Accrued Interest More than Profits from Selling of House

For an updated version, refer to the article HERE.

Today's post is to answer if you need to top up cash to cover your housing loan's accrued interest should a shortfall occurs.
The answer is, NO.
Illustrations are below

MORE LINKS
Difference using Cash or CPF to pay Housing Loan?
What to Own during Rate Hikes?
Fine Print of CPF Money Withdrawal
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Repaying CPF Accrued Interest - Why?
Reducing CPF Housing Accrued Interest


1) Accrued Interest ($20k) > Profits from Selling of House ($15k)

• Profits will ALL be used to cover the accrued interest.
• Any accrued interest not repaid by the profits will continue to accrued interest ($5k will continue to accumulate interest that will require you to repay some time in the future).
• You DO NOT NEED to TOP UP CASH to cover the difference ($5k), unless you wish to.

2) Accrued Interest ($20k) = Profits from Selling House ($20k)

• Profits will ALL be used to cover the accrued interest.
• No cash profit will be given to you.

3) Accrued Interest ($20k) < Profits from Selling House ($30k)

• Profits will be used to cover the accrued interest.
• Excess profits will be given to you in cash ($10k).

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What we know about risk is all wrong

As you can search in Google, Investopedia defines clearly what risk is. Schools preach on what risk is, how it is calculated and how it is quantified. But after reading this book, I am questioning the method that we were taught.

MORE LINKS
CPF Voluntary Contribution Rates
What to Own during Rate Hikes?
Fine Print of CPF Money Withdrawal
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Repaying CPF Accrued Interest - Why?
Reducing CPF Housing Accrued Interest

The book I am recommending today: The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks.

Honestly, from just skimming through the content page and back cover recommendations, this book looks like any other investment and finance book which "sells" you on conventional knowledge offered in many other books. However, what it presents is a wealth of knowledge that average investors do not note. An example of such is the following definition of risk, defined by the author himself, Howard Marks.

The diagram above shows the typical risk and return ratio that school generally preaches about, whereby higher risks should equate to higher returns and vice versa.

Source: bnpparibasmf

Source: Sound Mind Investing

However, what Howard Marks came out with, was this diagram above. While the general theory of higher risks equates to higher returns, he adds in 1 more variable into this consideration. The higher the risks, the higher the median of each rate of return and the greater deviation of the possible rate of return.

This basically means the higher your risks, the higher the chances of your expected rate of return fluctuates. 

I came to realise the significance of this after taking a while to digest but I feel that it is something important to account for and not just taking unnecessary risks without accounting the consequences of it.

Share and tell us some of your opinions on the above. Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

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Difference Using Cash or CPF to Pay Off Housing Mortgage

This post is dedicated to another reader of ours who posts us the following question:
Is there any difference if I use cash to pay off my mortgage and not use the CPF vs I use my CPF and then add in the equivalent in cash into my CPF account.

MORE LINKS
CPF Voluntary Contribution Rates
What to Own during Rate Hikes?
Fine Print of CPF Money Withdrawal
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Repaying CPF Accrued Interest - Why?
Reducing CPF Housing Accrued Interest


Scenario 1: Use Cash to pay Mortgage, CPF money remains in CPF.
1) You are earning interest (2.5% + 1%) paid by CPF.
2) No accrued interest from housing loan needs to be paid back when the house is sold
3) You will have less cash on hand, thus it is not recommended to do this UNLESS you have quite a sum of cash or income to sustain your monthly mortgage

Scenario 2: Use CPF to pay Mortgage, THEN contribute the same amount of money to CPF
1) Not earning interest from CPF
2) When you sell your house, you need to return back to your CPF account the accrued interest
3) When you voluntarily contribute money to your CPF, it is subjected to the Voluntary Contribution Rate Requirement (click for more info), which splits your money into different accounts
4) You will accumulate interest faster, at a double rate. 1 set of interest from selling your house (the accrued interest) and 1 set of interest on the amount you voluntarily contribute into your CPF.

Do note that regardless of choosing Scenario 1 or 2, CPF will only pay you 1 set of interest


Advantage of using Cash
1) Less Cash at hand, less likely to spend the cash (money bites us, once in a while)
2) Your money is earning higher interest from CPF, instead of being in bank earning miserable interest.

Disadvantage of using Cash
1) Opportunity cost: can your cash be used to invest at a higher return?
2) Voluntary contribution got limit - refer to the above link for more information about voluntary contribution

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

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