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THE latest advice from the experts is to pay down your home loan.

Citibank said the number of customers using cash to pay down their loans has more than doubled over the past year. Other banks have cited extra loan payments from CPF accounts.

It makes sense. If you borrowed from a bank, you are probably paying around 3.5 per cent interest. But your CPF ordinary account pays you just 2.5 per cent. By using your CPF money to pay down the loan, you save 1 per cent a year (3.5-2.5).

The one drawback that the experts never mention is that your CPF account is not a revolving door. It swings only one way.

Taking money out of your CPF account to pay down a bank loan is easy. But putting it back is difficult. In fact, it's impossible.

You cannot go to the CPF Board and say: 'Oops, I changed my mind. Please increase my home loan by $100,000 and deposit the money back into my CPF ordinary account.'

Why is that important? Why should you care if you have a high or low balance in your CPF account?

It's because a high balance is useful. It acts as home-made unemployment insurance.

Say you lose your job. Your CPF contributions will stop. But it is no problem to continue paying your home loan IF there is money in your CPF ordinary account.

But suppose you have used all your CPF money to pay down your home loan. Then you have no cushion. You have no choice but to use cash to make your mortgage payments. Can you afford it? Most of us cannot.

There is one way to have your cake and eat it too. You can boost your CPF yields and keep your CPF money handy in case you need it.

How? Invest your CPF ordinary account in a fixed deposit.

It will boost your returns from 2.5 per cent to around 3.2 per cent. These days, it is easy to find high bank deposit rates. (See best bank rates at www.AskDrMoney.com )

True, you earn a little more by paying off a 3.5 per cent mortgage loan than if you put the money in a fixed deposit earning 3.2 per cent. But the difference is small (3.5 - 3.2 = 0.3 per cent).

You can think of that 0.3 per cent loss as unemployment insurance. It is the cost of keeping a CPF reserve so you don't default on your home loan if you hit hard times, like if you lose your job.

DR MONEY QUOTE:

He who knows that enough is enough will always have enough. -
Jean-Paul Kauffmann