Choose a tenure and payment mix that fits your cash flow, total interest and retirement savings.
When you take a home loan, the bank's loan form asks you to make two decisions: the loan tenure, and how the monthly instalment will be paid, from cash, CPF or both. Both are quick to fill in. Both also trade money now against money later, so work them through with real numbers before you sign.
Tenure is the number of years over which you repay the loan. A longer tenure lowers each instalment because the repayments are spread over more months. It also raises the total interest you pay. The loan balance stays larger for longer, so you pay interest on more money for more years.
A longer tenure also raises the loan amount you can qualify for. Under MSR, your instalment is capped (lesson 4.2, "MSR: the cap on instalments for HDB flats and ECs"). Spread over more months, that same capped instalment repays a bigger loan.
There is a limit to how far you can stretch it. A tenure beyond a set length, or one that runs past a set age for the borrowers, comes with a lower LTV limit (lesson 4.1, "LTV limits and the cash you must put in"). If you stretch too far, the loan you are allowed shrinks and the downpayment you need grows. Check the current tenure and age thresholds with MAS and HDB before you choose. A longer tenure also means more years of payments running into the years when you would rather be winding down.
Farah and Hakim (an invented example) are taking a S$427,000 home loan. They hadn't expected to think hard about the tenure box or the payment-method box on the bank form. Hakim wanted the longest tenure available and CPF for the whole instalment, to keep their monthly cash outflow as low as possible. Farah wanted to know what that would cost.
At an example rate of 3% a year, the PMT function gives a 25-year instalment of S$2,024.88 a month and a 30-year instalment of S$1,800.25 a month. The 30-year loan costs about S$225 a month less (S$2,024.88 - S$1,800.25 = S$224.63). Over the full loan, total interest is about S$180,465 on 25 years and about S$221,090 on 30 years. If they keep the loan to the end, the 30-year tenure costs about S$40,600 more in interest (S$221,090 - S$180,465 = S$40,625). At the stress-test rate, their MSR loan limit is about S$564,200 over 25 years, rising to about S$618,900 over 30 years. A 30-year loan would also run until their early sixties.
They chose 25 years. The extra S$40,600 of interest on the 30-year option bought only S$225 a month of breathing room, and their budget could take the higher instalment.
You can pay the instalment from your CPF Ordinary Account, from cash, or from a mix of the two. Paying from CPF keeps your take-home pay free for other uses, but it has two costs.
First, every CPF dollar you use for the home stops earning CPF interest. When you sell, you must refund it to your CPF account together with the accrued interest, which is the CPF interest that dollar would have earned. If you sell at market value and the selling price is not enough to cover both the outstanding housing loan and the full CPF refund, you only need to refund the selling price less the outstanding housing loan. CPF Mastery: every account and the choices you control, lesson 2.3, "Accrued interest: what you refund to CPF when you sell", shows how accrued interest grows. Lesson 8.3 of this course, "Selling: proceeds, the CPF refund and the timing", applies the refund to a sale.
Second, CPF used for the home is not building towards your retirement. Paying instalments from CPF for twenty-five years can leave you with a much thinner retirement balance at age 55. CPF Mastery, lesson 2.4, "Pay the mortgage from CPF or cash: the trade-off", works through that trade-off in detail.
There is also a practical rule. If you pay HDB flat instalments from CPF, the Home Protection Scheme generally has to cover you. HPS is a mortgage-reducing insurance run by CPF Board, and 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 cash is thin or your income is uncertain, letting CPF carry more of the instalment protects your cash buffer, the cash that keeps you from missing payments if something goes wrong.
Together, Farah and Hakim get about S$2,600 a month into their two Ordinary Accounts. Hakim's commission makes their cash income uneven. The package they were leaning towards has an instalment of about S$1,880 a month, which is for that package and differs from the 3% example figure. They planned to pay S$1,500 of it from CPF and the rest, about S$380, in cash. That keeps about S$1,100 a month of their contributions in the OA and leaves their cash budget almost untouched.
The split isn't permanent. You can change the CPF and cash amounts later, and you can make voluntary refunds to CPF to rebuild your balance. Pick a starting mix and set a time to review it. Farah and Hakim agreed to review theirs if Hakim's commission falls for three months in a row, or once their emergency fund reaches six months of expenses.
Before you settle on a tenure, check the current MAS and HDB tenure and age thresholds so your choice doesn't trigger a lower LTV limit. Then look at how full your emergency fund is and how stable your job feels. If your buffer is full and your income secure, lean towards paying more in cash. If cash is thin or your income uncertain, lean towards more CPF.
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 down two tenure options with the monthly instalment and total interest for each, and the cash and CPF split you would start with.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).