About 2 years ago, I made a decision to do away with my HDB Housing Loan and switched my mortgage to POSB instead. Then, with interest rates near negligible for almost 5 years already, the HDB Housing Loan rate of 2.6% didn’t seem all that concessionary. Moreover, POSB made a great offer to all existing HDB owners then:
1.38% above the 3 month SIBOR rate and subjected to a maximum interest rate equivalent to the interest rate under the CPF Ordinary Account for the first 10 years of the mortgage
Even though I had just stayed in my existing flat for less than half a year and intended to service my mortgage for the best part of 30 years, I found this offer too good to refuse. I immediately saved more than $100 as my mortgage went down from $1,000 plus to just $910.
But well, the best of times didn’t last that long and interest rates started climbing for the past two years. Right now, the revised interest rate is 2.2% and I am expecting to pay $970 per month thereafter, which is pretty close to what I was paying prior to taking this floating rate home loan.
I have to admit that at this point in time, if I were on the HDB Concessionary Home Loan, I probably won’t switch to the POSB Home Loan (what more with the maximum 2.5% guarantee reduced to 5 years). But seriously, there are no regrets at this stage. Here’s why:
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Interest rates might not go much higher
I am not a great market timer and is not good at market predictions. This extends to predicting interest rates. Hey, I actually warned a cousin not to take a floating rate loan 6-7 years ago because I had expected that interest rates would rise. Luckily, he didn’t listen to me and he has saved tens of thousands as a result. 😆
Who knows? Rates might not rise that much going forward and I would continue saving $50 or more a month for the next 8 years. That wouldn’t be too bad a deal, eh? Well, it costs nothing to remain optimistic.
Downgrade within 8 years time
We received our keys late in 2012 and amazingly, it’s already 2.5 years into our Minimum Occupation Period (M.O.P.). Another 2.5 years to go, and we would be free to sell off our flat. Not that we are thinking of doing that right now, but that’s definitely an option, especially if we are unable to service out mortgage.
That could be due to unemployment, early retirement or well… rising interest rates.
A pretty good option would be to ballot for another BTO flat, probably a smaller 4-room unit when the M.O.P. is up. That would free us from the mortgage and the proceeds from the sale of that current flat should help to offset the bulk of the cost of that new BTO.
Problem solved.
Pay off the mortgage within the next 8 years
There’s a possibility that interest rates could rise through the roof in 8 years time. And during that period of time, we could develop an attachment to the place that we call home currently. That spells something like a disaster, no?
Well, in that scenario, we could liquidate all our investments to pay off our mortgage. Even right now, we can choose to live debt-free. We still owe about $240,000, but that can be easily taken care of by our current portfolio.
Some of our friends felt that we were taking a huge risk but I really think we had it covered when we signed on the dotted line at the POSB Branch in SengKang.
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We have saved almost $2k in the two years so far on this less-risky floating home loan and I do think we would be better off with it than without it when we evaluate again in 8 years time.
But I have to admit that sticking to the HDB Home Loan wouldn’t be a bad second choice either. Maybe you should do that if you’re buying a HDB flat anytime soon.
Interesting take. I also don’t want to predict anything about interest rates, but suffice to say I think many, many Singaporeans would be affected. 😀
I believe that for many, downgrading would be a good option if it comes to the crunch. I’m sure that a lot of us bought more house than we could afford due to the super lower interest rates.
I’m not too sure about the balloting for another BTO thing. Would that require you to already have sold off your existing HDB? And you would get lower priority because it’s not the first time right? So you’ll be transient for awhile?
Here’s hoping you continue saving on your mortgage!
Hi singaporemm,
Regarding balloting for BTO, one is not required to sell before balloting. One only needs to sell within a certain period after getting the key to the new BTO.
But it’s true that there is lower priority for 2nd timers. But with the property market tanking, it might not be hard in a couple of years’ time.
Hi 15hrww
Similar situation as yours in terms of mortgage. I bought in mid year 2012 and was contemplating to whether to get POSB home loan as we can repay in 10 years time. My wife and I discussed for the longest time and when we built up the buffer in our CPF OA, the POSB home loan reduced from 10 years to 8 years. 2 years later which is now, i wanted to explore further as my buffer has allowed me to commit to the newly reduced 8 years plan, they further reduced to 5 years now. haha.
However, my wife has never felt comfortable to take the risk of the “private loan” for that very marginal saving over the years for our CPF OA. Although we are paying high interest to HDB loan at 2.6%, I think it is our best option at the moment for the piece of mind.
I don’t think you can liquidate your residential home so easily and get a 2nd BTO. that is my plan too but I am not as optimistic as how you have wrote. 2nd BTO is like a lucky draw with higher chance, but it is still very challenging if you have been frequenting HDB balloting website. Unless you are willing to grab any location with your 2nd BTO, but it is still very challenging even that option. I actually want to move near my wife workplace. I think buying resale is more feasible. No harm trying for 2nd BTO too since HDB ramping up the supply. I am currently staying beside a MRT station, so could consider a prime area to sell. Good luck to us then.
Hi Frugal Daddy,
Shifting goalposts… Everyone had their fare share of it at some point.
I do agree that the savings can be considered marginal compared to the size of the mortgage. However, on its own, it can be quite substantial if we can save up to a few thousand.
2nd BTO will be a bonus. I have heard of stories where the purchase prices of two BTOs added up is less than the proceeds from the sale of the first BTO. If that really happens for us, I would be delighted. Nonetheless, have to admit that if we want to get another flat, it would be much easier on the resale front. =)
Posb loan i’m considering now.
I’m intending to take 100k loan and pay finish in 5 years. Wonder if this is possible? Is there a minimum loan amount?
Hi Bp,
If I don’t recall wrongly, the minimum is 100k. If you can pay off within 5 years, then the POSB Home Loan could still be good for you.