Wednesday, September 30, 2009

Housing loan, make it 15 years or 30 years?

I am using an example where housing loan is $150, 000 and the interest is 2.6%. You can see that you are paying $31306.80 in interest for 15 years and $66180 for 30 years. Wow so 15 years is better because I am paying $35000 less in interest. I can tell you a lot of my friends and colleagues will say the same thing. But I am totally disagreeing with this. No matter how I explain to them, they do not have any idea what I meant. The main reason I gave them is in your OA account, CPF will pay you at least 2.5% interest.

I am comparing how much OA CPF you have in 30 years (because both housing loan will be up in 30 years). Suppose your monthly OA amount is $1200. In 15 year plan, you save about $193 per month or $2312.88 per year. In 30 years plan, you save about $600 per month or $7194. By adding up the saving and interest for 30 years, in 15 year plan you will have $318287. In 30 year plan you will have $315836. The different is only less than $3k. Amazing? One points to note, CPF is giving 3.5% for the first $20000 in OA, so in fact the difference will be smaller.

This is just an example. My point here is to make your own calculation before you commit on the number of years for servicing your housing loan.

You may want to google "Housing Loan" to find out what are the rates given by different banks.


Anonymous said...

I think some people will say that it is good to stretch your housing loan for as long as possible since it is borrowed at such a low interest rate.

Anton said...

what does OA and CPF mean?...I am from Canada and we perhaps call it differently

Freedom Achiever said...

Hi Anton,

You can find out what is CPF from the link below:

Freedom Achiever

Singapore Man Of Leisure said...

Hello Freedom Achiever,

We both bought our HDB at the "right" time during 2003 ;)

I am guessing yours is a HDB 4 room?

We both have decided to max out to a 30 years loan, although our calculations differ.

But one thing hats off to you! Your rental is more than enough to cover the HDB loan, so like me, we will get our HDB for "free"!

Have you started your journey towards financial freedom?