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Planning a strategy to get out of debt

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Firstly, we need to have a complete understanding on our cashflow. Through this process, we will understand our earning ability and spending habit. Here is a guide to help you: https://www.blog.pzl.sg/understanding-your-personal-cash-flow/ Next, we have to determine your plans for the future. For instance, do you intend to stay in this place for as long as you can? How is your current cashflow like? Once we have a detailed understanding on your future, we will create a plan that works. For example, if you intend to sell your house some time later, then you may wish to minimise the potential interest payment to CPF. As a result, it may be wise to use cash as part of the repayment. In order to do so, we will need to create a budget. The best way to do this is via automation and this is how I do mine: https://www.blog.pzl.sg/how-to-create-a-monthly-budget/ While there is neither a right nor wrong answer to this, the only way that makes sense is by understanding your situation. Then we can decide the best solution. Here is everything about me and what I do best.

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In general, there are three ways to reduce the monthly repayment for your mortgage: 1. Reduce the interest rate 2. Increase the loan quantum 3. Increase the loan repayment amount Looking at your situation, #2 is unlikely to happen. This is unless you are able to find a financial institution that is willing to stretch it to 30 years. So, let's move on to the other two methods. In order to give you a more detailed suggestion, we will need to know everything about you. Firstly, we need to have a complete understanding on our cashflow. Through this process, we will understand our earning ability and spending habit. Here is a guide to help you: https://www.blog.pzl.sg/understanding-your-personal-cash-flow/ Next, create a budget that is capable of helping you to make early repayments to your home. The best way to do this is via automation and this is how I do mine: https://www.blog.pzl.sg/how-to-create-a-monthly-budget/ Alternatively, you may wish to consider using your budget to put into tools that yield a rate that is similar to your rate of interest. Through this process, it reduces the interest payment indirectly. However, this requires careful planning that may require you to take on calculated risk. For #1, we will need to create a spreadsheet to find out the exact cost and benefit to make adjustments, e.g. refinancing. Here is everything about me and what I do best.

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Sg 30s Dude
Sg 30s Dude
Level 3. Wonderkid
Answered 3w ago
Would suggest to start by looking at the following items 1st... 1) Budgeting Plan/list your monthly expenses to have a clearer picture of where you're spending your money and figure where can you cut down on spendings. This exercise will also better show how much disposable cash u have on hand less the necessary phone bills, student loan repayment ect ect. 2) Start building savings/emergency fund Start a bank account on higher interest be it dbs/uob/ocbc/boc ect ect. Would suggest to have at least 2-6 months worth of monthly expenses as your safety net first. 3) Chart your career path Check out various career options which pays better on top of being a good fit for your skillsets/character. Hitting 30 felt surreal for me, adulting just gets tougher...

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EC Condominium

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Teo See Hwa
Teo See Hwa
Level 5. Genius
Answered 3d ago
It is the same, but EC you can do DPS. You may message me for more detail. 87821025

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Fixed rates are generally higher because you pay for the stability (bank takes the risk of runaway interest rates). In the case of singapore, most mortgage packets convert to a floating rate after 2 or 3 years anyway. For first time owners and young adults still building up their net worth, i would just shop around for the best fixed rates, and go for one - then you wouldn’t have to worry about interest rates going up or down in the next 2-3 years, and you can focus on your career.

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Wilson Nid A Break
Wilson Nid A Break
Level 8. Wizard
Answered 4d ago
Looks like you can FIRE before 55 yo, as long you dont get married!

