SG Budget Babe
Asked on 03 Dec 2019
Which would be the best option and why? how do i go about making this situation as cost-effective as possible?
As long as you can be able to generate anything more than 2%, pay it as normally so your money can works harder for you.
I think either option will work, depending on your current cashflow situation. If you have 75k lying idle somewhere, then repaying your mortgage isn't necessary a bad thing to do.
Otherwise, just continue status quo and find some investment vehicles that's able to generate higher than 2% interest. It will still be a net-net positive.
Continue with status quo - given the current environment its still quite easy to generate > 2% interest. So you would be earning on the loan!
Compare that 2% against the interest rate you can get with things like high interest rate savings acounts. If you are confident of generating 2% on your money, then I would say go with that instead of paying off the loan.
I would just pay off my loan. Unless the early repayment penalties are severe.
The way your question is phrase, it would suggest that you have the ability to fully repay the remaining loan. In this case, I would repay the loan if I am not confident of generating more than 2% returns on my money. However, if I could generate, say 4% on my funds, then I would be better off paying the loan normally, while generating a higher return on my spare funds, compared to the interest that I have to pay.
It's leverage basically. If you borrow $100K @ 2% to invest, and can generate 4%, then your interest is $2K, which is sufficiently covered by the $4K you make, and the remaining $2K is yours to keep. Although not exactly the same situation as a home loan, but you get my idea.
Refinance or reprice your banking loan if you haven't. (Refinance is to seek another bank to get a lower rate mortgage loan, Reprice is to approach your same bank and sign a new lower rate mortgage loan)
interest rate now in the market is very low at 1.8x%
You can grab higher returns via the stock market returns via dividend stocks or growth stock (and you can be more secured if you able to hold on to stocks for 10 years and more)
Lots of answers already mentioning about how 2% is low rate already and worth to maintain if you can get comfortable about investing for higher returns. As mentioned, nothing guaranteed, but with a reasonable asset selection you can have reasonable confidence of beating your cost of financing and have good ROE due to the leveraging effect.
So with that theme in mind, let me even more extreme and push for the other direction of your original question - if you can keep this good 2% rate, you should investigate whether you can borrow more that is, unlock the equity in your home by borrowing against it and using the cheap funds as a way to invest for long term wealth accumulation.
Something to think about - this does dial up the risk a bit so worth a good discussion with your financial advisor/banker but something if you want to have above average returns.
Before anything, you should always ensure that your loans are repaid in descending order of interest rates. That means you should clear all loans with interest 2%(assuming your housing loan is at 2% interest) before you should even consider clearing your housing loan.
Next, can you earn more than 2% interest on this 75k either through investments or starting a business? Do your own due dilligence and risk assessment because returns are non-guaranteed and there's a risk of losing your principal as well.
My personal opinion is that 2% interest is considered very low compared to other kinds of loans and it is not that difficult to beat this rate with reasonable amount of certainty. No returns are guaranteed of course.
Continue status quo. Parking excess cash that you have in other investments that generates 2^% interest would be a much better idea and will also give you more passive income. :) Unless you intend to sell off your house, then you may consider paying off your loan in full.
Housing loans are cheaper than other types of debt. If you can find other places to generate more than 2% interest or returns, then it makes more financial sense to funnel your spare cash there instead of using it to clear your housing loan asap.
Hi Leslie, i will look at the cash on hand. If you have already saved 75k, putting it in those high interest account will rake you in more than the 2% interest. Eg. UOB one 3.88% (you hit all criteria), you will earn 1.88% without doing anything.
Either will work, but if u can find a better place to invest those 75k, why not?
Hey there! Housing loan is actually considered as a "good debt", because the interest rates are pretty low. The rationale behind is even though it feels good to pay lump sum and reduce your debt, that same lump sum can be used to generate higher returns - opportunity cost. It would not be that tough to generate higher returns through your own investments (for eg, STI ETF gives ~3% pa).
Gaining 2% returns is quite doable so I would keep my cash while repaying my loan. I would find a way to obtain at least 2% return from my cash.
If you are able to invest the same money and get back above the 2% interest, you should continue status quo. Housing loan is one of the lowest interest rates on loans that you can find, so it should be quite easy to cover this.
We will have to do a detailed analysis on your personal cashflow as well as on your entire financial portfolio. Through the process, it will allow us to calculate the exact opportunity cost associated with paying off the loan vs using the money for another purpose.
Since you are paying 2% interest, it is likely to be a bank loan. Accordingly, we will need to study the contract to understand on the terms for early repayment, as well as its interest rate over time.
All these require time and proper calculation so as to achieve an outcome that makes sense for your future.
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