Why you should NOT pay off your mortgage loan with your CPF OA

I AM WRONG!! Had a huge brain fart.... Apologies for that.

I was too engrossed with the total interest paid and not realized that although yes you do pay more interest to the bank, you still end up with $14k in your CPF after year 12.

Thanks to those who pointed this out to me!

I know… I know…. With the current low interest rate environment of around 1.5% for housing loan, many of you must be thinking that I'm crazy to propose the use of your CPF OA, which is giving you 2.5%, to pay off the low mortgage interest. In fact, I was also thinking that people should take more loan now with the interest rate so low and keep more in their CPF OA until I did the Math..... I hope I get the Math right.

What the Math shows is that for certain scenario, we will be actually paying more interest for our 1.5% mortgage as compared with the 2.5% interest earned from CPF. Yes it sounds counter intuitive but bear with me and let's run through with an example below.

Say we need a $600,000 mortgage and we have $100,000 in our CPF OA. The 2 scenarios we have are,

1) Take a $600,000 loan and keep the $100,000 in our CPF

OR

2) Use the $100,000 in our OA for housing and only take a $500,000 mortgage loan.

I have assumed a loan interest of 1.5% for a tenure of 12 years. With a loan of $500,000, the monthly repayment calculated is around $3796. To keep the monthly repayment around the same for both scenario, we will need to have a longer loan tenure of 14.7 years for the $600,000 loan at 1.5%.

At the end of 12 years, we will compare the total interest paid for Scenario 1 and the total interest paid for Scenario 2 minus the interest gain from CPF OA after repaying the outstanding loan at the end of year 12. The results are shown in the table below. 

From the results, we can see that using the $100,000 in CPF OA to help lower the loan amount and shorten the loan duration actually resulted in about $5,600 lesser in total interest paid.

The higher and longer loan tenure actually attract more interest than what the $100,000 can earn in CPF OA. This is because, for mortgage loan, the portion of the monthly repayment going to paying off interest is high at the beginning and this is amplified with the higher loan at a longer tenure. I guess this is not intuitive because not many people consider the fact that in order to keep their monthly repayment affordable, they will have to take a longer loan tenure and this will actually increase the interest they will have to pay substantially.

I did a bunch of other scenarios with different mortgage interest rate and loan duration. In order for it to be worth keeping the money in CPF OA, the loan tenure has to be kept shorter or the mortgage interest has to be much lower. So before you decide to keep your CPF OA or use it for your housing loan, do calculate it yourself to see if it's really saving you money. Of course besides savings, there are still other considerations such as liquidity.

You can use the link below to help you calculate your housing loan and CPF interest for your own comparison.

Housing loan calculation in EXCEL using PMT function

Mortgage calculation by PropertyGuru

Compound interest calculator for calculating CPF OA interest.

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