I remember when I paid off my housing loan many years ago, the interest rate that the loan attracted was 5.1%. That was pretty pricey. For a few years now, interest rates have been very low and, so, it has been pretty cheap for people to borrow money to help pay for their homes.
Personally, I am holding back from doing partial or full capital repayment on my current home loan because even with the sharp increase in the 3 months SIBOR in recent months, the effective interest rate on my home loan is still below 1.8%. The cost of having liquidity is not exhorbitant (yet).
Even if my investments are only able to generate a dividend yield of 4.0%, financially, I would still do OK. So, arbitrarily, an interest rate of 4% on my home loan could be the tipping point for me to want to pay it down at a faster clip.
Hi M,
A housing loan is amortising in nature. As we pay down the loan, the interest portion will shrink and the principal repayment portion will grow even as the monthly installment stays the same. If you would like to pay less interest, one way is to shorten the loan period. Then, you would be paying more of the principal amount monthly. However, your monthly installments would also be bigger, of course.
As for whether you should pay off the housing loan first or invest for higher returns, it depends on what is the interest payment on your housing loan and what you are able to get from your investments.
Imagine that you have a housing loan of $300,000 and that the interest rate is 2%. Let us assume that the loan is non-amortising for the sake of illustration. In a year, you would have to pay $6,000 in interest payment. If you were able to generate a 5% return through investments that year, you would make $15,000 which is more than enough to cover the interest payment.
Of course, there are good things to be said about paying down our housing loans ASAP no matter the interest rates or potential investment returns. Do what gives you peace of mind. That is priceless.
Now, as for stocks A and B, not an easy question because there could be so many different circumstances surrounding them. I would, however, first ask if the dividend is sustainable, if it is sustainable and if we are after passive income, I would go for stock A.
Price is, after all, often a function of Mr. Market's moods while there could be some certainty in dividend payments if they are sustainable. Like I said, bear in mind that this is actually a very simplified approach to a possibly very difficult question.
Best wishes,
AK
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