KiddyBoy posed this question, requesting Mr Wang's comments:
"I have a friend, just married and lives in a lovely but huge HDB flat. Just two of them. Price of flat stunned me, almost 300K. Friend tells me loan is for 30 years (no choice leh, he says), and by my quick calculation, total interest payment can buy a Subaru WRX (My dream car!) at today's prices."Mr Wang pointed out by making prepayments from time to time, the term of the housing loan can be shortened and the aggregate amount of interest paid would be reduced:
"A 30-year housing loan need not actually be repaid over the full 30 years. Along the way, you can make prepayments. This means that if you have extra cash, you can prepay part of the loan ahead of time. Thus you can repay the full loan sooner than 30 years. By prepaying part of the principal loan amount, you also reduce the interest you have to pay each month."(By the way, if you have a HDB loan, you can make prepayments as and when you like, and there is no prepayment fee or penalty). Lay is worried about future contingencies such as unemployment and medical emergencies:
"All is well if you have your job for life and your pay goes up in a straight line and you are healthy. However, my reasoning tells me that it is good to leave some flexibility to reschedule the loan when a shock (illness, retrenchment) occurs. What does Mr Wang and the other blog readers think?"Mr Wang then talked about the importance of having emergency reserves:
Analytics88 the Cockroach says that Mr Wang has "bad judgment", "stale analysis", should "watch his words", has made a "retarded reponse", is "obviously not the smartest pencil in the box", is "short-sighted and self-righteous", is a "chimp" and is "not in the same league" [with what, Mr Wang does not know. Intelligent cockroaches perhaps].
"I agree with you that it is not safe to assume that you have your job for life; will steadily earn more and more as the years go by; and will remain healthy indefinitely etc.However, this actually means that you cannot seek to pay off your housing loan so aggressively.
For example, if each month you put as much money as you can towards repaying the loan, you shorten the life of the loan but you also make it impossible for yourself to build any emergency reserves. You can aim to repay a 30-year loan in 20 years, but if you stretch yourself too hard, then you are in deep trouble if, in Year 5 or 6, you become unemployed and you can't even meet next month's mortgage payment or even next month's water bill (because you never had any savings - you'd thrown all your money into repaying the housing loan as fast as possible).
That is why I prefer the prepayment strategy. You prepay as and when you have more than enough, and you only prepay the amount that you're comfortable with. For example, if you got a big bonus in December, then you can prepay in January using your bonus."
Anyway, Analytics88's alternative strategy is:
"One should use the prepayment funds and invest in instruments yielding 6%. That gives you a spread of 4% beating any prepayment options hands down."Commenting on Analytics88 strategy, Singaporean said:
"There are no risk-free instruments that pays 6%. The closest to risk-free in Singapore is the Singapore Government Bonds, and the yields are barely 4%. Buy into US Treasuries, and you take on forex risks, and even then, you dont get 6% yield.With bated breath, Mr Wang awaits Analytics88's answer.
Even corporate bonds issued by LTA or HDB, dont pay you 6%, and you better be rich enough to fork out 100k a pop. And yet they are immensely popular. I wonder which morons who are so rich would subscribe to such bonds at 4.25% when 6% opportunities are everywhere.
Yes, you can do better than 2.5% with ease with cash. But 6% is unrealistic without taking on excessive risk. With CPF, with all the fees agent banks charge and government regulations, you'd be hard pressed to break-even, let alone profit.
So, enlighten us, Analytics88, where can we find an instrument that guarantees 6% returns at such a low risk that we can bet our house on it?
And what makes you think the HDB loan rates will stay forever at 2.5%? If you take a bank loan and property prices crash and send you into negative equity, will the bank force sell your property if you fail to top up with cash?"