Ok, 1 paper down, another one to go... but before that, we are still waiting for the 2nd appointment and while waiting for the paper to start at 7pm I did some calculations for the HDB loan again to check my 'working' previously. Well.. gotta distract my mind and keep it sharp after preparing for exams eh... (my study pattern is weird to Sucre but as long as it works, I'm fine with it)

Anyway, I found out that previously I missed out some important points when I did the comparison using the calculator function from CPF. The actual fact is not as simple.

The concessionary HDB housing loan has an interest of 2.6% currently, the CPF interest rate in our ordinary account is 2.5%. Now the calculations were correct if we borrow $X from HDB to pay for our house and indeed we will be paying $Y extra if we take up a 30 year loan versus, say a 15 year loan. BUT....

1.) If we use CPF money to service the HDB loan, that is like borrowing money from CPF to pay off another loan. Yes, CPF interest rate is lower at 2.5% but the difference of 0.1% is negligible compared to say, the >4% inflation we experienced lately. (In fact, if we consider inflation in a very rough way, the total salary we are drawing in civil service could be less than last year assuming our pay is stagnant! 15 months / 1.04 = 14.4 months or equivalent of 2.4 months bonus) Anyway, if we service the loan using 100% CPF money (which most couples would do), then it doesn't really matter much if you take a 30 year loan or a 30 day loan since we will still 'owe' the government money (the only difference is in interest)

2.) If we take up a 30 year loan and use less of our CPF money to service the HDB loan per month, we would have more money to 'save' in our CPF and earn 2.5% interest instead. That is without investing the money, something that Barney pointed out in my first post! Comparing a saving of 0.1% interest in loan versus a 2.5% interest gain, which is better? Of course, the actual computation is much more complicated than that, it depends on the fraction of your CPF used to service the loan monthly etc. I spend quite some time working on 3 excel sheets to do computations and arrive with the estimated difference.

The estimated difference for a $220K loan taken over 15 years compared to 30 years after considering 1.) interest payable for HDB loan, 2.) interest payable for CPF 'loan' (or accrued interest as they coin it), 3.) interest that would be gain/lost if we put the CPF money to earn only 2.5% interest is more than $23000 after 15 years!

Of course it makes things even more complicated that when you sell off your flat after 15 years and the money earn from the sales is insufficient to cover for the money you still owe HDB + CPF principal amount + accrued interest, your 15 year loan may still end up to be a better deal since CPF will write off the amount you owe them if the sales of the house could not cover for the total amount but I doubt HDB will 'write off' amount that you owe them. But I have to add, this scenario will only happen if the (touchwood) property market crashes and 5 room flats go for less than $100K etc

(Note! All computations based on a principal amount of $220,000)

The Big Question is
If getting the HDB concessionary loan is such a good deal then why are we given the option to 'shorten' our loans?

Well, not everyone could get HDB concessionary loan at a low 2.6% interest. Bank loans like the POSB Home Ideal charges a rate much higher than HDB, more than 4% to be exact and with terms and conditions applied (loan amount<>

I did another lengthy calculation to compare the 15 year loan and 30 year loan with a home loan interest rate of 4.5% instead of 2.6%, and keeping other conditions the same, the 15 year loan becomes a better deal by a sum of about $4000. I didn't bother to spend more time to look at where is the 'balance' point whereby both 15 year and 30 year loan would be 'equal', but I guess it is near the 4% rate that banks are charging so they can 'maximise' their earnings from interest collected from your loan and yet you would get a 30 year loan.

If the bank interest is much less, they earn much less income from interest with your 30 year loan, if the interest is much more, you would want to take a shorter loan to save money and a shorter loan translate to lesser income. (I seem to be forgetting inflation but hey, I don't work in the finance sector your know) Darn those banks, they get everything calculated nicely. And if you would like to complicate matters even further, add cpf investment, variable bank rates and partial payment in cash into the calculation too.

Bank loans are for my next housing property when I'm no longer eligible for HDB loans. For now, I know I will get a 30 year HDB concessionary loan for my new house instead.

I stand corrected