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Will You Try To Pay Off Your Housing Loan ASAP If You Have One? (12)
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Should you pay off your loan even if you have extra cash?
By
Wilfred Ling
How will I advise my clients if they want to buy properties?
First, I always encourage my clients to pay off their loan as soon as
possible for their own residential home. It can be HDB or private it
does not matter. I encourage them regardless of the interest rate
environment to pay off their residential mortgage because they need a
physical place call home which is safe and not subject to any kind of
risk such as foreclosure. For a fully paid up HDB, the property is
protected from creditors. However, I will not advocate paying off the
debt in a single lump sum as it can create a liquidity crisis. So I’ll
have a proper pre-payment strategy in place for them. Say, if their loan
was a 30 years loan, I’ll have a schedule of pre-payments over the
next 10 years so that their mortgages will be cleared by 10 years
instead.
Createwealth8888
Is your only residential home loan your investment loan? Think again!
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I have learnt that although I can pay up full, why not I make use of leverage to buy another property?
ReplyDeleteFor residential property (the one you stay in), it is best that you can payoff before you retire, i.e. 50-55.
ReplyDeleteYes, pre-payment can shorten the loan period, but one should evaluate carefully how best he can deploys his additional money to build up his wealth through investment such as equity or real estate.
An advice given by somebody maybe good in some circumstances but may be totally wrong in another person's circumstances. Hence, I advise not to listen to an advice when it maybe totally out of context. I presume the adviser is giving a general advice since majority of his clients probably own one residential property which is also their ONLY propery. Its sounds cliche but that only property is most people's single property throughout the entire life. However, if the investor has several property investments, then it is wiser to pay off those with higher interest rates first. Common sense, right?
ReplyDeleteThe most balanced view by Wilfred in the whole article is: "It depends."
ReplyDelete:)
My personal experience with ex-colic or people whom I met who were retrenched.
ReplyDeleteSome will say: "Heng ah, I have fully paid my housing loan."
Another will begin to seriously worry.
It depends on what are you doing with the money. If it gives you a higher return compare to the interest of the loan, then you shouldn’t be pay off your housing loan.
ReplyDeleteExample,
If you are taking a bank loan at 1.25% (I make an assumption as the interest is dependent on the bank and the loan package).
For CPF, CPF is paying you 2.5% on the CPF OA. For every $100K you will get net amount of positive $1250 [(2.5% - 1.25%) x 100K]. It makes more sense to leave the money with CPF.
But if 100K is sitting in the bank deposit account earning 0.75% interest, then the net amount will be negative $750 [(0.75% - 1.25%] x 100K]. It makes more sense to use the 100K to offset the loan.