Tuesday, October 4, 2011

Should I pay down my mortgage or should I invest my savings?

I received an email from a reader of my book, Route to successful property investment in Singapore. Once again, I want to thank all those who have bought my book for your support. He asked if he should do a partial redemption whenever he has enough to do it, or invest the money? I pondered for quite some time, did a bit of calculation and replied him. I will not discuss about the email. I shall discuss my strategy in this post.

Take for example, a couple who has taken a $300,000 mortgage loan. It does not matter how much is the monthly repayment. The figure that is important here is the interest rate. Let's take the current rate of about 1% per annum. Many will say that I will invest the money since the loan rates is still so low. I can just put in any preference shares that give me 5% dividend and I can beat it by 4%. That is totally WRONG!

First, you must take note that 1% of $300,000 is $3,000. If you have only $20,000 of savings, 5% of your $20,000 invested in the preference share is only $1,000. You are actually paying $2,000 interest instead of $3,000. You are still paying interest on your part. In order to beat the loan interest, you have to make at least 15% profit from your $20,000. It is not impossible but a very difficult target to achieve. And remember, DO NOT try your luck on the gambling tables.  If you pay the $20,000 and reduce the loan to $280,000, the interest will be $2,800 and you are paying $800 more than what is mentioned above. If you are not confident of investing in the stock market, then you may choose to do the latter. You will still be saving 6.7% on the interest to be paid. Investment in stock market carries much higher risks than repaying your own home. In the event that a Lehman-like crisis happens again, buying the wrong stocks may cause you $20,000 and you will still have to pay $3,000 interest. Weigh the consequence carefully before you make your decision.
Of course, if you are confident that you can make more than 15% per annum for the next 5 years, then by all means, invest the money. But the current market condition is not suitable for one to dump their money into stocks. Anyway, invest in your own property is a better and more certain choice, compared to the stock market.

When you have partially redeemed to $150,000, then maybe it is a better choice to invest your money. A 1% interest on $150,000 is $1,500 per year. I believe that if you have $20,000 in savings, a 10% return every year will give you $500 more than your loan repayment. It is not difficult to find a good company that can give us more than 10% returns. You can read my other posts in this blog to find out how.

I will just use another figure to illustrate another scenario. A couple bought a $1 million condominium and took 80% loan. Their interest each year will be about $8,000. How much do they need to invest, in order to overcome the $8,000 interest? Let's just talk about making a profit of $8,000 every year. The highest dividend that I have come across so far, is Cerebos Pacific. Their dividends per year should be at least $0.25 per share. So taking $8,000 divided by $0.25, the couple needs to buy 32,000 Cerebos Pacific shares. At today's closing price of $4.69, they need to have $150,000, just to break even with the interest. If they have $197,000 to buy 42,000 shares, then they can expect to receive $10,500 dividend each year. Not only have they beat the interest, they have an additional $2,500 to reinvest and grow their savings further.

In summary, if you are not confident of investing in the stock market with your savings, it is better to repay the mortgage loan and reduce the interest. Interest rate may differ, but our aim is to invest only when we can really beat the interest of housing loan. Hope each and every one of you find this post useful and recommend your friends and colleagues to take a follow this blog.


Disclaimer: Any investment mentioned here is meant to be illustration only. Every investment involves risks. Readers are advised to exercise their own discretion when investing their own money. Writer of this blog shall not be held responsible for any failed investment made.


  1. ermmm... don't agree.
    in your example, invest 20k can generate 1000$ per year.
    while pay the loan can only save 200$ per year.

  2. Thanks leopard for your sharp observation. Indeed, if we can make $1000 a year, interest paid is only $2000, while repaying it, we will need to pay $800 more. Will change the above paragraph.

  3. For those who has no faith in the stock market, you may want to reduce your interest. Still better than putting the money in your savings account.