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3 strategies to manage your monthly bank loan repayment

3 strategies to manage your monthly bank loan repayment
PHOTO: Unsplash

With interest rates on the rise, some of us are feeling the pinch, especially those of us that have to deal with a floating interest rate home loan package.

Did you know that there are strategies you can adopt to help you manage your monthly bank loan repayment? One of them is to change the way you pay for your monthly mortgage repayment such as switching from a CPF-only approach to an all-cash approach.

Here are three strategies you can adopt and why they might make sense for you.

1. Go with the conventional CPF-only approach

The most common strategy to paying off your bank home loan is to do it via your Central Provident Fund (CPF).

Financing your bank loan with CPF is the easiest strategy among the three because it happens so seamlessly for you. All you need to do is to indicate on your bank loan that you want to make your monthly repayment via CPF and... that's really all there is to it! It doesn't require you to fork out extra cash from your own pocket every month. Of course, that's dependent on whether there's enough savings in your CPF Ordinary Account (OA) to do that for you. And if there is, there's nothing much for you to worry about.

Pro: Gives you more disposable income every month

Adopting this strategy to manage your monthly bank loan repayment lets you leverage on the cash you have in your CPF OA. After all, you can't withdraw your CPF OA until you are 63 years old - the minimum retirement age in accordance to the Retirement and Re-employment Act.

Whatever amount you take home from your monthly salary can be flexibly allocated to how you want to spend it. Be it whether you want to invest it in an endowment fund, buy an insurance policy for your family, or use it for some much-needed renovation.

Con: Opportunity cost of using your CPF money

While you can use your CPF OA to finance your home, it does come with an opportunity cost. The opportunity cost in this case is missing out on the 2.5 per cent interest rate that CPF pays you if your money was still sitting in your CPF OA.

Since you withdrew from your CPF OA to finance your home, you'll instead have to "pay yourself" that 2.5 per cent interest rate. This happens when you sell your property. You will first need to replenish your CPF with the amount you withdrew from your account. But on top of that, you'll also need to repay the 2.5 per cent interest accrued and place it back into your own CPF OA.

2. Switching to cash-only mode

Having to repay that 2.5 per cent accrued interest on your bank loan does sound daunting. What if you don't want to use your CPF to pay your monthly bank loan repayment? Is that even doable?

Well, the good news is that you have this other option available to you. Anyone who is taking a bank loan to finance their home can choose to finance it solely through cash. Which means that you can leave your CPF money intact to earn the 2.5 per cent interest offered by CPF OA!

Pro: Create a forced saving mechanism for yourself

One reason cited for using cash-only for your monthly bank loan repayment is to create a disciplined forced saving mechanism for yourself. While this does mean less disposable income, you are ultimately "spending" your income to build your assets, i.e. your home.

If you need cash one day, you can either downsize your home for cash, or you can choose to rent it out. Since you've been relying on cash from Day One, you won't have to repay the accrued interest into your CPF OA.

Pro: CPF OA becomes your failsafe to fall back on

Mortgage repayments are important because missing out on a couple of them may result in banks foreclosing your property. This means they will take control of your property and sell it to someone else so that they can recover what you owed them. Therefore, it is of paramount importance that you never miss any mortgage repayments.

If you choose the cash-only option, the good news is that your CPF OA can be your failsafe. Even in the event that you get retrenched or meet with a family emergency that depletes your cash, you can still turn to your CPF OA to pay your monthly bank loan repayment.

Con: Less disposable income to spend

Naturally, the biggest grievance you will have with an all-cash approach is the reduced amount of disposable income to spend. But all this is for a good cause because you are channelling your disposable income as a forced savings/inflation hedging asset.

3. How about an in-between approach of cash-CPF mix?

We've shown you how you could go with either an all-CPF or all-cash approach, so that begs the question: Is there a possibility where you mix them together? Indeed! This is an option that's available to you too. Instead of 100 per cent cash or 100 per cent CPF, you can choose your own combination of how you want your monthly bank loan repayment to be paid.

You can repay anywhere between one per cent to 99 per cent on your monthly bank loan repayment using CPF with the remaining amount covered by cash. To do so, for those of you that are already taking a bank loan, you can submit an online application via SingPass. If you are taking an HDB housing loan, you will need to take an additional step of going down to the HDB branch to sign the CPF withdrawal form (PHS9).

Pro: Two-in-one approach that creates a forced saving mechanism while you enjoy great CPF interest rates

Since the cash-CPF approach is a hybrid approach between strategies 1 and 2, it comes with both benefits. Not only do you get to create a forced saving mechanism for yourself, you can still enjoy the 2.5 per cent interest rate for the money you have left in your CPF OA. It's a win-win situation.

Con: The dilemma with allocating your cash-CPF mix

If you were already having a dilemma about which strategy to adopt for your monthly bank loan repayment, then this in-between approach of part-cash-part-CPF is going to add more concerns for you.

With such a wide variety of choice to allocate between cash and CPF, it's hard to know where or how to start. After all, the percentage to allocate between cash and CPF is an art, rather than science. There's no fixed formula to help you with it.

Which strategy fits your refinancing goals best?

Like many homeowners, questions may still linger on which strategy is most suited for you to manage your monthly bank loan repayment. That's why we, wholeheartedly, suggest having a chat with our mortgage consultants. Our mortgage consultants will gather information on your life situation and refinancing goals to provide you with unbiased mortgage advice.

And if you have any questions about the strategies, our mortgage consultants will be more than happy to answer them.

At the same time, we know the latest home loan packages in the market and sometimes can even offer exclusive interest rate packages that you cannot get directly from the bank. If you're looking to purchase a new property, or refinance your existing home loan, fill up our enquiry form and our mortgage consultants will follow up with a call.

ALSO READ: What can you invest in under the CPF Investment Scheme?

This article was first published in Mortgage Master.

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