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CPF

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EK
Eileen Khoo
Level 3. Wonderkid
Updated 5d ago
Https://www.dbs.com.sg/personal/calculators/homeloans-calculators-repayment-schedule.page The above is an example of a loan repayment calculator obtained online via the dbs website. With the variables 1) loan amount 2) tenure 3) interest rate (hdb 2.6%) One can use this to calculate the monthly instalment figure; and generate a monthly repayment schedule. Using the Original figures, original full loan amount and full term will generate a repayment schedule that should give you your current situation. (This whole paragraph is a bit side tracked; Notice that the schedule uses a monthly reducing balance interest estimate; as in It uses the Opening monthly outstanding balance X interest rate (2.6%/12; interest rate chargeable per month) Then it adds this interests to the opening outstanding and minuses off whatever payment that one makes for the month (lump sum or partial principal or monthly instalment etc) to arrive at the closing outstanding balance. This closing outstanding balance then acts as the new opening outstanding and goes through the same process until the loan is settled. I will come to this “monthly reducing balance” later.) #I believe you also know that the are TWO ways in which one can reprice the current outstanding; which are 1) shortening the tenure (you are asking this) ; this means maintaining the same monthly instalment amount and paying in shorter time 2) reducing the monthly instalment amount. (Maintaining the tenure and reducing the amount paid monthly) There are a few ways to find out how many years will be shortened, one simply takes a look at the original repayment schedule (from the website for example), to see which part of the schedule one is currently at; by matching the “current outstanding of the actual loan to the current outstanding in the schedule” This means, find out 1) current outstanding amount with hdb 2) look into the repayment schedule to see where the outstanding amount is. This would be somewhere into the 10th year to follow that you have paid up 10 years. Find out which particular month (or between two months) the outstanding balance matches. Mark this spot-let’s just say “A”. Then take this current outstanding loan and minus the amount of lump sum you are looking to pay off to get a new lower current outstanding balance. Let’s just say this is “B” Now look for where “B” is in the repayment schedule. The period between A and B is the period you have managed to cut off the repayment schedule (in months) and the balance of tenure is the period from B to the end of the tenure ( ) That’s about it. There are other ways to calculate, using excel etc. Some prefer to go by looking at the “principal” column; one can see how much principal is being used to knock off the outstanding balance each month. I.e. Outstanding $100,000 Monthly installment $1779.15 Interest paid $216.67 “Principal paid $1562.48” If one pays$1779.15 and knocks off $1562.48 in principal from the outstanding, in this example, one knocks off one month period ( ) Just add up the principals monthly to reach the amount of lump sum you are looking to pay off and match that with the number of months shortened. If for example one intends to pay off $50,000; From the matching current outstanding, just take the $50,000 and minus the next month’s principal paid back amount and the next’s and the next’s and next’s until the $50,000 finishes. Etc. On actually “how much lump sum to pay”, the minimum allowed is SGD5000 and from then onwards increases in multiples off $1000. So, do add the sums to match the interests saved or the periods you want to save to get an idea. Hope this helps. P/s not involving the questions posed; I) Are you opting to keep sgd20k in the CPF OA due to the extra 1% given (totalling 3.5% or “an extra 0.6% over the loan”)? I am assuming this. The other option could to transfer the funds to the Special Account to attract the 4%. Point- CPF could be better if this is available. II) On the monthly reducing balance mentioned; the effective rate would be lesser than 2.6% a year and the difference increases more if the outstanding reduces more (more principal is being paid). Take the total interests to be paid for the year and divide it by the outstanding balance at the beginning of the year to get the effective rate. Point- Chances are that these last 5 years could get much lower effective rates (and therefore cost less than the 3.5% to be gained from the first $20k in the CPF OA or the 4% if the same is transferred into the Special Account). III) the term is shorter towards the end of the loan, so the lump sum paid (say $50k) will have a “shorter” tenure to be effective. So the Lump sum used would only be used for saving interest for term of the tenure (5 years max) n none thereafter. Left in CPF this same sums would generate 2.5%?3.5%? 4%? Etc. compounded yearly, until taken out (with many scenarios allowing for this to be more than 5 years) Point- Leaving it in CPF May be an option to consider. Comparison is made on interest rate and tenure and not on other factors like availability of funds etc. What these means is that there could be very little to be saved if this is done after 2/3s of the loan being paid as both the effective rates and tenure have reduced. I could be wrong but do consider looking at the numbers. These are the main reasons why there are people using Other People’s Money (loans, credit card etc) to pay off home during the first 30%-60% of the home loan. And stretch the home loan once the effective rates are Low- aka to prolong settling the loan after clearing 70% of principal outstanding for example. The money used to settle the loan could be used to generate a better rate of income than the actual savings from settling the loan. (Stress issues aside) Cheers.

