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https://scmp.com/business/money/article/1027081/melanie-nutbeam-answers-basic-personal-finance-and-investing-queries
Business/ Money

Melanie Nutbeam answers basic personal finance and investing queries

Property prices may go up or down. Photo: Bloomberg

This is the start of a weekly series where Melanie Nutbeam, a certified financial planner based in Hong Kong, addresses common personal finance queries. Send queries to [email protected]

I'm not earning anything on my money in the bank. Should I pay off part of my Hong Kong home mortgage?

Paying off your mortgage is essentially a no-risk investment. You will achieve a guaranteed return equal to your mortgage interest rate - currently 2 per cent to 3 per cent, depending on your loan arrangement. That's not nothing.

Hong Kong interest rates have already crept up from the 20-year low of 0.9 per cent reached early last year and, as this creep continues, you will benefit from early, lump-sum mortgage repayment.

In so doing, you might be able to cut your monthly mortgage bill or bring forward your loan maturity date. You'll need to ask your bank what your options are, and whether there are any penalties for early repayment. You can also ask the bank for a calculation showing the savings you would make by paying off your mortgage, as these can be significant when calculated over the life of the loan.

On the other hand, the 2 per cent to 3 per cent cost of your mortgage provides, in effect, a cheap loan. If you are prepared to take on some risk, you should, over the medium to long term, earn enough from investing in growth assets to outstrip the cost of your mortgage.

In other words, it might make more sense to invest spare cash in the market, rather than use it to pay off the mortgage.

Growth assets include shares and property, as well as mutual funds that cover such assets.

Returns usually come from a combination of dividends, rent, and capital appreciation. Unfortunately, capital appreciation is not guaranteed and it's seldom in a straight upwards line. We've seen unusually large swings, downwards and upwards, in the value of growth assets since the 2008-09 global credit crisis. This has created winners and losers. Before using your cash in the bank to invest in growth assets, you need to consider how comfortable you are with risk and whether you can manage some of that risk by, for example, investing in a portfolio spread across a range of assets.

Before you do any of this you should set aside emergency cash - usually three to six months' income - for job losses or medical setbacks not covered by insurance.

You should also look at your eligibility for a new mortgage. The bank might consider you too old to lend to. In which case, if you quickly repay your mortgage now, you will take out your biggest source of debt funding. This might not be desirable if you want money for something else, such as investing. Having all your eggs in one basket - your home - may not be the right strategy.

In the end, this is a strategic decision. You need to review your liquidity needs, your budget, risk appetite and time frame for investing.

You might even decide to bet each way - pay off part of your mortgage to lock in your savings, and diversify your strategies by committing part of your cash to growth investments. If your bank lets you cut your repayment, you can use the spare cash to invest in a spread of growth assets.

The advice presented here is for indicative purposes only. For a clearer picture, you should talk to a professional adviser