Let's put in the context. I used HDB's loans with interest of 2.6% pa, spanning over 30 yrs. My monthly mortgage, all paid in cash since I have no or little CPF, is about 2k. Each year, based on the monthly mortgage payment of 2k, I would have paid a sum of $24k (2k per month x 12 months). Me and my wife had saved up $24k and I was wondering if it's good to make a partial repayment of our loans. Since the loan is by HDB, there isn't any penalty for early repayments for loans, so this is quite unlike most private bank loans. I guess even bank loans have their own terms and conditions, so penalty for early repayment is not a given; it depends on the contract you've signed on.
|Pay down your debts or invest it?|
Effectively, if I were to make a partial repayment, that means I'm paying a total of $48k this year - twice as much as I'm obligated to. What's good and bad about this? The good thing is that if I maintain this yearly, I can shorten my remaining 27.5 yrs loan to just 11 yrs. There is going to be huge interest savings in this. The bad thing is that I'll have less cash available for investments. This is especially true for me because I pay off in cash, not using CPF. In other words, I have a higher opportunity cost than if someone pays off in CPF (yes, I know CPF earns 2.5% interest pa and cash inherently has near 0%). What kinds of investments are we talking about? Not just restricted to stocks, but also property.
I've blogged before that I would take the middle path. I would pay off a big portion in the form of partial repayment in my early years of the loan period, until the monthly mortgage becomes 'manageable', before conserving the cash and reserve it for investments/property etc. I've changed the plan a little though. Initially I wanted to make partial repayments and choose the option that allows me to reduce the monthly mortgage instead of the option that reduces the mortgage loan duration. I didn't take into account the fact that the paper work involved for both of them differ. There's a whole lot of paper work that needs to be done to reduce the monthly payment, like changing the GIRO amount, writing in to HDB etc etc. Nah, too much trouble. I'll just tweak my plan to reduce the loan duration initially. When it makes a substantial difference then I'll switch to reducing my monthly mortgage amount.
Anyway, it's not as if all these is going to end in 2-3 yrs. It's more likely going to be an arduous 10 to 15 yrs. Long journey to go, so no point being caught up in paper work every year. Maybe after the 5th year of such repayments, I'll review and see if it makes sense to reduce the monthly amount.
Interest that you owe to others is guaranteed. Investment returns are not. I guess we have to make a compromise between these two.
* After putting in the extra cash of 24k, I noted that I've shaved off 2.5 years off my 30 yrs loan period. A future payment of 1 yr equates to 2.5 yrs of savings from future payments. Hmm, depending on inflation, it might or might not be worth it.