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Thread: Three home loan repayment strategies

  1. #1
    Join Date
    Dec 2008
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    Default Three home loan repayment strategies

    What is a good strategy for home loan repayment? From the people around me, I notice that there are 3 different strategies:-

    • One dual income married couple whom I know really hate to pay bank interest. They have a stable income and what they believe in is reducing the loan interest as much as possible. They donít have other investments and want to have peace of mind asap. They aimed at clearing their loan as quickly as possible. Whenever they have spare cash, they do a partial redemption. By doing few partial redemption a year and refinancing after 3 yrs, they clear their home loan within 7 yrs. After clearing their home loan, the savings in bank is now real savings. How they intend to use this money? For rainy days perhaps and who knows probably a second property for long term investment.

    • The second behavior comes from a bachelor friend. He took up a 20yrs home loan and his strategy is to clear it slowly. Interest rate of 2-3% is low as far as he is concern. He said that instead of paying the money back to the bank immediately, he can get much higher returns by investing these monies somewhere else. One main reason is he is very good in stocks & commodities investment. He believe in this own analysis & instinct. Before the stock market crashes, he has sold off his shares. He has a healthy bank savings today & waiting for re-investment. I asked him when? He says cannot tell me --> Tian Ji Bu Ke Xie Lou.

    • The third strategy is in between strategy 1 and strategy 2. This couple took a 15yrs home loan. They said that the first few years is the critical period. They do partial redemption for the first few years using strategy 1 and stop when the outstanding loan is about 30-40% of the initial loan amount. Theyíre now pretty relax. A loan interest of 2-3k yearly going to the bank is not a big sum of money to them. They can now use spare cash for other use and strategy 2 comes into action. They smile and say that the returns from other investments are much higher than 2-3k a year.

    There is no right or wrong in the strategies mentioned above. It depends on your income, bank savings, risks assessment and comfort level. Calculated moderated risk is healthy to some but may not be so for others.

    Is there any other strategies out there?

  2. #2
    Join Date
    Jun 2008
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    Both are permutation of Strategy 2 you mentioned :-
    A) Pay 40% and loan 60% and pay only interest, reinvest the balance into a portfolio of bond/stocks to get the coupon/dividends(for interest payment) + capital appreciation(for principal payment).

    B) Put 100% into a portfolio of bond/stocks and loan 100% against the portfolio value - Means your home is 100% paid. Now it is dependent on the portfolio to pay off the interest + principal.

    This is most appropriately used by people who have the means to pay 100% cash on a property. For those with less, it is higher risk.

  3. #3
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    Nov 2008
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    Quote Originally Posted by focus
    Both are permutation of Strategy 2 you mentioned :-
    A) Pay 40% and loan 60% and pay only interest, reinvest the balance into a portfolio of bond/stocks to get the coupon/dividends(for interest payment) + capital appreciation(for principal payment).

    B) Put 100% into a portfolio of bond/stocks and loan 100% against the portfolio value - Means your home is 100% paid. Now it is dependent on the portfolio to pay off the interest + principal.

    This is most appropriately used by people who have the means to pay 100% cash on a property. For those with less, it is higher risk.
    Very risky. i would borrow 80%, set aside 40% in cash, 40% in gold. in mass inflation, gold will pay for the 80%. if i had a choice, i would borrow in usd now

  4. #4
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    Quote Originally Posted by gfoo
    Very risky. i would borrow 80%, set aside 40% in cash, 40% in gold. in mass inflation, gold will pay for the 80%. if i had a choice, i would borrow in usd now

    You are assuming that your 80% loan interest will be covered by the rent?

    I am assuming that the portfolio will help covered the loan interest and any rent on top will be bonus.

    Anyway, I am doing it quite conservatively lah.. at most borrow 50% of portfolio value to buy a property. So shouldn't be affected by margin call when portfolio drop in value.

  5. #5
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    Quote Originally Posted by focus
    You are assuming that your 80% loan interest will be covered by the rent?

    I am assuming that the portfolio will help covered the loan interest and any rent on top will be bonus.

    Anyway, I am doing it quite conservatively lah.. at most borrow 50% of portfolio value to buy a property. So shouldn't be affected by margin call when portfolio drop in value.
    i'm also still figuring this out, so not the best to provide advice. i'm great with research, but failed A Maths in JC.

    all i know is that whatever you buy, have the equivalent amount in cpfm cash, real income, and assets to back it up fully. my granddad taught me that

    but he also taught me to keep cash, and use other people's money ( banks) to make money. anything happen, at least you still sit on shitloads of cash and can decide whether to pay your mortgage slowly and keep your asset, or if it's a gone case asset, just declare bankruptcy but can still live like a king on cash.

    dunno lah, am still just a young punk wet behind the ears, learning the ways of the world.

  6. #6
    Join Date
    Jan 2009
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    Hey, all these is useful information for people looking to buy their first home like myself. At the moment, I am looking around for my first apartment, but what I have in mind is the first strategy, which is to pay off the whole loan (80%) within the first ten years. I figure that way, I can purchase a second investment home immediately afterward as a source of future income in the future. I understand the benefits of borrowing cheap cash and using it to generate returns higher than the interest rates, but there seems to be greater risk. Perhaps I am risk averse, and belong to the camp that believes that nothing beats owning the roof over your head. Investments may depreciate, etc, but well, unless there's an earthquake, unlikely that your (freehold) home will be lost.

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