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21-04-2014, 09:46 PM
(21-04-2014, 08:54 AM)valuebuddies Wrote: Put it in this way, POSB mortgage loan capped rate at 2.5% per year for next 8 years, if one do have excess fund for loan repayment, would it not make sense to make use of the fund to invest in this bond which gives 3.08% and then a lump sum payment after 7 years?
Firstly, I am trying to point out that the comparison should be done between two securities that provide a return to the investor (i.e CMT 3.08% vs 7 year treasury). Comparing a bond vs a loan might be difficult (at least to me) to understand.
Secondly, not sure on how your scenario works. Assuming that you take a 7 year $100,000 loan @1.8% and put $100,000 in CMT for 7 years. The monthly repayment for home loan is $1,268 per mth or $15,216 per year. The interest you derived from CMT is $3,080 per year. So you will be drawing down of $ 12,136 ($15,216 - $3,080) from your savings ?
(21-04-2014, 08:54 AM)valuebuddies Wrote: Well I believe the bank are not stupid, if they can guarantee 2.5% mortgage interest for next 8 years, does it not mean that they don't foresee rate to go up rapidly for the next couple of years?
The bank probably assumes that fed will do a job in terms of inflation targeting and EU's economy will remain in a depressed state in the near future. However, it is possible that rates can go beyond 2.5%.