As from April 2013 my Journey in Investing is to create Retirement Income for Life till 80 years old for two over market cycles of Bull and Bear.

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Sunday, 7 January 2018

Should I Use CPF OA or Cash To Pay My Home Mortgages???


OT834 January 2018 at 12:24:00 GMT+8

Hi Uncle CW,

Huat ah! Power! But nowaday all use CPF to pay house. Even mandatory contribution also doesn't have much compounding effect already.


Hmm .... may be how some of you or many of you also think like OT.

Should I use CPF OA or cash to pay my home mortgages?


Three scenarios for home mortgages here:

1. No spare cash so no choice has to pay home mortgages with CPF OA

2. Use spare cash to pay home mortgages and CPF OA to earn compounding 2.5%  interests

3. Use CPF OA pay home mortgages and spare cash to earn compounding investment return


1. No spare cash so no choice has to pay home mortgages with CPF OA 


"But nowaday all use CPF to pay house. Even mandatory contribution also doesn't have much compounding effect already."


The response from Uncle8888 to the above statement is No hor!

The compounding effect of CPF OA 2.5% interests is intact. It is just compounding inside the value of your residential home and out of CPF OA account!

How come and why like that?

In this case; you are using your CPF OA and accrued 2.5% compounding interests as your investing capital for home mortgages.

When you decided to sell unlock the net capital gains of your home property after deducting the cost of (1) fully paid replacement home,  (2) total mortgages using CPF OA and (3) accrued interests and (4) any other fees


2. Use spare cash to pay home mortgages and CPF OA to earn compounding 2.5%  interests



Your spare cash as capital invested in your home property. Same as Case 1 you will earn net capital gains after deducting the cost of (1) fully paid replacement home,  (2) total mortgages and (3) any other fees

Your CPF OA will continue to earn 2.5% compounding interests

3. Use CPF OA pay home mortgages and spare cash to earn compounding investment return



For CPF OA; it is same as in Case 1!

For cash, you will earn compounding investment return.


Technically and Mathematically; your CPF OA will continue to earn 2.5% compounding interests till you decided to fund your retirement income with either your CPF OA account itself or through CPF OA refund on mortgages and accrued interests.


Any significant Pros or Cons?

If any; it will lie in your heart!

The financial difference will be capital appreciation of your home property and your investing skills across market cycles in whichever scenario you have taken.







5 comments:

  1. 2. Use spare cash to pay home mortgages and CPF OA to earn compounding 2.5% interests

    Beside earning compounding 2.5% interest, it is also act as a war chest for investment...only use it when there is blood in the street.

    ReplyDelete
  2. Wah. I made it into a blog post :) thanks uncle cw. Regardless of which option, provided the property need to appreciate and provided one has a place to stay when house is sold, else house is consumption item.

    ReplyDelete
  3. More and more baby boomer retirees are going to downgrade over the next decade or renting out.

    ReplyDelete
    Replies
    1. Alamak ... you reminded me ... maybe should look out for a good time to let go my mickey mouse condo over next few years...

      Missing out on GST vouchers over last few years LOL!

      Delete

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