Posted: 17 Jul 2008 02:06 AM CDT

Image by moominsean via Flickr

Dave Ramsey’s “Total Money Makeover” baby Step 7 is to pay off your home mortgage. I have written posts on this topic before and am amazed at how people are split right down the middle when it comes to this topic.

Your Mortgage Loan – Good or Bad Debt?

Proponents of good debt believe that you can leverage off the low costs of home equity to borrow monies to invest and provide cash flows for general day-to-day use because in Singapore you can use your Central Provident Fund ordinary account monies to pay your mortgage instalments. Thus, you do not have to touch your take-home pay and can use it to spend, save or invest.

Opponents of good debt or those who like Dave Ramsey believe ALL DEBT IS BAD BAD BAD take a diametrically opposite view. Because the longer you take to pay, the interest you incur increases the true cost of your home. Besides the actual purchase cost of your home, the financing costs in terms of interest makes you pay more through interest. Paying off your mortgage earlier by increasing the instalment payments or making pre-payments to principal saves you interest costs. Delaying payment and investing the same amount of money will result in a gain only if you can get a higher return than your cost of borrowing.

Panzer’s Take on Good vs Bad Debt

I weigh on the side of being a supporter of Dave Ramsey. Debt is bad bad bad for a whole host of reasons. I talked about “the bearable likeness of being” and also in my previous post “Should I pay off my housing loan first“.

After managing my own monies for the last 5 years, I’ve realised that it is difficult to consistently beat the market and paying off your mortgage earns you the interest saved every time. For instance, let’s say you borrow $150,000 at 2.6% to finance your HDB apartment. Your total interest costs over a 30 year term at 2.6% is $323,975.44 representing an interest cost of $173,975.44. If you borrow $10,000 less instead, this savings will translate into a total interest cost of $162,377.07 or savings of $11,598 on interest costs. So every $10,000 prepaid now saves you that same amount plus more in interest costs alone 30 years down the road.

Being the stingy accountant that I am, I don’t want to pay a penny more to the borrower more than I have to. Thus, I took a decidedly aggressive approach and got myself housing debt relatively quickly by borrowing less and using almost all my CPF ordinary account plus savings for my home purchase. I also made regular capital re-payments because my loan package from the bank allowed me do so subject to a cap of 30% of the principal each year for the 1st three years. I literally ploughed back most of my year-end bonuses and windfall gains from shares into such payments.

My approach is not for everyone as not everyone shares my view on debt. Some believe that life is to be enjoyed and a balance has to be struck between today’s wants and tomorrow’s needs. I agree. Decide on your approach to your home mortgage based on your own values and principles and take appropriate action accordingly. But do be aware of the advantages and disadvantages of different approaaches.

Be well and prosper.

Posted: 16 Jul 2008 04:57 AM CDT

The more you learn, the more you earn.

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