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Purchasing a HDB flat as your first home is likely to be the most important financial decision at this stage of your life. To do so, most people finance their homes through a HDB or bank loan. As it’s usually long-term commitment, deciding on a manageable loan duration can be a challenging exercise.
Let’s assume that you’ve decided to go with a bank loan for its lower floating interest rates rather than a HDB loan, which has fixed but higher interest rates. You may be wondering whether you should stretch out your loan tenure to its maximum limit, or get a shorter one to pay it off as soon as possible.
A longer tenure allows you to hold on to more cash, thereby letting you use your funds for other purposes like investing or as part of your emergency fund. As your home loan is unlikely to be your only priority, you might need more cash on hand to address more immediate needs.
The example below shows the potential difference in monthly repayments between a 25- or 30-year loan for a built-to-order (BTO) flat in a mature estate.
|Flat type||Outstanding amount after down payment (S$)||Loan tenure||Monthly repayment (S$)|
The resulting difference of S$167/month adds up to S$2,004/year. If you invest the amount over the next 25 years with a 5% return, you’ll receive S$102,431 at the end of the period.
However, a longer loan increases the risk that you may not be able to finance your home for its entire term, which could result in repossession. Your property is used to secure the loan, and if you stop your repayments for any reason, HDB or the bank has the right to seize it from you.
Once your home has been repossessed, it can be very difficult to regain access to it due to the level of outstanding payments that you have to make. Hence, the longer your loan, the longer you’ll have to bear the collateral risk upon your property.
If you are confident that you will be able to meet your monthly repayments for the entire duration, then a longer tenure may be suitable for you.
If, like most people, you choose to use your CPF savings to pay for your home, having a longer-term loan will continuously drain your CPF funds. You could be earning the risk-free rate of 2.5% if you kept the money in your Original Account (OA).
Using too much will inevitably affect the amount you’re able to keep for your retirement years. Having more in your CPF accounts increases the chances of you hitting the minimum retirement sum, thereby ensuring that you will receive a suitable retirement income from CPF LIFE to help with your future expenses.
In addition, you could also use that amount to make investments with your OA to further grow your retirement nest egg.
No matter which option you end up choosing, having a long-term loan is a big responsibility. Do ensure that you are able to make the monthly repayments in a timely manner, and the amount you agree to is affordable within your overall financial plan.