If you can afford to pay for a house in full using cash, is it better to do that instead of taking a loan? Thanks? - Seedly
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Anonymous

Asked on 18 Sep 2019

If you can afford to pay for a house in full using cash, is it better to do that instead of taking a loan? Thanks?

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?

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Ernest Yeam Wee Leong
Ernest Yeam Wee Leong
Level 6. Master
Answered on 19 Sep 2019

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.

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Cedric Jamie Soh
Cedric Jamie Soh, Director at Seniorcare.com.sg
Level 8. Wizard
Updated on 27 Sep 2019

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

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Question Poster

19 Sep 2019

Thanks everyone for your logical analysis of the options at hand.
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Awk D
Level 3. Wonderkid
Answered on 20 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.

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Question Poster

20 Sep 2019

Makes sense.. Thanks for sharing!
Fergus Tan
Fergus Tan, Senior Partner at Vision Advisory Management
Level 5. Genius
Answered on 29 Sep 2019

I answered a similar question here https://seedly.sg/questions/what-would-be-a-better-choice-using-lump-sum-of-money-to-pay-off-one-significant-chunk-of-debt-or-invest-that-money?aid=17194

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.

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Andrew Kwek
Andrew Kwek
Level 3. Wonderkid
Answered on 26 Sep 2019

For me, I would definitely take the loan due to low interest rates and invest the rest in equity!

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Kenneth Chan
Kenneth Chan
Level 5. Genius
Answered on 26 Sep 2019

If you have the following in place,

  1. 3-6 months emergency fund

  2. Fully funded retirement

  3. 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.

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Hi there,

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

Good luck

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Angeline Teo
Angeline Teo, Calculator at The Internet
Level 5. Genius
Answered on 19 Sep 2019

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.

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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

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