Repaying your Mortgage Loan
Now that you have decided on buying that new house, are you asking yourself how you should repay your mortgage loans? This is a very popular question on many homeowner’s mind, and we’ll look at some of the important factors to consider before you make that decision.
Most Singaporeans seem to prefer paying their mortgage loans using their CPF, given that if one is working you will have a steady input into your CPF account every month. However, we need to remember that the primary objective of the CPF account is to build a retirement account, so by using some of that money to buy a property incurs long term opportunity costs from building up your nest egg.
In a basic way, ask yourself what is the primary reason you prefer to use your CPF money – what will you do with that cash that you free up? To pay for health insurance for yourself and your family? To invest in higher returns investment vehicles or is it to satisfy your ‘needs’ for material comfort like having a car, expensive home renovation or simply to have more liquidity for shopping?
What many people forget to consider is that when you use your CPF to pay up your mortage loans, you forego the 2.5 percent interest you could have earned on the CPF funds(which could already offset some of your mortgage interest. On the day you decide to sell your house, you will also need to pay back the amount you ‘borrowed’ from your CPF, including the accrued interest that you should have earned! Added together, that’s about a 5 percent in ‘lost returns’.
Well, if you feel that you cannot afford to pay up your mortgage with cold, hard cash each month, do bear in mind that the money from your CPF account is meant for your retirement. Using the money today will simply mean you have less for later years.
If you are considering using money for investments, you should also try to invest in instruments that can generate at least more than four percent annual returns, since your CPF monies earn you 2.5% on your ordinary account and 4% on your Special Account.
Remember that at the end of the day, the CPF as a system works to help you with the three biggest financial situations you will ever face – healthcare, retirement and property, so make sure each of these are given its due importance and allocation.
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