Tuesday, September 09, 2008

Take a bigger loan at a low interest rate

Hi Mr. Tan,
I am in the process of looking for a housing loan. My friend advised me not to pay off the loan so fast, but to use my available cash for investments. Is it a wise thing to do? He showed me some calculations, to convince me that I would be better off taking loans and investing my cash. But won't I be losing from the high interest the bank charges?

REPLY
If the interest rate on your loan is low (say 2.6% for HDB loan), you should be able to earn more than than this interest rate from your invetment, if it is invested wisely. You should avoid investment that has a high charge, especially if it is marketed to you by an agent or financial adviser.

However, if the interest rate is more than 4%, it is not worthwhile to take the investment risk.
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2 comments:

Roland said...

Hi Mr Tan,

I am also in a similar situation. the problem is where to invest to get at least 8% interest? I always hear this advice (dont pay up, better to invest)but dont know where to park the $.Current savings interest is very low. Even Bank's preferance share is only at 5%. Can you suggest area for investment that can get return of 6-8% with time horizon of <5 years?

September 10, 2008 11:41 PM
Falcon said...

Roland,
You can get around 10% by investing in a RMB fixed deposit for 2 years at over 5% interest rate. The appreciation of the yuan should also be able to get you another 5% or more over this period. I put some of my savings in RMB in March this year at 4.14% for one year. Since then, the exchange rate has appreciated more than 5%. I expect further upside and by march next year I should be able to get the 4% plus another 10%. So I am on track to get more than 10% even after factoring in the govt tax of 5% on my interest.
Hope this helps.

September 13, 2008 1:17 AM

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