Housing Arithmetic

Wai Mun Fong and Benedict Koh

Chapter 13 in Managing Your Personal Finance:From Start of Career to Retirement and More, 2020, pp 85-91 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Dear David,When your mom and I bought our first home, we took only a small housing loan to finance the purchase. This was possible because house prices were relatively low then. The same loan today would barely pay for the kitchen! I shudder to think of the amount you would need to borrow when it’s your turn to buy a house. Given the rate property prices are rising, you’d probably have to stretch your loan period for decades. Already, some banks are offering housing loans with terms of up to 35 years (or the difference between retirement age and current age of the borrower, whichever is earlier). While a longer loan period reduces the monthly repayment, the downside is that the loan seems to drag on forever. More importantly, by the time the loan repayment runs its course, the total interest paid could well be more than what you borrowed in the first place. Later, I will run through some numbers to back this claim. Don’t get me wrong. I’m not saying you shouldn’t get a housing loan. That simply isn’t an option unless you are a Bill Gates or Warren Buffet. My advice is simply this: borrow what you can afford and repay your loan as quickly as you can…

Keywords: Personal Finance; Investment; Managing Money; Retirement planning; College planning; Borrowing; Buying Bonds; Investing in Real Estate; Estate Planning (search for similar items in EconPapers)
JEL-codes: D14 (search for similar items in EconPapers)
Date: 2020
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