Debunking HDB loan using CPF monies and bank loan

I have heard quite a number of my friends saying that using cash is better than using your CPF for your HDB loans. Some of the reasons are:
1) On top of the CPF 2.6% interest, you still need to pay additional 2.5% for the accrued interest, making the total interest of 5.1%
2) Use cash to pay and let your CPF monies earns 2.5% interest instead
3) Bank rates are lower than CPF OA interest rate +0.1%

Well parts of the statements are true enough but I think using CPF is still better. Let's debunked the reasons:
1) Actually we need to pay only 2.6% for the loan interest i.e. current CPF OA interest rate +0.1%.
The 2.5% is set aside as "Accrued Interest" so that when you sell your house, the amount need to transfer back to the OA account, which is also your own money. So you are not paying the 2.5% "Accrued Interest" as an interest for the loan but as an interest to your own OA.
And yes, the money parked in "Accrued Interest" will not earn you any interest but is it using cash still better?

2) True, that if you use cash to pay your loan and leave your CPF monies alone, you will enjoy the 2.5% interest. Much better than leaving in your bank deposit earning a 0.05%. But there are other alternatives to make your money work harder to easily beat the 2.5% interest. One way is to invest and another, you can to our previous article on:

Earn 71x your Savings Account Interest Rates

And if you use cash, instead of CPF monies, liquidity might be an issue if you need cash as CPF monies is locked up to Age 55 (as of today) that is if you meet the minimum sum requirement.

For the above reasons, let's do a simulation with actual figures, taking into account "Accrued Interest" (which not earning any interest):

Assuming you have $1,000 in both CPF and cash, on the left is you use your CPF to pay a $200 loan and on the right you use cash to pay the loan of $200.

If your cash interest can earn anything higher than current CPF interest rate of 2.5%, e.g. 2.6% in this simulation, the total interest you earn is more if using CPF to pay for your loan.

So to conclude, in my personal opinion, using CPF monies to pay for your housing loan is better and to highlight again, CPF monies can't be used till Age 55. So even if you have $500k in CPF, but you exhausted your cash for your loans, you will need to starve till 55.

3) As of today, or even the past 10years, yes the bank rates is much lower than the HDB loan rates. That is because of the current low interest environment.

Back to about 12 years ago only, in 2006:

HDB mortgage rates was 2.6% and still the same as of today.

The SIBOR then was 3.44% and and a typical mortgage rates would be around 4.5%.

Back to about 10years ago, in 2009:

HDB rates is still at 2.6%

SIBOR has dropped to 0.69% and a typical mortgage rates would be around 1.7%. And SIBOR continues to be at low level for the next 5~6years.

 

Today, in 2019:

HDB rates is still at 2.6%

SIBOR has increased to 1.88% and some banks have already increase their rates and some even exceeded the HDB rates.

So it's true that the bank mortgage rates are better then HDB's, but very soon, opposite will be a norm - that's what I believe.

Here an article talking about the housing loan option during this volatile period for your reading:

https://blog.moneysmart.sg/home-loans/housing-loans-fixed-vs-floating/

$1,000,000 coverage for less that $100

Yes, you read right. It's $1 million dollars death coverage for less than $100, or $88 to be precise for a man who is 40 years old for a 20 years coverage. It's even cheaper than your mortgage insurance (where the sum assured is reducing each year).

Before we continue, we are talking about a "term" insurance:
Term is a type of life insurance that provides a potential death benefit for a fixed period or "term." This is commonly a flat premium for say, 5, 10, 15, 20, or 30 years. After the end of the term the policy no longer provides a death benefit
Source: https://www.investopedia.com/ask/answers/08/term-life-insurance.asp
To add, it has no cash values at the end of the term. It's just like your car or mortgage insurance or even your electronic good insurance (fridge, washing machine, etc.).

Do I need a million dollar coverage? Well it depends.

Below are 3 commonly consideration you might want to take note:

A) Current Debts (house, car, etc.)

Do you know that you can use Term insurance to replace your HDB's Home Protection Scheme (HPS)? With this Term plan also, you do need to get a new HPS when you get a new house, which is usually more expensive because the HPS is based on your current age and not the younger you whom 10 or 20 years ago took up HPS when you got your first house.

B) Family regular living expenses

You can just use your monthly expenses and multiply by the number of years you need to support your family.

E.g. A new born just join the family and assuming your monthly expenses is $2,000. So for the new born to be independent, we assume he/she will take about 25years. So we just multiply accordingly: $2,000 x 25y x 12m = $600,000.

C) Children Education

For a 3 years course in a local universities (NUS/NTU), based on inflation rate of 5%, in 20 years time, the course fee will come to about $71,000. If we add in the living expenses with an inflation of 1.6%, the grand total comes to $142k.

And if we are talking about overseas education, like Australia, the total cost will come to $440k

Still unsure if you really need the $1mil coverage? Talk with your financial advisor and they are the best person to advise you.

What is Insurance?

Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. 

The above is extracted from Wikipedia. And you can easily find several other "textbook-like" variations on the definition of Insurance via the Internet search engine(s). While the meaning from multiple sources could arguably be standardised in a way or another, the diversification largely stems from one's relativity to the value(s) of such a hedging tool and/or potential loss to be covered.

