Sunday, August 3, 2008

The Family Aspect of Paying down Housing Loan

Today's local papers talk about why you should, or should not pay down your housing loan. In Singapore, you can say that its one of the unique places where almost everyone owns the roof over their heads. That's one of the unique characteristics of Singapore.

The article in today's papers is a typical "textbook" answer. Put a little money in the CPF, let it generate interest, pay down your low interest loan slowly, etc etc. It even teaches you how to "re-arrange" your funds so that you still have money in your OA after applying for a HDB loan.

However there is one aspect that so far, no articles or financial advisers have highlighted to me. The reason why people will pay down their housing loan. This is my reason.

Flexibility in family planning.

Why do I say that? Its a very simple concept. If you pay down your loan slowly, these are the assumptions that you have to take:
  1. You, and your other half will have a job that pays just as well, or better for the duration of the loan, with no loss of income in-between

  2. The low interest rate will always be comparable to your savings and investment returns

  3. The CPF rules do not change for property related purchases

For the first assumption, that means you and your other half must have a job that pays for the loan for the duration of the housing loan. Either that, or one of them must earn enough to pay the 2 portions.

The second assumption is related to the first assumption. You and your other half must assume that the increase of your pay would offset this interest rate game that you choose to play.

The third assumption is also related to the above 2. If the CPF rules changed (they did recently with regards to the AHWL), you and your other half must have sufficient resources to top-up or increase your loan repayment. Many people also forget that our CPF is capped at $4,500 gross salary. No matter how much your salary increases, your CPF will hit a ceiling, and you'll have to top up the rest using cash.

What all these assumptions have in common? To me its family planning.

Couples that over-extended themselves by buying a flat which they cannot afford will be forever caught in the rat race. That's because if they leave their jobs, they might have problems repaying all those loans. If they are in the rat race, where's the family? The answer is there's no family. It'll just be like 2 person, who happens to live together in a big house, because they will spend a large proportion of their time in their work, or traveling.

Is it any better if you fully repay your housing loan? To me, there is a significant advantage. That is the couple has the option not to work if they can afford it. If the couple has about $5,000 per month coming in from their savings and investments every month, why do they need to work if their loans are all fully repaid? Heck, I can even save for the kids with $5,000 per month without all those loan repayment.

There'll be more time for family, for kids, and of course for friends. Life is not about working. We work to live, not live to work. However, to reach this level, you would have to look beyond the present, and of course beyond the $$$. $$$ is the means for survival. They are not collectible items.

Personally to me, the repayment of the housing loan, and all types of loans, is the critical family aspect that everyone (at least in Singapore) seems to neglect. $$$, and expectations of what life should be, has clouded their visions so as to speak.

Spend and live within your means, and you'll find you and your family happier, and more content. For me, I'll still repay my housing loan as soon as possible. There is more to life than being a Scrooge Mcduck.


Lawrence said...

I totally agree with paying down housing loan. It definitely make sense becasue the interest saved is almost 45% of the loan amount. With this money you can invest and make more money for your retirement.

joe aldeguer said...

Great article.

Nikhil Pandey said...

Read your blog its really informative and helpful keep updating with newer post on House loan

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