Manage your leverage

[yeokiwi]

Assume both Investors A and B have monthly $2015 of CPF contribution,
Investor A - 30 years, 300k loan at 2.6% interest rate. Monthly payment = $1201
Investor B - 15 years, 300k loan at 2.6% interest rate. Monthly payment = $2015
For Investor A,
Assuming the investor invests the difference of $2015-$1201 = $814 with 5% return for 30 years,
The capital with investment gain at the end of 30 years is $54081.
For investor B,
Assuming the investor invests $2015 at 5% return from 15th to 30th year,
The capital with investment gain at the end of 15 years is $43480.
So, at the end of 30 years,
Both Investors A and B had repaid the loan but Investor A is ahead by $10600.

You got to multiply that (814 and 2015) by 12 to get the annual investment dollars. If we do that, then the difference between a 15-year and a 30-year loan is $127k advantage for the latter if the rate of return is 5%.

If one is totally hopeless and gets only 2.5% CPF return rate, his disadvantage is only $4k. With 3.5% for the first $20K, the disadvantage is less than $1k. These are really small amounts compared to the "liquidity" you get (oh yah, liquidity in CPF, oxymoron). The bottom line remains, do NOT rush to pay off the HDB loan. It makes no financial sense under the current interest rates.

I am ignoring the effect of inflation. If accounted, it should favor the longer loan period. I am also ignoring the way CPF accrue interest.

haha... thank you thank you...
I like the oxymoron part..

Basically, I treat my CPF as my Whole Life Policy. I paid a lot of premium and I had to double up as the investment manager and if I bite the dust, my family will get the payout.