Like many Singaporeans, my wife and I applied for a HDB flat in 2005. That year, there were some flats at Redhill and Tiong Bahru area available for application. These two areas are great locations because they are just within walking distance to the MRT stations and just 10minutes drive to our famous shopping district, Orchard Road.
Our queue number for the balloting was 209. I was thinking we should have a high chance of getting a unit. True enough, we were given a choice between Redhill Road and Boon Tiong Road.
Long story short, we decided on a unit at Redhill Road because we felt that the area was more vibrant and it’s near a hawker centre and very near to the MRT station.
The cost of the unit was $384,200.
Looking back today, it was such a bargain!
So we went to process the documents and work out the payments at HDB Hub.
We took a 30-year HDB loan with a 2.6% interest. The monthly installment worked out to be about $1300 a month. Fortunately, our CPF accounts were able to cover the installments so we do not have to top up with cash.
So things remained unchanged for several years as we continue to work in our own jobs.
After a couple of years, my wife and I were talking about changing careers or starting a business. Though we don’t have any concrete idea which career path or business we are going to try, one thing that kept coming up was the housing loan that we need to service.
It is a burden that is holding us back.
So we made a promise to ourselves, pay off the housing loan before considering switching job or start a business.
In the next few years, we repaid HDB through lump-sum payments when we received our bonuses or whenever the CPF accounts have accumulated a significant amount of money.
Now, you may be thinking, “What a stupid move! Why not use the cash and invest in something that yields higher returns? You can get rich faster!”
I definitely considered putting my money in the stock market to give higher returns. A simple strategy could be putting the money in Real Estate Investment Trusts (REITs) and easily earned 6-8% dividends annually. That’s already higher than the interests that I pay to HDB.
I have invested in the stock market and have seen share prices doubled, tripled, quadrupled and more. I have also seen share prices tanked more than 50%. (More on investment in the other blog posts.) So the stock market is volatile and no one can even Warren Buffet, can predict what will happen.
The biggest reason why we stick to the promise is to clear the psychological burden of this housing loan. If we stopped working, we still need to fund the $1300 monthly installment. So we told ourselves, just clear it as fast as possible. Get out of the debt and give ourselves MORE options.
There is also another benefit of prepaying the housing loan and that is, reducing the accrued interest to your own CPF account. This accrued interest benefit will only apply if you sell your house before you turn 55.
What is the accrued interest benefit?
CPF has an accrued interest rule where 1) If you use CPF to pay for your house, and 2) you sell your house before you turn 55, you have to “refund” your own CPF account with what you would have earned if you left that money in CPF. So in short, if you keep using your CPF to pay for your house, you will get lesser cash proceeds from the sale because you have to repay the accrued interest to your own CPF account for your future retirement needs.
It’s a subtle benefit and honestly, I did not factor this in our decision making. But for some of you out there, this is additional information.
After a lot of patience and staying discipline to pay the housing loan, we finally paid off the loan in 2016!
Yeah…
Looking back, I was 37 that year and I have no more housing loan. I think it is a huge relief compared to some of my peers who are still servicing 300-400k of housing loans.
Though we are not financially free yet, I have one less ‘burden’ and I can focus on using my money to build my portfolio. Our CPF accounts also grow faster now because there is no need to withdraw $1300 every month. The compounding interest accelerates very quickly. It will come in handy for our future retirement needs.
So if you are thinking of whether to pay off your housing loan, you can consider our thought processes and weigh the pros and cons.
Another possibility is to set aside money to invest and pay off the loan concurrently. For example, you can invest 10% of your income in the market index every month using the dollar-cost averaging method and use your bonuses to pay the housing loan. In this way, you will have assets that are generating some passive income for you.
There is no perfect solution. If you google, “Should I pay off my housing loan…”, there will be many articles giving you different opinions. It depends on your comfort level and your goals. Once you have made the decision, stay discipline and focus to achieve your goals.
Note: If you are not a Singaporean and you don’t understand some of the terms like CPF and accrued interest, just click on the links to find out the definition.
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