‘I’m 40, have a home loan and some savings. What’s the smart thing to do?’


Welcome to The Money Coach, a Times of Malta column where readers can ask questions about life’s money issues. Send your questions about personal finances, inheritance, gifting or other personal finance topics to moneycoach@timesofmalta.com.

Dear Luca,

I’m a 40-year-old single individual with a stable job. Recently, I took out a home loan of €250,000 at a 2.65% interest rate, repayable over 25 years. I maximised my loan amount based on advice and spent some of my savings on home essentials, leaving me with a lump sum of €50,000.

I’m considering whether using this €50,000 to reduce my home loan debt is a wise financial move. Also, I’m curious about the optimal timing for such a payment – should it be right after the monthly deduction, mid-month, or just before the next payment is due?

I have no significant debts other than this home loan, no emergency funds, and I’m not currently exploring investment opportunities. There are no penalties for early loan repayment, and my risk tolerance is average. I’m seeking your insight on how best to utilise this lump sum.

Looking forward to your response,

Debt-Free Dreamer

 

Luca responds:

You’re taking a thoughtful approach to managing your finances, and it’s commendable. Given the specifics of your case, let’s consider a balanced strategy that not only addresses your loan but also builds a solid financial foundation for the future.

1. Emergency fund First: Establishing an emergency fund is critical. It should cover at least 3-6 months of expenses, offering a buffer in times of unforeseen financial needs, like unexpected medical expenses or job loss.

2. Consulting a financial advisor for investment strategies: Considering your current loan interest rate of 2.65%, this may be an excellent time to explore investment opportunities.

I recommend consulting with a professional financial advisor to discuss a variety of investment options tailored to your average risk tolerance. This discussion can include the potential of mutual funds, index funds, bonds, and even stocks. A financial advisor can provide insights into how each of these options works, their risk profiles, and their suitability for your financial goals, especially focusing on long-term benefits such as retirement planning.

Starting with a modest investment and progressively increasing your commitment can be an effective strategy. This approach not only diversifies your portfolio but also aligns with a prudent financial plan to balance loan repayment and investment growth.

3. Partial loan repayment: After setting aside a portion for your emergency fund and investments, you can still use part of the €50,000 to reduce your loan principal. This will decrease your interest payments over time and shorten the loan term.

When is the best time to make a loan repayment?

  • If interest is calculated daily: Making an early payment in the loan cycle (right after the monthly deduction) can reduce the principal balance sooner, which in turn reduces the daily interest accrual for the remainder of the loan term.
  • If interest is calculated monthly: Although the interest for the current month may already be set, making an early payment can still be beneficial. By reducing the principal before the next month’s interest calculation, you decrease the total interest charged in subsequent months.

Additional considerations:

  • Review your loan agreement for any clauses related to extra repayments. Although you mentioned there are no prepayment penalties, it’s always good to double-check.
  • Continuously reassess your financial situation. If your circumstances change, your strategy might need to adapt accordingly.

While it’s tempting to use the entire lump sum to reduce debt, diversifying its use can offer you more financial stability and growth potential. This approach aligns with building a robust financial foundation while also working towards reducing your debt.

Remember, these suggestions are based on the information you’ve provided, and it’s always a good idea to consult with a financial advisor for personalised advice.

Luca is the founder of the Money Coaching Hub. Email him your financial questions at moneycoach@timesofmalta.com

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Disclaimer: This column is intended to provide general information on various topics related to personal finance. The information provided is for educational purposes only and should not be construed as personalised financial advice for your specific situation. Financial decisions are highly individual and can vary greatly based on your unique circumstances, goals, and risk tolerance. The author of this column is not authorised to provide financial advice. Before making any financial decisions, it is recommended to seek professional financial advice from an authorised financial advisor.



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