Some people believe in getting a 30 year loan and if they manage to earn sufficient money, they can pay off their loan early and lose little interest. Well.. No chance man! It doesn't work for car loans neither does it work for housing loans. Some information I dug out from CPF that your housing agent may never tell you.
I'm going to quote 2 tables computed from www.cpf.gov.sg for hdb housing loans. The first table is a $220,000 loan taken over 10 years, the next is the same loan taken over 30 years.
| Detailed workings - 1 | |||||||
| Year | Opening Loan Balance | Monthly Instalment Payment | Total Interest Paid for the year | Total Principal Paid for the year | Cumulative Interest payment | Cumulative Principal payment | Closing Loan Balance |
| 1 | 220,000.00 | 2,083.96 | 5,488.48 | 19,519.04 | 5,488.48 | 19,519.04 | 200,480.96 |
| 2 | 200,480.96 | 2,083.96 | 4,974.89 | 20,032.63 | 10,463.37 | 39,551.67 | 180,448.33 |
| 3 | 180,448.33 | 2,083.96 | 4,447.79 | 20,559.73 | 14,911.16 | 60,111.40 | 159,888.60 |
| 4 | 159,888.60 | 2,083.96 | 3,906.84 | 21,100.68 | 18,818.00 | 81,212.08 | 138,787.92 |
| 5 | 138,787.92 | 2,083.95 | 3,351.61 | 21,655.79 | 22,169.61 | 102,867.87 | 117,132.13 |
| 6 | 117,132.13 | 2,083.96 | 2,781.81 | 22,225.71 | 24,951.42 | 125,093.58 | 94,906.42 |
| 7 | 94,906.42 | 2,083.95 | 2,197.02 | 22,810.38 | 27,148.44 | 147,903.96 | 72,096.04 |
| 8 | 72,096.04 | 2,083.95 | 1,596.83 | 23,410.57 | 28,745.27 | 171,314.53 | 48,685.47 |
| 9 | 48,685.47 | 2,083.96 | 980.86 | 24,026.66 | 29,726.13 | 195,341.19 | 24,658.81 |
| 10 | 24,658.81 | 2,083.96 | 348.66 | 24,658.86 | 30,074.79 | 220,000.05 | 0.00 |
| There may be minor rounding differences in the calculation | |||||||
| Detailed workings - 2 | |||||||
| Year | Opening Loan Balance | Monthly Instalment Payment | Total Interest Paid for the year | Total Principal Paid for the year | Cumulative Interest payment | Cumulative Principal payment | Closing Loan Balance |
| 1 | 220,000.00 | 880.75 | 5,661.80 | 4,907.20 | 5,661.80 | 4,907.20 | 215,092.80 |
| 2 | 215,092.80 | 880.75 | 5,532.67 | 5,036.33 | 11,194.47 | 9,943.53 | 210,056.47 |
| 3 | 210,056.47 | 880.75 | 5,400.16 | 5,168.84 | 16,594.63 | 15,112.37 | 204,887.63 |
| 4 | 204,887.63 | 880.75 | 5,264.16 | 5,304.84 | 21,858.79 | 20,417.21 | 199,582.79 |
| 5 | 199,582.79 | 880.75 | 5,124.58 | 5,444.42 | 26,983.37 | 25,861.63 | 194,138.37 |
| 6 | 194,138.37 | 880.75 | 4,981.34 | 5,587.66 | 31,964.71 | 31,449.29 | 188,550.71 |
| 7 | 188,550.71 | 880.75 | 4,834.30 | 5,734.70 | 36,799.01 | 37,183.99 | 182,816.01 |
| 8 | 182,816.01 | 880.75 | 4,683.41 | 5,885.59 | 41,482.42 | 43,069.58 | 176,930.42 |
| 9 | 176,930.42 | 880.75 | 4,528.56 | 6,040.44 | 46,010.98 | 49,110.02 | 170,889.98 |
| 10 | 170,889.98 | 880.75 | 4,369.62 | 6,199.38 | 50,380.60 | 55,309.40 | 164,690.60 |
| 11 | 164,690.60 | 880.75 | 4,206.49 | 6,362.51 | 54,587.09 | 61,671.91 | 158,328.09 |
| 12 | 158,328.09 | 880.75 | 4,039.08 | 6,529.92 | 58,626.17 | 68,201.83 | 151,798.17 |
| 13 | 151,798.17 | 880.75 | 3,867.26 | 6,701.74 | 62,493.43 | 74,903.57 | 145,096.43 |
| 14 | 145,096.43 | 880.74 | 3,690.93 | 6,877.95 | 66,184.36 | 81,781.52 | 138,218.48 |
| 15 | 138,218.48 | 880.74 | 3,509.96 | 7,058.92 | 69,694.32 | 88,840.44 | 131,159.56 |
| 16 | 131,159.56 | 880.75 | 3,324.22 | 7,244.78 | 73,018.54 | 96,085.22 | 123,914.78 |
| 17 | 123,914.78 | 880.75 | 3,133.61 | 7,435.39 | 76,152.15 | 103,520.61 | 116,479.39 |
