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Hi All,
I will be going to pay for my HDB loan soon but I also have the intention of leaving some spare cash for investing. Have you all faced this dilemma before? Do you pay down the mortgage first or invest?
If you could share your experiences. Any opinions will be much appreciated.
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31-03-2014, 08:11 PM
(This post was last modified: 31-03-2014, 08:17 PM by CY09.)
Hi Art or Science,
In my view, a HDB loan is considered a healthy debt. Hence I will advise invest. This is because the current cost of capital is 2.6%. Using a business analogy, your "housing section" is able to borrow at a cheap rate, and your cash can be brought over to your "investment section" for its operations.
When will then be a good time to pay off? My advise is when your capital cost/return spread is too low. An extreme example is investment returns yield only 4% while cost of capital has run up to 3%. This is up to an individual's risk tolerance. Secondly, I am not advocating for gearing up to the max, but to take on a healthy level of gearing on a low cost of capital. (Debt to asset ratio of 20% is a good gauge).
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Dont pay off hdb loan so soon la... drag as long as possible, hold money in the cpf oa and wait for a chance to whack stocks again if sti ever drops below 2500
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Hi Art or Science San,
Roof over the heads and for loved ones, I will pay down the loan.
Not a call to Buy or Sell
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(31-03-2014, 08:11 PM)CY09 Wrote: Hi Art or Science,
In my view, a HDB loan is considered a healthy debt. Hence I will advise invest. This is because the current cost of capital is 2.6%. Using a business analogy, your "housing section" is able to borrow at a cheap rate, and your cash can be brought over to your "investment section" for its operations.
When will then be a good time to pay off? My advise is when your capital cost/return spread is too low. An extreme example is investment returns yield only 4% while cost of capital has run up to 3%. This is up to an individual's risk tolerance. Secondly, I am not advocating for gearing up to the max, but to take on a healthy level of gearing on a low cost of capital. (Debt to asset ratio of 20% is a good gauge).
Thanks CY09.
I have similar thoughts too. But you were able to better articulate it. My worry is whether my investment returns is 'good enough' to surpass the cost of capital (2.6%). Guess my risk tolerance is not that high and I'm not that confident yet.
As for the gearing, mine will be something like 22.5%. Still okay ahh
Personal finance a little bit like analysing a business hor - knowing my 'assets' and liabilities', cost of capital and return on investments..
Winston Churchill:-
“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”
"The farther backward you can look, the farther forward you are likely to see."
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(31-03-2014, 08:33 PM)kbl Wrote: Hi Art or Science San,
Roof over the heads and for loved ones, I will pay down the loan.
I agree.
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If you decide to take a HDB loan, HDB will clear everything in the cpf oa account before granting you a loan. Therefore you need to transfer the money out of the oa through investment prior to the "sweep". Bear in mind that your savings will be subjected to market and securities risk when you invest.
If you decide to temporarily park your money in investment and transfer back to CPF, have to keep exposure period minimal and go for low beta securities.
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Middle path. Pay half of loan. Use half to invest.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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I had another 38-years to serve my bank loan, which means till my 68th anniversary. I don't see it difficult in making a decision when CPF is paying 2.5% interest and bank charges me less than 2%. However my preference is not to risk all my spare cash into equities or high yield stuff, and thus I do have small portions like 20-30% invested in FD, higher-interest saving accounts, bonds and perhaps SGS (under consideration). Got 1% return on these, so in fact I am still making loss on higher bank loan interest, but I am waiting for opportunity, whether in property or in equities. When time is right, fund is there, this is my plan.
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(31-03-2014, 09:33 PM)csl123 Wrote: If you decide to take a HDB loan, HDB will clear everything in the cpf oa account before granting you a loan. Therefore you need to transfer the money out of the oa through investment prior to the "sweep". Bear in mind that your savings will be subjected to market and securities risk when you invest.
If you decide to temporarily park your money in investment and transfer back to CPF, have to keep exposure period minimal and go for low beta securities.
What is the best way to do CPFIS parking? Years ago, I did the CPF FDs way. Now no more.
One low risk way is to plonk entire CPF Stock Limit into unconditional offers e.g. Singapore Land. Lose some money and some commission.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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