Consumerism is a social and economic order and ideology that encourages the acquisition of goods and services in ever-increasing amounts. 

In my opinion, one of the main deterrents to transferring contingent loss to Insurance is a comprehensive set of normative beliefs that doing so would inevitably incur high costs. And such valuations is especially subjective while the benefits that the product/service could bring about, is intangible.

Insurance, in its native origins, is simply a plain vanilla pooling-of-risk instrument. However, this instrument has been evolving and undergone a series of transformation into sophisticated insurance products that you can find today. It could be bundled with investment/savings; includes extensive coverage via means of a multiplier till certain age; offers a wider spectrum of coverage to include for eg., early-stage Dread Diseases; etc. This would concomitantly explain why the cost of insurance has moved northwards with the evolution of it. Having said that, the plain vanilla form of Insurance remains available till date. However, shoppers for insurance are increasingly spoilt (or confused) with choices. 

Hence, it remains important (if not, even more important!) to engage a trusted Advisor who champions your interest in helping you understand your options. If you ain't sure what are the qualities of a trusted Advisor, then don't stop short of contacting either one of us!

Pre-existing condition and not covered for ADL (Activities of Daily Living)?

If you don't have Eldershield nor coverage for Acitivites Daily Living, you can still be covered under Aviva which has a Guaranteed Issuance Offer (GIO) plan.

If you already have coverage for ADL, then how about simplified coverage for loss of use of one limb OR loss of sight of one eye OR loss of speech OR loss of hearing from NTUC Income which is also a GIO plan?

Advance Medical Directive (AMD)

An Advance Medical Directive (AMD) is a legal document that you sign in advance to inform the doctor treating you (in the event you become terminally ill and unconscious) that you do not want any extraordinary life-sustaining treatment to be used to prolong your life.

Making an AMD is a voluntary decision. It is entirely up to you whether you wish to make one. In fact, it is a criminal offence for any person to force you to make one against your will.

Source: MOH

The AMD must be made through a doctor (you do not need either a lawyer or legal advice to make an AMD). The doctor has the responsibility to ensure that:
1. You are not being forced into making the AMD.
2. You are not mentally disordered.
3. You understand the nature and implications of making an AMD.

You need to have two people witness you sign the AMD and they must sign the form as witnesses in your presence. One witness must be the doctor. The second witness must be 21 years or above and can be the doctor’s nurse, or any other suitable person.

If the witnesses are relatives, so long as they have no vested interests in your demise, they would be allowed to act as witness.

Since it's a requirement to get doctor to certify, it's best to do it during LPA application.

FAQ on LPA

What is the difference between a Will and a LPA (Lasting Power of Attorney)?
A Will is effective only after death. A LPA is effective when you loose mental capacity e.g. when one is in coma or dementia.

What happens if I do not have a LPA?
Your family members will have to apply to Court under the Mental Capacity Act, to apply for someone to take charge of your personal welfare and property & affairs matters. Somewhat similar to someone without a Will, it's costly and time-consuming and you do not get to choose who's best to take care for you.

Can I assign my spouse to take care of my healthcare whereas my son to take care of my financial matters?
Yes. Basically LPA allows you to assign the following decision making:
1) personal welfare (which may include health care) and/or
2) property and affairs (including financial matters).
3) both personal welfare and property and affairs
So it's best to decide who's best to manage your healthcare and financial matter.

What happen if the assigned is not taking care of my affairs irresponsibly?
The Office of Public Guardian has the power to oversees the assigned do their job responsibly. If they don't they are held responsible and in worst case be fine and imprisoned.

What happens if I recover my mental capacity?
The LPA will not be effective. It's only effective when you are certified to be incapable of managing your own affairs.

Will my LPA be revoked or cancelled in any condition?
Yes, if the person you assigned decline to take the job, passes away, bankrupt or he himself lost mental capacity.
If the assigned is your spouse and there is a divorce.


Other than LPA, anything else I need to consider?
LPA is effective only when you lost your mental capacity. Upon death, LPA is of no use. Will is the only effective tool to help you.

What is Lasting Power of Attorney (LPA)

The LPA is a legal document which allows a person who is at least 21 years of age ('donor'), to voluntarily appoint one or more persons ('donee(s)') to make decisions and act on his behalf should he lose mental capacity one day. A donee can be appointed to act in the two broad areas of personal welfare and property & affairs matters.

Benefits of an LPA

• Early preparations to protect your interests should one become vulnerable one day. 
• Enables you to make a personal, considered choice of a trusted proxy decision maker, who is reliable and competent to act in his or her best interests.
• Alleviates the stress and difficulties faced by loved ones who need to apply for a Deputyship order, if you lose mental capacity without an LPA in place.

Source: Office of the Public Guardian

Do you know that the application is free at this moment:

(fee of $75 waived for another 2 years until 31 August 2020)

However applicants are required to pay a fee to engage an LPA Certificate Issuer to witness and certify their application. We last checked it was only $60 from a a medical practitioner accredited by the Public Guardian.
Please note that LPA application must be within 6 months from the date the certificate issuer signs on the LPA.
Click here to find out more who can certify your LPA.