| 18 | 116,479.39 | 880.74 | 2,937.96 | 7,630.92 | 79,090.11 | 111,151.53 | 108,848.47 |
| 19 | 108,848.47 | 880.75 | 2,737.16 | 7,831.84 | 81,827.27 | 118,983.37 | 101,016.63 |
| 20 | 101,016.63 | 880.74 | 2,531.11 | 8,037.77 | 84,358.38 | 127,021.14 | 92,978.86 |
| 21 | 92,978.86 | 880.75 | 2,319.60 | 8,249.40 | 86,677.98 | 135,270.54 | 84,729.46 |
| 22 | 84,729.46 | 880.74 | 2,102.56 | 8,466.32 | 88,780.54 | 143,736.86 | 76,263.14 |
| 23 | 76,263.14 | 880.75 | 1,879.78 | 8,689.22 | 90,660.32 | 152,426.08 | 67,573.92 |
| 24 | 67,573.92 | 880.74 | 1,651.15 | 8,917.73 | 92,311.47 | 161,343.81 | 58,656.19 |
| 25 | 58,656.19 | 880.75 | 1,416.52 | 9,152.48 | 93,727.99 | 170,496.29 | 49,503.71 |
| 26 | 49,503.71 | 880.74 | 1,175.67 | 9,393.21 | 94,903.66 | 179,889.50 | 40,110.50 |
| 27 | 40,110.50 | 880.75 | 928.53 | 9,640.47 | 95,832.19 | 189,529.97 | 30,470.03 |
| 28 | 30,470.03 | 880.74 | 674.85 | 9,894.03 | 96,507.04 | 199,424.00 | 20,576.00 |
| 29 | 20,576.00 | 880.75 | 414.53 | 10,154.47 | 96,921.57 | 209,578.47 | 10,421.53 |
| 30 | 10,421.53 | 880.74 | 147.34 | 10,421.54 | 97,068.91 | 220,000.01 | 0.00 |
| There may be minor rounding differences in the calculation | |||||||
Here's a few things to note.
1.) The interest paid for 30 year loan is more than 3 times the interest paid for a 10 year loan.
2.) If you took up a 30 year loan and decided to clear your loans in 10 years, you would have paid up to $50,000 for interest compared to $30,000 if you started off with a 10 year loan.
3.) That for the 1st 3 years of loan repayment in the 30 year loan version, you are paying off more for interest than for your principal amount
4.) It takes more than 6 years of loan repayment in the 30 year loan version before your principal amount payment catches up with the interest payment
Now that's depressing. I'll go for a 10 year loan and save myself $67,000 which I could use to pay for a decent car. So why wait? Go shorten your loan hdb loan.
Update (29/11/07) - I stand corrected. Read here instead for an updated and more detail analysis
Labels: Blog - Random Rants
2 comments:
- At 7:04 pm Tsk said...
-
Hi Mastermind, I believe those who took the 30 year loan have in mind to invest the rest of the money in their CPF, and earn more in interest than the low interest of 2.6%pa that CPF charges. If we consider that for each dollar that could have been invested (instead of being used to pay HDB) earning more than 5 cents, we would have earned 2.4 cents instead of losing money on interest!
- At 9:41 pm Mastermind said...
-
Barney,
Unfortunately investment in CPF is not going to give you your 5% returns consistently. Hidden costs to investment will prevent your funds from meeting benchmark returns
Take a look at what this author, a professor in economics write about to tear down the arguments for taking money out of CPF to invest.
http://www.askdrmoney.com/Academic_Funds_vs._CPF.htm
Bottom line is, taking money from CPF for investment is a gamble that may or may not bear fruits. Saving on interest is a risk free long term cost cutting measure.
I prefer not to play with my luck. I didn't even buy 4D for my ROM and HDB flat numbers even though my Dad won 4D twice by betting on those numbers!
But I would agree that those who take 30 years loan should try to invest their CPF for the chance of greater returns because I will be $40,000 better off compared to them if they did nothing.
Posts
