Asked by Anonymous

Spare cash to invest or service housing loan?

Suppose you have: $1 million housing Loan 3% interest p.a. 30 years After 30 years, total paid $1.5million (!!!) IF: You have $100k spare cash after 1 year... Would you: a. Put all to housing loan to substantially reduce the overall interest paid to the banking after 30 years? (By the way, can someone help me do a calculation). Or: b. Work hard to invest $100k AND still have to pay the housing loan interest which btw adds up to $500k after 30 years (!!!) (~$17k annual in interest alone!)

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  • Luke Ho
    Luke Ho, Money Maverick at Money Maverick
    Level 6. Master
    Answered on 06 Dec 2018

    I'm not sure how you got such a ridiculously high housing loan to begin with. The highest one anyone should settle for is the HDB one 2.6%. And trust me, every 0.1% counts. The first thing I would do for you is negotiate and refinance a much lower rate, like 2% or less.

    It ultimately depends on your investing skill and discipline. Especially discipline, since investing for 30 years is not something every likes. But its very easy to beat 3%.

    So if you ask me personally, I would absolutely just invest the $100k. The interest may look high by not paying it off early but it would be nothing compared to compounding $100k for 30 years. With that kind of time horizon, I could also take a more aggressive position and make double digits annualized.

    In 30 years, your 100k at a 10% compounded rate - which is VERY doable...you'd have 1.745 million dollars.

    This would be on the basis that I don't intend to sell my house in the future. I can still take out a second mortgage on it later for even more income.

    Do let me know if I can help you further by messaging me below.

    https://www.facebook.com/luke.ho.54

    Comments (2)
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    • Ernest Lin Yizhi
      Thanks Luke for the thoughtful comment! I use the hypothetical figures for illustration purposes to show just how expensive housing loans are that not many are aware of (i.e. after 30 years, you would have repaid to the bank 130 - 150% of your loan quantum due to a seemingly harmless looking 2-3% p.a. interest p.a.) To further illustrate my point, think of it as the bank is charging you 50% interest rate per "30 year" (instead of annum). But yes, Housing Loans are moving in the direction of 3% p.a. (!!!) and yes fully agreed every 0.1% counts! I also see your illustration that how $100K can be compounded to $1.745 million after 30 years at +10% YoY. I can imagine it takes really consistent and hard work to achieve that and provided that you won't be distracted to spend that liquid $100K+ in the years to come....
      06 Dec 2018
    • Ernest Lin Yizhi
      Or for example, you really achieve +10% YoY on your $100K for 10 years, and you have ~$250K+... and you have to spend $150K+ at the 10th year, Thus, you are back to square one ($100K) so to speak......
      06 Dec 2018