Should You Pay off Your HDB Home Loan in Advance If You Can?

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Image of a person standing confused with money in hand, surrounded by HDB flats

Should you be paying off your HDB loan in advance? Not all of us have the luxury to even consider this question. But if you have been frugal in your spending or managed to get a nice bonus or raise, it may be possible.

Partial vs. full repayment

There are two ways to make repayments of your HDB loan: a partial capital repayment and a full capital repayment. A partial capital repayment lets you pay off some of your outstanding loan with a minimum amount of S$5,000. You can either pay it back in cash or use the money from your CPF Ordinary Account.

To pay or not to pay, that is the question

It’s obviously great to have less debt than more. But there are opportunity costs involved when you pay your HDB loan in advance.

Let’s have a look at your options and see whether we can help you decide what to do.

Repaying your HDB loan with cash

The first consideration here is whether keeping cash in your bank is going to earn you more interest than your HDB loan is going to cost you. We always advocate using high interest savings account like the OCBC 365 account or BOC SmartSaver account. The interest rates on these accounts, assuming you don’t insure or invest with them, usually range from 1.8% – 2.35% p.a..

Since your HDB loan’s interest is 2.6%, it makes sense for you to try and repay part of your loan if you have the spare cash. By making a partial capital repayment of S$10,000 on a S$255,000 HDB loan, you can save close to S$9,500 of interest, and also reduce your tenure by 1.5 years.

Use the HDB Mortgage Interest Calculator to find out how much you’ll save on your loan if you made a repayment.

What happens if you instead decide to leave your money in the bank at 2.35% interest per annum? Using this savings calculator, you’ll see that over a period of 25 years, you’ll only end up with S$17,984.51.

That’s a difference of $1,500. The difference will be bigger if you repay larger amounts. Not only that, it’s unlikely that the banks would continue to offer such high interest rates over the long term too.

The simple math suggests that it’s better to repay more of the loan. However, you should take into consideration whether you have sufficient cash in your emergency fund and if you are able to invest the money and get better yields.

“If you have nothing better to invest, or don’t know how, it’s probably wise to make a partial repayment.”

Conclusion: Cash in bank – 0 | Partial Capital Repayment – 1

Repaying your HDB loan with CPF OA

The same consideration above stands – does the money in your CPF earn you more than your loan interest would cost you?

When you first get your keys, HDB would empty everything you have in your Ordinary Account, before extending you a loan. Assuming you’re using your CPF for the monthly instalments, this could mean that your CPF OA won’t have much savings for a couple of years. Since you get an additional 1% (making it 3.5%) on your first S$20,000 in your CPF OA, you should keep more money in your CPF rather than make a partial capital repayment.

After saving more than S$20,000 in your CPF OA, there would be a marginal 0.1% interest benefit of making a partial capital repayment. Furthermore, the money you take out from CPF not only doesn’t earn you interest, you need to repay the interest you would have earned when you sell the house.

With this in mind, it would be more prudent to use cash (that aren’t yielding much returns) than using your CPF monies for the loan repayment.

Conclusion: Money in CPF – 1 | Partial Capital Repayment – 0

How do you make a partial capital repayment?

This is simple.

Head to the HDB payments page and select the partial capital repayment option. Fill up the online application form and wait for the HDB’s approval. You can then make a cash payment through an AXS machine.

There are no fees involved so you can make these repayments as often as you like, as long as it’s at least S$5,000. Just make sure you keep enough for your expenses. There’s no point in saving on your loan’s interest only to get trapped in a credit card debt.

Obviously, you may have different cashflow needs or higher potential investment returns, which can affect your decision to use cash for repayment. Nonetheless, we hope this has been helpful!

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