HDB Loan: Pay down your HDB loan slowly
Article Contributed by www.PropertyBUYER.com.sg
Tel : 6100 0608
SMS : 9782 8606
Email : loans@propertyBUYER.com.sg
Contact us : http://www.PropertyBUYER.com.sg/contactus.php
In the recent months, we have come across many individuals calling us up trying to get cash out of their HDB homes.
This person, let's call him Mr. Tan. He bought a HDB property for $400,000. The HDB property is worth $450,000 he reckons.
Bought at :$400,000
Current estimated value :$450,000
CPF/HDB interest rate :2.6%
The outstanding loan size :$120,000
PAYING DOWN YOUR HDB LOAN?
Just 2 years ago, Mr. Tan used $50,000 from his CPF to reduce the outstanding loan amount. This wiped out his entire CFP ordinary account savings.
Mr. Tan's home loan installment is ~$1000 a month. $500 each him and $500 from his wife.
However Mr. Tan recently lost his job and his CPF has totally run out. This leaves him having to pay $500 cash for his HDB flat.
Mr. Tan came to enquire with us. He would like to refinance his HDB and get CASH OUT.
Since his house is only owing very little. Assuming that the price is $450,000 with a debt of $120,000, the equity in the HDB flat should be $330,000.
That was what Mr. Tan thought. He needed some cash to tide him over the financial crisis.
HDB flats have NO (ZERO) Equity for Term Loan
What many people forget is that HDB flats have no equity in the refinance market. Under current HDB rules, banks cannot give term loans to HDB flats.
DEBT is BAD???
For those people on HDB preferential loan of 2.6%, DEBT is not a bad thing. If they took their time to pay for the installment, the cash held in ordinary account would be earning 2.5% while the debt is payable at 2.6%. This represents a very small spread of 0.1%. This is hardly anything. For $100,000 this is just $100 dollars.
Of course if the couple had the money, they should pay off the debt so that it is cheaper in the long run. (even though it is very marginal)
In this case, DEBT is not a bad thing. Debt is better than having no food on the table.
What Should Mr. Tan have done? (If he met us earlier)
We would have advised Mr. TAN not to use his $50,000 from CPF ordinary account to pay down his loan. Sure, the extra 0.1% cost (pay 2.6% while earning 2.5% interest) would cost him roughly $50 a year. But that is a very small price to pay, it is similar to buying insurance.
With CPF savings of $50,000, Mr. Tan should have kept at least $12,000 from his CPF ordinary account to stand-by for at least 12 months worth of HDB installment/repayment.
This way, in case he did not have an income, at least he does not need to fork out more money to maintain the house.
Unfortunately we cannot help him this time and we are saddened by this and the several incidents that came before Mr. Tan.
In case you are in Mr. Tan's position, even when you still have a job, we see no rush in paying back your HDB loan in double quick time and paint yourself into a corner.
If you haven't done it yet, we strongly encourage you to give yourself some breathing room of at least 12 to 24 months. Keep 24 months worth of HDB repayment in your CPF ordinary account in case of emergency.
REFER a FRIEND TO US
Contact us : 6100 0608
SMS : 9782 8606
Email : loans@propertybuyer.com.sg
http://www.PropertyBUYER.com.sg/contactus.php
Sunday, May 17, 2009
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