Why quickly paying off Housing Loan is not wise?

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Post by Dennis Ng »

gimz63251073 wrote: Yes the HDB concessionary loan is indeed one of the few benefits that Govt actually gives us. Usually they take from us. hah..

i realise that stretching the HDB loan is indeed not common. I spoke to a few frens about this idea since even the first $20k pays more than 2.6%. But they all still think got loan better repay early.

i guess psychology plays a part in that decision. Not everyone is comfortable with a loan and not everyone would like to keep a opportunity fund as people normally cannot stand inactivity. When they have $, must spend it, as if they don't like $...
yes, such thinking is common. I used to think the same way too, about it is NOT wise to have any loans and to pay off Housing Loans as soon as possible.

I only started to become more financially literate from age 28 onwards. The Asian Financial Crisis in 1998 heightened my learning as I saw with my very own eyes how the Crisis wiped out the fortunes of some people but how the Crisis ALSO provided Rare opportunities for some other people to get Richer.

Avoid ALL Loans on consumption. They are All Bad Debts.

The ONLY Good Debt almost everyone has access to is Housing Loans. Plan, structure and manage your Good Debt wisely and it can help accelerate your road to Financial Freedom.

See out those who know to guide/assist you. Groping in the dark is very dangerous.

Avoid any Financial Mistakes that might be FATAL. Learn from other people's mistakes rather than learning from your own mistakes. That is Leverage (learning from Other People's Mistakes).
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
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Warren Buffett on Good Debt helping his biz Grow

Post by Dennis Ng »

Even Warren Buffett when he was interviewed by CNBC on 22 Aug 2008 said that there's nothing wrong with debt, and when Good debt used wisely can help you grow your wealth.

He also said his company can expect to have debt forever, and to operate debt-free is actually against the company's interest.

Here's what Warren Buffett said:

BUFFETT: Well, there's nothing inappropriate about having debt in America. I mean, Berkshire has debt, and it's helped us grow over time. And it's when debt gets out of control that you worry.

Berkshire can expect to have debt forever, and the larger we get in terms of our equity and earning power, the more debt we can sustain.

And I don't think our shareholders would want us to operate--take on some rule where we're going to operate debt-free in the future.

So it's--what you worry about is when the debt starts spiraling out of control, when it goes up year after year after year as a percentage of GDP, because eventually when that occurs people--if you try to borrow money around the world in your own currency, the world will say no.

That's what happened in South America in the past, it happened in the--in the Asian arena. We are able to borrow money in dollars. The world trusts the dollar. If we tried to run our debt up to 3- or 400 percent of GDP, nobody would want debt denominated in dollars.
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
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Post by Dennis Ng »

remember I keep saying that Housing Loan is different from other loans eg. Shares Margin Financing? Why? Becos for Housing Loans, as long as you can pay the monthly Housing Loan instalments, you're fine.

That's what Warren Buffett said in this interview with CNBC on 22 Aug 2008 as well.

Here're his exact words:

Warren Buffett: Now the nice thing about borrowing on a house is if you make your payments, you keep it.

And so if you signed up for payments you could handle, you're fine unless you lose your job or there's a divorce or death or something of that sort.
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
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Should I reduce/pay off my Housing Loan now?

Post by Dennis Ng »

someone emailed me and asked me:

"Dennis, should I be using Cash/CPF to reduce my Housing Loan by say S$10,000, S$15,000 as and when I can?"

My reply to him below:

Cash is King in Crisis.

We are entering into possibly the Worst Global Financial Crisis in 50 years…..you don’t want to use your cash to reduce Loan or things like this.

How much “returns” are you making by reducing your Housing Loan? 3% or 4%, depending on interest rate you’re paying.

If you invest in a Crisis, you can easily get 50% to over 200% returns.

I’m holding tightly to my cash and raising cash…for the up-coming Opportunities in a Crisis.

Just my opinion. I might be totally wrong. Do not treat this as advice to you, it is not.
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
Dennis Ng
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Post by Dennis Ng »

it is really very funny. I have NEVER asked anyone to borrow money to invest.

I only urge people NOT to be in a hurry to pay off Housing Loans.

Last year I asked people to take profits on their stocks. I shared I sold 80% of my stocks and made over 200% profits. I made close to another 100% in properties. If you had sold your stocks, you would have CASH in your pockets, and not facing UNREALISED losses as many are facing now.

