Saturday, April 16, 2011

Is it wise to clear your housing loan if you have enough money in CPF?

I believe that this is a common question that most of us will ask when there is enough money in the OA account to pay for the outstanding housing loan. So for this post, I will analyze whether it is better to clear the entire housing loan at once, or continue to service the loan and at the same time use the money for investment to get better return.

The example that I used is based on an outstanding housing loan of $100k with loan interest rate as 2.6%. The loan period is 10 years, and the monthly payment will be $947.25.

In the table below, I have listed out seven options. Option 1 is based on clearing the entire housing loan. Since the housing loan has been cleared, $947.25 will be saved each month to earn interest in CPF OA account for the next 10 years. For option 2 to 7, is based on $20k in the OA CPF to earn interest (as currently the first 20K cannot be used for investment). And the rest of the $80k will be used to for investment with different return ranging from 2.5% to 5%.

As you can see in the table, you may be better off to keep your money for investment if your investment return rate is 3% or more.


Createwealth8888 said...

Ideally it is so; but returns from investment may unexpectedly become negative.

Freedom Achiever said...

Hi Createwealth8888,

You are very right. It can be quite hard to maintain a 3% return or higher per year.

Freedom Achiever

Anonymous said...

Besides, you only to start to accumulate wealth when you are debt free.

engwei said...

It's depends. Whether it's good debt or bad debt :)

Have you started your journey towards financial freedom?