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How much loan to take and CPF to use?

TL;DR evaluating interest rate opportunity and trade-offs by investing to offset mortgage interest instead of using up all your deployable cash towards funding the property. Investing a portion of it will offset the mortgage interest, keeping a healthy financial position overall.

For more info on about Loan to Value (LTC), Total Debt Servicing Ratio (TDSR), Mortgage Servicing Ratio (MSR), Grants, Cash requirements, Loan Tenure, Loan Structure, click here.

Here's a quick example of interest rate opportunity cost and trade-offs:

1. Starting with an asset of $500,000 deployable cash and no loan or liabilities, investing it in an instrument with 5% returns will give a return of $25,000.

2. Now, with the same $500,000, let's allocate 50% to investments with a 5% return and the other 50% to the purchase of a property with an interest of 2.8% (flat rate method) will bring us to a positive position of $5,500 (5%*$250k - 2.8%*$250k = $5,500).

With 50% being $250,000 going towards to the purchase of the property and loan amount, we are looking at a property price of $500,000.

3. However, allocating 20% to investments with a 5% return and the other 80% to the purchase of a property with an interest of 2.8% will bring us to a negative position of -$6,200 (5%*$100k - 2.8%*$400k = $-6,200).

With 80% being $400,000 going towards to the purchase of the property and loan amount, we are looking at a property price of $800,000.

4. An allocation would be about 36% to investments with a 5% return and the other 64% to the purchase of a property with an interest of 2.8% will bring us close to break even, a positive position of $40 (5%*$180k - 2.8%*$320k = $40).

With 64% being $320,000 going towards to the purchase of the property and loan amount, we are looking at a property price of $640,000.

Note: the above compares the interest component only. A typical mortgage payment have two payment components, the interest payment and the principle payment.

Evaluating the trade-offs above will give us a better informed decision on the opportunity cost and the amount of loan to take or CPF to use.

In addition, the right mortgage matters. Every 1% increment on a $1 million loan for 30 years increases the monthly payment by around $500. Take control of the mortgage plans to see which package and how much spread works for your situation, review the terms and conditions to avoid unnecessary fees, and review it regularly. An interest-offset mortgage account can also offset your mortgage interest yet keep flexibility and liquidity.

Reviewing how much loan to take together with your objectives, plans and timeline will help you make a better decision.