You will be able to choose a tenure and payment mix based on cash flow, total interest and retirement savings.
The bank's form had two boxes Farah and Hakim hadn't expected to think hard about. One asked for the loan tenure. The other asked how they would pay the monthly instalment: cash, CPF, or both. Hakim wanted the longest tenure on offer and CPF for everything, to keep the monthly cash outflow as low as possible. Farah wanted to know what that would cost.
Both boxes trade money now against money later. This lesson works out the size of each trade.
The tenure is the number of years over which you repay the loan. Stretch it and each instalment is smaller, because the repayments are spread thinner. But the loan stays larger for longer, so you pay interest on more money for more years.
On Farah and Hakim's S$427,000 loan at an example 3% a year, a 25-year tenure costs S$2,024.88 a month. A 30-year tenure costs S$1,800.25, about S$225 a month less. Over the full life of the loan, the 25-year tenure costs about S$180,465 in interest and the 30-year tenure about S$221,090. The lower instalment costs them about S$40,600 more in interest, if they keep the loan to the end.
A longer tenure also raises the loan you can qualify for, because the same capped instalment from lesson 4.2, MSR: the cap on instalments for HDB flats and ECs, repays more over more months. In the example, their MSR loan limit at the stress-test rate rises from about S$564,200 over 25 years to about S$618,900 over 30.
But there is a limit. As lesson 4.1, LTV limits and the cash you must put in, explained, a tenure beyond a set length, or one that runs past a set age for the borrowers, comes with a lower LTV limit. Stretch too far and the loan you are allowed shrinks, so the downpayment grows. Check the current tenure and age thresholds with MAS and HDB before you pick a number.
A longer tenure also means more years of payments into the years you'd rather be winding down. For Farah and Hakim, a 30-year loan would run until their early sixties.
You can pay the monthly instalment from your CPF Ordinary Account, from cash, or from a mix. Paying from CPF keeps your take-home pay free for other things. It also has two costs.
First, every dollar of CPF used for the home stops earning CPF interest, and must be refunded to your CPF account with accrued interest when you sell. That refund comes out of the sale proceeds before you see any cash. CPF Mastery: every account and the choices you control, lesson 2.3, Accrued interest: what you refund to CPF when you sell, shows how it grows, and lesson 8.3 of this course, Selling: proceeds, the CPF refund and the timing, puts it into a sale.
Second, CPF used for the home is CPF that isn't building towards retirement. Using CPF for the instalments for twenty-five years can leave a much thinner retirement balance at 55. CPF Mastery, lesson 2.4, Pay the mortgage from CPF or cash: the trade-off, works through that trade in detail, so this lesson stays with the loan decision.
There is one practical rule to know. If you pay instalments on an HDB flat from CPF, the Home Protection Scheme, a mortgage-reducing insurance run by CPF Board, generally has to cover you. Lesson 6.4, Lawyers, insurance and the paperwork at completion, explains it.
The right mix depends on how secure your cash flow is. If your emergency fund is full and your job feels safe, paying part of the instalment in cash keeps more in CPF earning interest. If your cash is thin or your income is uncertain, letting CPF carry more of the instalment protects your cash buffer. That buffer is what keeps you from missing payments if something goes wrong.
You don't have to decide forever. You can change how much comes from CPF and how much from cash later, and you can make voluntary refunds to CPF if you want to rebuild your balance. So pick a starting mix and set a time to review it.
In this example, about S$2,600 a month goes into their two Ordinary Accounts together. Hakim's commission makes their cash income uneven. They chose the 25-year tenure, because the 30-year option's extra S$40,600 of interest bought them only S$225 a month of breathing room, and their budget could take the higher instalment.
For the instalment of about S$1,880 a month on the package they were leaning towards, they planned to pay S$1,500 from CPF and the rest in cash. That kept part of their monthly CPF contributions in the Ordinary Account and left their cash budget almost untouched. They agreed to review it if Hakim's commission fell for three months in a row, or once their emergency fund reached six months of expenses.
For your own loan, run two tenures through the PMT function and note the instalment and the total interest for each. Then decide your starting split between cash and CPF, and what would make you change it. That is what the activity below asks for.
Write two tenure options with their monthly instalment and total interest, and the cash and CPF split you would start with.
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