When you take a housing loan from HDB, it will take all the money in your CPF Ordinary Account (OA) before giving you the loan. This is to reduce the loan quantum that you need to service. To avoid having an empty OA account, you'll need to transfer some or all of the OA balance to somewhere else before you apply for the loan. One way is to invest in some bond or money-market unit trusts that will not drop too much in value while you're holding them. But the key question is, do you want to leave some money in your OA account or clean it out? It depends on whether you have any need for the OA money in the future and your risk preference.
There actually isn't a lot of approved uses for the OA money. Besides building up your retirement nest egg, you can buy properties, service insurance policies, invest in stocks and unit trusts and finance your family members' tertiary education. If you foresee that you need to use the OA money for such needs in the short- and long-term, then it's better to keep some money in the OA. This is because if you have an empty OA account, it'll take a fairly long period of time to build it up again as the monthly loan repayment will take a portion of your monthly CPF contributions. In any case, assuming you keep some money in the OA but later find that you have no other need for it, you can always make a lump sum repayment to reduce the loan quantum.
The second factor that you need to consider is your risk preference. Do you prefer a bigger debt burden (and bigger OA balance) or a near-empty OA balance (but smaller debt burden)? Some people will prefer to have a smaller debt burden so as to reduce the amount of interest payable over the loan tenure and/or to become debt-free earlier. Personally, I prefer to have a bigger OA balance. The main reason is it takes a long time to build up the OA balance when you start to service the loan as explained earlier. If, for some reasons, you are in between jobs for several months, the OA balance will quickly become insufficient to service the monthly repayment and you might risk losing your flat (I understand HDB is quite forgiving if you miss a few monthly payments, but the risk exists). Not only that, you might also default on other financial commitments such as insurance premiums, risking your insurance coverage as well. For this reason, I prefer to live with a bigger debt burden than to risk a snowball default. Of course, you can always make up any shortfall with cash, but it would be a constant worry over the low OA balance.
It also helps that the HDB loan interest is only 0.1% higher than the OA interest rate. At 0.1%, you pay an extra $100 for every $100,000 in your OA balance that is not being used to repay the loan. Over a 25-year loan tenure, this works out to be $3,112. This extra payment is like insurance premium, to guard against a snowball default and constant worry over the low OA balance. Not only that, you get to save the money for some other uses in the future and have the flexibility of making a lump sum repayment. And if you manage to invest the OA money at a rate higher than the loan interest, you get to grow a bigger retirement nest egg as well!
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What kind of invesments should i look at to park my OA monies in before HDB clear out my OA account?ReplyDelete
You can refer to this table for a list of assets in which you can invest 100% of your OA money in excess of $20,000. As preservation of capital is an important consideration, you should consider only low-risk assets and exit them as soon as HDB has cleared out the account.Delete
I was led here by the latest post.ReplyDelete
Another alternative is to transfer part of your OA to the SA and let the 4% work its magic.
This is another way; the only issue is that the transfer is irreversible. For me, OA money can be invested, so I prefer to keep it in OA. Just have to invest it somewhere safe when HDB cleans out the account.Delete
if the first $20k cannt be used for investment; hence if you intend to use cpf, this amt will be wipe out, since only in excess of this can be used to buy CPFIS.ReplyDelete
is this assumption correct?
Yes, the first $20K that cannot be invested will be taken by HDB. However, this should not be a concern. The max. loan quantum for a HDB loan is 90%, and most flats cost more than $200K. You need to pay more than $20K as downpayment anyway.Delete