On Loans and the Father-Mother Fund

I was looking through the HDB guidelines for buying an apartment (or flat) when I found out how much I would have had to pay as a down-payment for a 5-room one. Being fresh in the job market, a 10% down-payment is a pretty big sum. I simply haven’t had much opportunity to accumulate that much capital.

Assume that I wanted to buy a build-to-order flat (a flat built only when a certain number of people have registered their interest). The earliest date that it would be available (as of now) would be in March 2013. Being below 30-years of age, I would be eligible for the Staggered Downpayment Scheme, whereby I pay 5% of the purchase price of the flat at the signing of the agreement for lease (when they start construction of the apartment) and another 5% after the flat is completed.

I intend to take an HDB housing loan (at 2.6% it’s dirt cheap), but it only covers 90% of the purchase price, leaving me with a 2×5% down-payment which I will have to fork out using a combination of CPF monies (of which I have hardly enough) and cash (most of which is currently tied up in longish-term investments). With limited liquid funds, I figured I would have to source for other ways to finance this down-payment.

I recall reading somewhere (I’m certain it was in several places actually) that one of the best loans one can get is from one’s family. In Singapore that loan is sometimes affectionately known as the “father-mother fund”. With such loans, the interest rates (if any) are often low, and the repayment periods (again, if any) can often be long. As a rule of thumb, the returns that the victim person giving out the loan should at least equal what that person would get from other sources. So if that person can get a 4% return from other investments, you would pay that person 4% returns as well.

This rule of thumb had me giggling for a while. Judging from current market conditions, I think that if I had to take a loan from my “father-mother fund” and I returned them the principal with no interest payments whatsoever, the returns they would get from me would certainly be higher than what they would get from their investments (I mean, 0% returns certainly beats negative returns any day); and, what is more, it might even be possible to pay back less than the principal, since I would be, theoretically, losing them less money!