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Saturday, 12 September 2009

Know Your Interest?

Do you always up size your Burger?

Do you always max up your whatever loan you take? Car loan or especially Home loan can be up to 30 years. If you opt for a 30-year home loan, your banker loves you most.

Why not you try to borrow this book from NLB? Know your interest : a guide to loans and investment / Tse Yiu Kuen.

or quick visit to

Repayment of a home loan is usually made in monthly instalments. Each instalment consists of two parts: principal repayment and interest payment.

Do ask your bank to provide you a full details of home loan repayment schedule, then you would know how much of the monthly instalment goes towards paying the principal and how much towards paying interest, and the total amount of interest payable for the whole loan tenor.

Sometime, I feel that your banker is just better than Ah Long (Loan shark) as your banker allows you to pay small part of the principal in the first few years while Ah Long doesn't, and you always seem to owe them full principal even after paying for some years.

A 30-year home loan??? 30 years is a very long time and your future is full of uncertainties but only certainty is your monthly mortgage and must not fail.

But you think your job is secure; you are doing well and there is no problem in servicing the monthly mortgage. Don't ever forget that you are PERCEIVED to be good only by your current bosses and that about it. Remember PERCEIVED.

Over the next 30 years, anything can happen will happen, your current bosses may leave or be replaced, and your new bosses may not PERCEIVE you as "GOOD" as your previous bosses or your new bosses may want to bring in their lieutenants or generals to replace the old guards. Sadly, this is the truth in the corporate world. Your value is somehow just PERCEIVED by your current bosses.

But, the smart investors will tell you even if they $1M cash to pay for $1M property upfront they will not as home loan is the cheapest loan in town. The smart investors may just pay 20-40% and borrow the other 60-80% and they think they are better off investing 60-80% of the cash available.

Alas, the smart investor may have forgotten the Dark Side of Compounding Interest if you have a 30-year Home Loan that you are compounding 60-80% of this "capital" at confirmed losses due to interest payment. But, are you so sure that your returns on your investment using the saved 60-80% of this "capital" will exceed your losses due to interest payment?

As a smart investor, I can't believe you will deploy your entire 60-80% of your "capital" at your target investment at all time after taking up your home loan. I believe most likely you will be deploying a faction of 60-80% of your "capital" at a time as you now have huge debts and likely be more cautious and more risk averse.

For a 30-year Home Loan, you are compounding confirmed losses at 60-80% of your "capital"; but, you may potentially earn compounding returns on fraction of your 60-80% of your "capital" throughout the 30 years period.

May be you are thinking that you will be an idiot for not taking advantage of the current low mortgage rate at less than 2%. If the mortgage rate goes up in the future, you will redeem and refinance or even pay up the outstanding loan in full.

Don't you ever think that your bankers are a bunch of idiots and you are smarter than them. They already know what you are thinking. You better find out what are penalty fees for partial or full redemption of the loan. How much it will cost you?

Think again and do your maths. If it is a GOOD DEAL, then GO for it.

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