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 don’t 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. They’re 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?