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Bang Hong
Bang Hong
Level 6. Master
Answered on 20 Jul 2018
I would pay "little" and i think it is practical to drag out loan over time. The answer is obvious, I am seeing there is a gap which i can gain. Interests rate = 1.88% for housing loan Investment return = 3-5% for a reatively conservative Instead of paying my loan, I will drag as long as the economy on my side. Monitoring every quarterly closely should be more than sufficient, rates wont go up overnight unless there is a crisis. There will be risks involved in this approach, but to leverage the "gap", yes it is worth it for me and many others.

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K
Kevin
Level 2. Rookie
Answered 3w ago
I have similar question in mind albeit it's not about tuition loan, but same capital allocation dilemma between early loan repayment vs investment. Agree that simple consideration is comparing the expected investment return vs loan interest rate. However i'm thinking more from perspective of Risk Management. For young adults, the investment portfolio is assumed to be made up of aggressive 100% equities, hence the expected return should be higher (considering long-term, assumed @ 6-7% on average); and comparing to loan rate (student loan perhaps @ 4%, home loan @ 2-2.5%) - Purely from this comparison, the obvious answer is to allocate most if not 100% of the capital available to the investment portfolio and let it grow as the return is expected to more than cover the loan interest cost. However, from risk management perspective, below some of my considerations: (a) while investment return can be assumed long-term at average 5-6% in the case of equities, in reality it will have ups and downs along the years. Like one of the members above mentioned, investment return is not guaranteed, but loan repayment is guaranteed to be required on-time-in-full every time; (b) Early loan capital repayment saves substantial interest cost especially for long-tenure loan eg. 20-30-yr mortgage loan; (c) As we age into 30s/40s and increasing financial commitments eg. home loan plus growing family size and increasing family/kids expenses while job is no longer as secure, ability to service the monthly loan could be a risk. Yes refinance could be an option but early capital repayment helps to reduce the loan burden and saves interest cost, also means possibility of debt free earlier. My own thought is to allocate my capital 50/50 to investment and loan repayment. Any thoughts/ideas from the community welcomed and appreciated. Thanks.

Savings

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Firstly, we need to have a complete understanding on our cashflow. Through this process, we will understand our earning ability and spending habit. Here is a guide to help you: https://www.blog.pzl.sg/understanding-your-personal-cash-flow/ Next, create a detailed tracking for both of the loans and understand which will result in a greater repayment over time, i.e. higher effective interest. Thereafter, create a budget that is capable of helping you to plan for the future. The best way to do this is via automation and this is how I do mine: https://www.blog.pzl.sg/how-to-create-a-monthly-budget/ The objective of your budget will be to clear the loan with the higher effective interest as soon as possible while maintaining the repayment for the other loan. At the same time, restrict yourself from taking up further loans or any form of debt facility. Always go back to your cashflow and budgetting to ensure that you maintain at least the same level of surplus every month (use the budget article to help you enforce greater discipline). Finally, yes - you should build up your rainy day funds at the same time. This will act as a safety net in case of an emergency. The last thing that you want is to be left with nothing and two debts to repay. Therefore, always have a safety net in place. While we focus on your debt management, I will like to take this opportunity to highlight the importance on insurance coverage for yourself. While this may seem unnecessary because the focus is on loan repayment, the focus is still on you as mentioned earlier - without you as the engine to generate income, you will be left with debts. Therefore, ensure that you have the right insurance coverage. To this end, one of the most important things to do is to have a complete understanding of your existing insurance portfolio. Through this process, it allows us to understand the coverage that we have, any financial gap, as well as to find out whether we are overpaying for our insurance policies. I have highlighted the rest of the reasons here: https://www.blog.pzl.sg/why-every-client-needs-an-insurance-policy-summary/ All things considered, do proper tracking and devise a plan that is capable to help you overcome this situation. Here is everything about me and what I do best.
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