I advocate Market Cycle Investing, not BUY and HOLD forever. Look what the strategy of buying and stubbornly holding even as markets turned from Bull to Bear has done to some forumers' fortunes. Some are looking at 60% unrealised losses on their portfolio.

I'm in a Net Cash position, (effectively debt-free). The Cash I have on hand is 3 times of what I owe in Housing Loan.

Cash is King. In the months ahead, when people lose their job or have no income, they will Regret using Precious Cash to reduce/pay off Housing Loan during Good Time.

I've been approached by many people who were Cash tight during the last Crisis (in year 2002 to year 2003), and many of these same people had used precious Cash to reduce/pay off their Housing Loans when times were better before market Crash.

I hope that one day you will know the Wisdom of my sharing.

Crisis is an Opportunity? NOPE. The TRUTH is Crisis is only an Opportunity for those who have CASH, not for those who had used up their Cash to reduce/pay off their Housing Loan.

For example, even Warren Buffett keeps Cash. Warren Buffett has US$40 billion Cash waiting to be deployed.

Whether my strategy worked or not? Well, last 5 years I've grown my wealth by over 300%. And now by holding 50% in Cash, I'm well positioned to increase my wealth by 100% to over 300% in the next 5 years ahead. I will update everyone on my progress.

NOTE: I'm forced to repeat my results as someone asked does my strategy work or not, I'm not doing it to boast, as some have thought.

Why am I repeating my message? I hope that SOME people out there can finally get it that what I do can be done by others as well, Market Cycle Investing does not require great deal of fundamental/technical knowledge to execute. And it has been practised by ALL my mentors who are self-made multi-millionaires. To them, anyone who invest against Market Cyclces are either foolhardy or too egoistic or want to prove they are smarter than others.

While Market Cycle Investing can actually be Simple and Easy and at the same time enable you to reduce your risks in investing, since you're letting the Trend be your friend instead of trying to Guess the turning point of markets.
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
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Re: Why quickly paying off Housing Loan is not wise?

Post by Dennis Ng »

This article has been selected to be featured in CPF's National Financial Education website http://www.imsavvy.sg in the "savvy blog corner" and is voted the most popular post there.

Regards.

Dennis Ng, http://www.HousingLoanSG.com
Dennis Ng wrote:Why hurry to pay off Housing Loan is not wise?

Sunday Times 29 Oct 2006 page 26 and 27 published an article entitlted]:" Why paying off your mortgage quickly is not always good."

I was asked for my comments. Only some of which were published, below are the full comments I provided to Sunday Times for your easy reference:

If you read any Personal Finance books from all bookstores, one "recurrent" advice they have is "be debt-free as soon as possible". I have seen many people after reading such books quickly pay off all their debts, including Housing Loan, which to me is actually unwise.

They forget that there is GOOD debt and there's BAD Debt. Bad debt is any debt on consumption. Thus, to me car loans, personal loans, credit card debt are ALL bad debt and a person should avoid such debts or aim to pay them off as soon as possible.

Actually, if there's a way you can be "debt-free" and yet enjoy the benefit of leverage that debt provides wouldn't it be better? It can be done, let me show you how.

Personally, my Housing Loan is $x amount. What I have in cash is more than $2x. So am I debt free? Actually on a NETT basis, I am. However, I'm "retaining the Housing Loan debt" becos it makes financial sense to do so. In my opinion, the problem is most people only have a limited knowledge and finance and debt but they just stick to concepts such as "be debt free as soon as possible" without looking at the issue deeper.

They never think deeper, such as how you can "be debt-free" but still enjoy the "Leverage" that debt provides (just like what I'm doing). Isn't that better? It's likely having your cake and eat it too.

Not doing what I am doing is "shortchanging" yourself.

As I mentioned, as long as a person does not over-borrow, (ie. debt servicing ratio less than 35%), he can just aim to pay off Housing Loan by age 55 and not in a hurry to pay it off.

Why? Here’re the reasons:

1. Housing Loan is cheapest loan a person can ever get. Currently, Housing Loan interest rate is about 3%, compared to 7% for car loan, 14% for personal unsecured loan and 24% for credit cards!

2. paying off Housing Loan does not increase your networth.

