up to $20,000 of your money in CPF Ordinary Account will actually earn 3.5% interest. Not mind-blowing, but pretty decent still.

Home Protection Scheme (HPS)

If you are using CPF savings to pay off your HDB apartment, then you must (it is compulsory) subscribe to Home Protection Scheme (HPS). HPS is a mortgage reducing insurance scheme administered by the CPF Board.

Should the insured member become permanently incapacitated or die prematurely before age 65, the CPF Board will pay the outstanding housing loan based on the amount insured under the HPS. The premium payable will depend on your declared percentage of coverage, loan amount, age, gender, etc. This premium can be paid using your CPF savings or cash.

Touch wood, but in the event of a catastrophic proportion were to befall myself, the HDB apartment would be fully paid for, and I (or my family) get to keep whatever that is still sitting in my CPF Ordinary Account. Granted, this is really a what-if scenario and I hope no one ever need to utilise the Home Protection Scheme.

Investing your CPF Ordinary Account Money

Last but not least, investing your CPF Money will potentially have returns that far exceed the paltry 2.6%. You can perform index investing by buying into STI ETF using your CPF Money.

You can’t touch the first $20,000 in your CPF Ordinary Account anyway, so it’ll be sitting there earning 3.5% interest. Anything after the first $20,000, you can DIY a regular investment plan by buying into STI ETF on perhaps a quarterly or half-yearly basis. Be mindful of the commission though!

Alternatively, you can think of it as your market-crash war-chest. When the next cyclical market crash comes around, you can be sure to have a huge hoard of cash sitting around, ready to dump into the STI ETF. That is provided you have the guts to do it.

Be Fearful When Others Are Greedy, and Greedy When Others Are Fearful.
– Warren Buffett