As from April 2013 my Journey in Investing is to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

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This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

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Sunday, 28 November 2010

Will You Try To Pay Off Your Housing Loan ASAP If You Have One? (5)

Read? Will You Try To Pay Off Your Housing Loan ASAP If You Have One? (4)

"When I told some colleagues that I dumped all available CPF money to pay up and took up only 5-year housing loan. I believe some of them might think that I was stupid not to take advantage of the cheapest loan available." - Createwealth8888

I know that the housing loan is the cheapest loan in town and I also heard many times from Mr Property Guru and Mr Banker that housing loan is GOOD DEBT if you are a savvy investor. Really ah?

But I also know that debts will cost me interests payment ..

You need to remember that as long you have debts, any money you invest elsewhere is costing you interests payment since you are not paying off that money towards your debts so actually there is a net effect between Returns on investment and interests payment.

A Simple Case Study

Let assume ...

Investor A and Investor B are both savvy investors. Both have $300K cash to purchase their home and $10K per year to invest for the next 30 years.

Investor A chooses to pay off $300K upfront and starts off investing at Year 1 with only $10K while Investor B takes up a 30-years term housing loan at 1% fixed interest mortgage rate and starts investing at Year 1 with $310K and both investors can generate compounded ROC at 2% for their accumulated investing capital for the next 30 years.

[I use this Mortgage Calculator to get the yearly loan payment for $300K loan at 1% for 30 years term. (Property tax, PMI = 0%)]

Here is the Maths:


At the end of 30 years, Investor B made 17.8% more than Investor A or annualized of 0.6% better than Investor A. However, for 30 years, Investor A can sleep soundly at nights during multiple recessions that can be expected since this is the way economics cycles work.

I also learnt that Every Bull and Bear market may impact you differently. Beware!

In this case, Investor B is exposed to higher capital loss risk since Year 1 while Investor B is exposed to capital loss risk gradually every year.

Seriously, do you want to be Investor A or Investor B?

2 comments:

  1. Till today I am still trying to have the guts of investor B. I just don't know how to use OPM.

    ReplyDelete
  2. I just asked my wife, she thinks i should be A. Sleep soundly is good (without the sounds or rather, noises).

    ReplyDelete

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