Let me use an example to illustrate:

Mr A owns a condominium with a market value of $500,000. He has an outstanding housing loan of $400,000 and no other liabilities. He has other investments worth about $100,000 and has $100,000 in cash/CPF Ordinary account balance. He is considering to use the $100,000 in cash/CPF fully to reduce his housing loan from $400,000 to $300,000 after reading books which “teaches” him to be debt-free as soon as possible. Will doing so really improve his net worth position?

This is his current Net Worth Position:

Assets:

Cash/CPF $100,000

Other investments $100,000

Property (market value) $500,000

Total assets $700,000

Less total liabilities:

Housing Loan $400,000

Net Worth $300,000

By using his cash/CPF to reduce his housing loan, this would be his revised net worth position:

Assets:

Cash/CPF $0

Other investments $100,000

Property (market value) $500,000

Total assets $600,000

Less total liabilities:

Housing Loan $300,000

Net Worth $300,000

As you can clearly see from the above example, using his cash/CPF to reduce his housing loan, he is simply reducing his asset to reduce his loan. The net result of doing so makes no difference in his net worth position, which remains as $300,000.

3. by reducing your Housing Loan, actually you’re reducing your “Financial Security”.

What are the 3 worst things that can happen to anyone?

They’re :

death
disabled
retrenchment

in all 3 worst scenarios, the person who did not use up his cash/CPF to reduce loan, his dependants would actually be in a better financial position than after he reduces his loan.

If he take up mortgage insurance, his housing loan would in fact be paid off by insurance in event of death and total permanent disability. Thus, by reducing his loan, he is just reducing his own benefit from mortgage insurance.

4. You can actually gain financially by keeping your housing loan!
As I have shown in the detailed spreadsheet calculations of $100,000 loan vs $100,000 savings.

5. Opportunity cost of using cash to pay off Housing Loan

As mentioned, I hold about 30% cash currently. If next year, U.S stock market crash due to correction ins U.S. property market, I would be able to benefit from a “crisis” because I have cash to invest when prices are low. People who use cash to reduce loan has NO cash to take advantage of opportunities in a crisis.


People say “crisis is an opportunity”.

It’s wrong. I say, a crisis is only an opportunity to those people who have cash. A crisis is NO opportunity for people who do not have cash to invest. When a crisis comes, I can easily make 50% to 100% returns. Just take a look at past crisis eg. SARS in S’pore in year 2003 and you would know what I say is the truth.

6. You can easily get 3% to 4% annual returns single premium endowment even if you don’t know how to invest.

For people who say they don’t know how to invest their money, that’s why they use cash to reduce loan. My reply to them is just take up a 20 year single premium endowment and you can easily get annual returns of at least 3.5% per year. (just get any quotation from any insurers in Singapore and again you know I’m speaking the truth.

7. instead of using cash to reduce your loan, you can take up "Interest Offset Loan". By doing so, you're not paying interest since the interest earned on your cash 100% offset interest you pay on your loan. You enjoy the same advantage as paying off your loan. However, you have another additoinal advantage of having liquidity of your cash which you forgo if you use cash to reduce loan.
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
Dennis Ng
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Post by Dennis Ng »

What I shared in this article may first appears to "contradict" what most Personal Finance books teach you and what your parents teach you.

However, all my sifus who are multi-millionaires in Singapore use debt wisely to get Rich.

And below I attach one posting by williamlim in another forum for your information, it appears that what I share is now getting more acceptance in Singapore.

Below posting by williamlim at another forum:

The 1st part, the rest is about how typical millionaires got their wealth and how they lived to clear some misconception on how to get rich.
http://www.smartmoney.com/spending/rip-o.../?cid=1231

This one is very true.. "Judicious use of Debts - Good Debt"


Regardless of how they build their nest egg, virtually all millionaires “make judicious use of debt,” says Russ Alan Prince, coauthor of "The Middle-Class Millionaire." They’ll take out loans to build their business, avoid high-interest credit card debt, and leverage their home equity to finance purchases if their cash flow doesn’t cut it. Nor is their wealth tied up in their homes. Home equity represents just 10% of millionaires’ total assets, according to TNS. “People who are serious about building wealth always want to have a mortgage,” says Jim Bell, president of Bell Investment Advisors. His home is probably worth $1.5 million, he adds, but he owes $900,000 on it. “I’m in no hurry to pay it off,” he says. “It’s one of the few tax deductions I get.”
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
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