Mortgage Management: CPF, HDB or Bank

After a fruitful discussion with a friend who was considering among the options of (1) using CPF to pay in full, (2) take a HDB loan or (3) take a bank loan for his HDB flat, I did quite a lot of calculations, so I thought I might as well share it, in case there are others who face the same dilemma.

Option 1 will need to be the reference point. Based on the assumption of $100k as a ball park figure in CPF where any other amount can be multiplied from. Time frame will be another consideration, but will pick a short time frame of 5 years and any other tenure will compound the differences further.

Option 1, CPF will determine the opportunity cost which will be using (1.25^5 – 1) = $13k.

Option 2 (assuming the $100k in CPF is squirreled away in a CPF investment before it gets wiped out and then placing it back), HDB loan with 2.6% interest, will be a monthly installment of $1,780 paying $6,800 in interest, approximately earning about $4,660 in CPF interest and creating an opportunity cost of $8,145.

Option 3, bank loan with 1.2% interest on average. Monthly installment of $1,718 paying $3,080 in interest, approximately earning about $4,846 in CPF interest and creating an opportunity cost of $7,861.

Conclusion:
Option 1 – Pros, save paying anyone any interest. Cons, creates a huge opportunity cost “deficit” owing back to CPF without earning any actual interest.
Option 2 – Pros, interest rate is fixed and can at least have some CPF earnings. Cons, high interest is loss to HDB as the interest charged is higher than interest earned.
Option 3 – Pros, interest rate is lower than CPF rate at the moment and hence interest earned is higher than the interest paid to the bank. Cons, rate is variable and interest is loss to the bank.

Well, my opinion at this point in time will be to proceed with a bank loan and maximum tenure. Until the point in time where the bank floating rate exceeds the CPF rate of 2.5%, will re-evaluate the options based on the new assumptions at that point in time. Options are to pay in full or re-finance with possibly a fixed rate and different tenure, however, HDB is no longer allowed.

Do share your comments for discussion if you have a differing opinion. Thanks.