Asked on 18 Sep 2019
Is it better to pay for a house using cash (assuming I have enough funds to pay for it in full but it will mean using up all my available cash, without touching CPF or savings), or is it better to take a loan?
There are two ways to look at it.
1) Using Cash to Pay
No worries about loans to pay.
If need cash urgently might be difficult, no emergency money.
Can do equity loan to "withdraw" money with the house as collateral if needed
2) Using Loan to Pay
Have to worry about loans repayment every month
Cash on hand means got buffer money for emergency
Can also use cash to do investment that is able to cover the loan repayment interest.
End of the day got to see whether you are able to use cash that you have more effectively.
If you can make returns greater than the cost of borrowing it, then take a loan.
If cannot, then probably use more cash to pay.
Yes. That is the smarter way. (mortgage loan current rate is 1.89%)
A mortgage loan is a secured loan and hence enjoys very low returns. now the banks are fighting to offer 1.89% for first year of interest rate, and even as it increase in 2nd and 3rd year, it is still only below 2.3%
Taking the cash on hand to invest in something can easily net you more than 2.3% pa, even if you choose safer and lower returns instruments.
I personally will suggest IWDA ETF for global investing, or STI ETF for Singapore scene. If you are risk adverse, then go for those income funds, or bond funds. It is really not difficult to seek returns higher than 2.3% currently
19 Sep 2019
If the loan interest is high where you cannot find investing opportunities to beat the loan interest, then clear the loan first.
For example, everyone will pay the credit card first. Because credit card interest is very high (24% or more a year). But most people have house loan, it is because you don’t have to pay full and home loan is the lowest interest in credit facility you can get.
Another example is the company. Even though the company has cash, they still issue notes to get more cash. It is because they want to take advantage of current low interest. The same principle applies to personal also.
If you invest diligently, should not be difficult to get a 3% return year on year. Already beat up the loan part.
20 Sep 2019
For that, I also created a google sheet, to compare between taking a loan or paying using cash https://rplg.co/slopu
In short, If your loan interest is 2.6%, and you are able to get investments at least 2.8%, technically you will come ahead by taking a loan and using the money to invest.
You can make a copy of the google sheet and do your own calculations https://rplg.co/slopu
But after that, it's really down to your personality and objectives. Some people might find active management of the investments a hassle. Some people feel they can't even do 2.8%, and they feel that they might have a double whammy if banks want their loan back, and their investments are illiquid.
There are other intangible factors such as having liquidity just in case or seeing what is your age and all that...
There's no perfect answer, but if it was me, it would be the loan any day, every day.
If you have the following in place,
3-6 months emergency fund
Fully funded retirement
Fully funded kids education
...then yes, throw everything into the house. Also, if this is a windfall, IMHO, you should clear the stuff above mentioned (including the house) before you "invest" the remainder.
Paying off your house is good. It lets you take a larger loan if you are buying a second property in future.
I saw " without touching CPF".
I'd suggest using CPF to pay off the mortgage and instead keep some cash behind. More in this post 5 Reasons Why You Lose Out If You Use Cash To Pay For Housing Loans
Using Loan is better due to
1) interest rates are very low now
2) you get to keep cash which can be used for emergencies, such as opportunities to buy stocks, another property, business, or some good opportunities.
Cash is good to have some around.
And then if you can, put the cash to work that generates higher returns than the housing loan now.
I see a unique situation where you can take advantage of it, but whether it works for you, depends on whether you are ok with the arrangement.
(1) Hit FRS (Full Retirement Sum), and BHS (Basic Healthcare Sum) in your CPF account.
(2) Continue to contribute to your CPF to the limit (if you are unable to do so).
(3) Take out the loan, so that you have accrued interest. Instead of repaying, use the available cash to invest in other markets (if possible). Else, just continue to store in CPF.
(4) Use OA to pay off the loan (to incur more accrued interest).
(5) by age 55, you would have more than enough to fully pay for the loan, and contribute back to CPF using the accrued interest, without touching on the annual limit. If you like CPF so much you can top up to the available accrued interest.
But all in all, paying off the loan just means you are unable to find a better investment opportunity to beat the loan interest. If that works for you, good :D