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Anonymous

22 Jan 2021

Property

How quickly should a young couple repay our HDB loan? Which is more important - avoiding debt or having a cash buffer?

Hi David, young couple here buying our first home (BTO)! Can you give some guidance on how we should approach our mortgage payment?

  • Pay off quickly to avoid debt (we have saved up for our house and will be able to knock off a large part of the loan relatively quickly)
    OR
  • Pay in decades-long instalments to be able to invest each month. (Moderate risk appetite)

We've received different advice from the people around us so would love some expert opinion! Thank you :)

AMA Mortgage Master

Discussion (2)

What are your thoughts?

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Thanks for your question.

Both pay off quickly or pay off slowly is correct depending on what you want to achieve and also how else you want to use your extra $ if you pay off slowly.

To Pay off quickly or not, pros and cons.

I do not like debt. Debt over me gives me stress.

  • If this is the main and only reason, you do not need any justification. Just pay it off. Being happy in life Is the most important.

Mortgage interest rate cost money

  • Say you have $100k extra to pay off your home loan. interest is 2% but you have an investment vehicle that can pay you 5% for your 100k investment

  • Quick Maths! - says that you should invest the money instead

But if you do not like the risk of the investment vehicle please don't use this option.

  • Personally i did not have a huge lumpsum of cash. Fortunately my wife and I have extra monthly cashflow. I reduced the loan tenure and paid higher monthly installments, also reducing the total interest paid in the end.

Am i going to stay there forever or not?

  • If you are not staying there forever, meaning that you will probably buy another place after 5-10 years and move out. Then it does not really break your savings by paying the loan slowly.

We can talk about many many reasons here. But the bottom line is always this if else loop.

If you do not pay the loan off, is there another avenue that can generate more returns than your mortgage? and can you accept that other vehicle's investment risk?

Else just pay off the mortgage.​​​

All are important.
1. Need at least 6 - 12 months of household expenses. Track all expenses to have a feel of it.
2. Are you considering to have a kid soon? Factor in expenses and think about how you want to care for the kids. Possibly maybe a maid, childcare or someone not working. All these need $.
3. Do you invest? If you do not, better learn but do not do it for the sake of doing it. Otherwise you might lose sleep or money. HDB loan interest is actually very low.
4. One possible way is contribute to SA $7000 per year for tax relief and earn 4% inside but this money can only be used when you reach 65 and assume no change in interest rate.

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