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Have a $327K home loan and $200K in savings.

Thursday, June 30, 2016

What to do?

Hi,
I have been following your blog for last two years and would like to have your opinion on whether to pay off my mortgage or to invest the money I have in my bank.

I have a mortgage loan of S$327,000 of 12 yrs tenor at current interest of 1.625% per annum.  Following year about 1.9% to 2% per annum.  Currently, I have about S$200K idle in my bank and do not know whether to pay off the mortgage or invest it in bonds, etc.  I was advised to invest in UOB United SGD Bond, but I'm not sure about it.

Appreciate your professional opinion on the matter.  Thank you.

Best Regards,
M



Hi M,

Alamak. I am not a professional. So, if you want a professional opinion, I have nothing to offer you. -.-"

This is my unprofessional opinion:

You managed to lock in interest rates of less than 2% on your home loan for the next 2 years and you wonder if you should invest your money for higher returns which really isn't difficult. However, if your investment horizon is only for 2 years (because you managed to lock in low interest rate for the next 2 years), then, better not. Investing is best done if we are using money we won't need for anything else (and we wouldn't have to liquidate our investments at a time not of our own choosing to meet those needs).

As for buying into a bond fund, er, I won't touch a bond fund even with a 5 feet pole. ;p

Best wishes,
AK


Related posts:
1. Get income from investments to pay interest.
2. Nobody cares more about our money. (Bond funds).

12 comments:

pw said...

hello AK, care to share why no bonds? currently looking into buying the fullerton healthcare bond

AK71 said...

Hi PW,

Er, I said "no bond funds", not "no bonds". ;p

Please see related post number 2. ;)

Ray said...

http://www.cnbc.com/2014/04/10/bonds-vs-bond-funds-what-you-need-to-know-now.html

AK71 said...

Hi Ray,

Thanks for this. Good stuff.

Taken from the article:

Bond funds.

Bonds held within the fund portfolio are designed to mature on a staggered basis so that income payments are delivered consistently. The fund manager replaces bonds as they mature, when the issuer's credit is downgraded and when the issuer "calls," or pays off the bond before the maturity date.

Some bond funds are designed to mimic the broader market, while others specialize in high-yield (junk) bonds, short-term debt, emerging markets or tax-free municipals from state and local governments.

Bond-fund investors can expect a monthly payout of the income earned by the fund.

Because you own mutual-fund shares, however, there is no maturity date on which you can expect to get back "par," or the face value of the bond.

"It's what I call 'perpetual duration,'" said Colyer. "When you own bond mutual funds, there is never a day that you are assured of getting back 100 percent of your principal."

Many investors mistakenly believe the diversification inherent in a bond fund renders them more insulated from market forces, said Greg Ghodsi, senior vice president of investments at Raymond James.That's not the case.

With mutual funds, he noted, rising rates can create a snowball effect that drives prices quickly lower.

CN said...

AK, my idol. my situation about the same with M. However,I have 2 young kids who is 7 and 8 years old and I am at early 40s. My current balance tenor is 24 years. 3.5% p.a. currently charged by MBB - after lock in period. I am very gross whether to sign SIBOR or fixed rates. From the comparison table, 1M/3m SIBOR rates (promo rate) can save interest in 5 years period but not in 10 years time (based on current rates – subject to revision) compare to FD rates (refinance costs, ie legal fee, valuation fee plus admin fees will be about 2k).
Any pro and cons of early repayment?
I am also wondering whether can use this idle cash to generate higher guaranteed income in view of bond funds is not that safe?
Y

CN said...

AK, my idol. My situation about the same with M. Really appreciate your advise.
I have 2 young kids who is 7 and 8 years old and I am at early 40s. My current balance tenor is 24 years. 3.5% p.a. currently charged by MBB - after lock in period. I am very gross whether to sign SIBOR or fixed rates. From the comparison table, 1M/3m SIBOR rates (promo rate) can save interest in 5 years period but not in 10 years time (based on current rates – subject to revision) compare to FD rates (refinance costs, ie legal fee, valuation fee plus admin fees will be about 2k).
Any pro and cons of early repayment?
I am also wondering whether can use this idle cash to generate higher guaranteed income in view of bond funds is not that safe?

AK71 said...

Hi CN,

Alamak. I must protest. I am not idol material lah. -.-"

Well, paying off a home loan is always a nice feeling. Of course, people can say this and say that. It depends on what gives you peace of mind. No point investing for higher returns than the interest payments but cannot sleep properly, right? ;)

Where got such a thing as guaranteed income? Bonds can default on payments too. Buy into bond funds must know what kind of bonds are in the funds. How they promise 7% per annum, for example? Must pay this fee and that fee still give 7%? ;p

Bonds do well in a deflationary environment where interest rates keep falling. Interest rates go down, bond prices go up.

I would avoid bond funds today. See related post #2. :)

Siew Mun said...

With the economic uncertainties, I would go for peace of mind with no liabilities. If I am retrenched, I have a roof over my head with no mortgages and no loans to fret. :-)

AK71 said...

Hi Siew Mun,

Peace of mind is indeed priceless. :)

foolish chameleon said...

AK,

the ABF sgp bond (A35) listed on the SGX conisdered as a bond fund?
if so, do you consider this as something to avoid too?

AK71 said...

Hi chameleon,

The good thing about ABF Singapore Bond Index Fund is that it is not in junk bonds. When we buy bonds to diversify away from equities, we should avoid junk bonds.

However, you might want to question if the fund is holding more long term or short term bonds. If we expect interest rates to rise, then, long term bonds even if they are AAA rated are not a good idea.

This question becomes even more pertinent a concern when we are reminded once again that bond funds are practically perpetuals. They have no maturity date. There isn't any date when 100% of our capital will be returned to us.

SMK said...

I differ.

I see nothing wrong with bond funds or bond etfs.

however I do not see them as income instruments or part of a portfolio against volatility.
neither would I buy bonds at my current age for income.

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