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HDB Loan Analysis

>> Monday, August 31, 2009

Should one:
A) Repay the loan early. (The longer the repayment period, the more interest you pay.)
B) Take the maximum loan duration. (The HDB Loan Rate at 2.6%pa is very attractive.)

Analysis:

There other factors to consider like affordability of installment amount, retirement age, loan eligibility, etc, and this is based purely on a mathematical approach.

Comparing a $250,000 loan for 30 years vs 15 years at the HDB Loan Rate of 2.6%pa.

Using HDB Loan Calculator,
Monthly Installment:
For 15 years = $1679
For 30 years = $1001
Difference = $678 for first 15 years, $1001 for next 15 years

Total amount paid:
For 15 years = 1679 x 12 x 15 = $302,220
For 30 years = 1001 x 12 x 15 = $360,360
Total Difference = $58,140

Assumption:
Invest the $678 monthly for 15 years.
Accumulated investment continues to invest but it is used to pay out the $1001 monthly for subsequent 15 years.
Achieved a returns of 3%pa over the 30 years.

Calculation:
Accumulated amount after 15 years = FV(3% returns, 15, $(678*12) yearly contribution) = $151,321
If $151,321 continued to be invested at 3% returns while withdrawing $1001 monthly, at the end of 15 years there will be a surplus of $12,343.

Conclusion:

To enjoy the benefits of taking a longer loan duration, you have to set the difference aside AND you must achieve a return higher than 2.6%pa for 30 years when investing it.

Therefore, if you do not intend to save & invest the difference OR do not think you can achieve a return higher than 2.6%pa consistently over 30 years, it would be better to choose as short a duration as possible after considering the various other factors.

Conversely, if you have the discipline in saving the difference AND able to invest it at a return higher than 2.6%pa, a longer loan period will be better.

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