Prepayment Wave (Tiqian Huandai): Following the Trend or Being Rational?

Over the past two years, China has seen an unprecedented "Prepayment Wave". Long queues have formed at banks, and appointments are needed months in advance just to pay money back to the bank. Why? Because financial returns have dropped. Previously, buying any financial product yielded 4-5%, now it's hard to find 3%. Meanwhile, interest rates on many existing mortgages are still above 4% or even 5%.

The Problem: Asset Shortage and High Debt

When Investment Return < Mortgage Rate, holding cash is a loss. This is why everyone is rushing to deleverage. Logically, this is completely correct. For example, if you have a mortgage with an interest rate of 4.5% and the best investment return you can find is 3%, it makes sense to use your cash to prepay your mortgage. By doing so, you can save 1.5% in interest payments, which is a significant return.

The Agitation: The Cost of Blindly Following

However, not everyone should follow the trend. If your mortgage rate has already been lowered to 3.6% via LPR, and you have a well-run business bringing in 10% returns, or you have long-term USD asset allocation, then prepaying is a mistake. Prepaying consumes your liquidity. Once money is paid back to the bank, trying to borrow it again (for business or consumer loans) often faces stricter audits and shorter terms. This can limit your financial flexibility and make it harder to take advantage of future investment opportunities.

The Solution: Calculate Your "Spread Threshold"

You need to make a simple comparison: 1. A = Your Real Mortgage Rate (LPR + Basis Points). 2. B = The Risk-Free Return on Your Cash (Certificates of Deposit, Government Bonds).

If A > B + 1%: Definitely prepay. The gap is too large for investments to catch up.

If A ≈ B: Keep the cash. Liquidity itself has value (for unemployment, illness).

If A < B: Do not prepay. You are using the bank's money for arbitrage.

For example, let's say your mortgage rate is 4.2% and the risk-free return on your cash is 3%. In this case, A > B + 1%, so it makes sense to prepay your mortgage. On the other hand, if your mortgage rate is 3.8% and the risk-free return on your cash is 3.5%, A ≈ B, so it's not as clear-cut. You may want to consider other factors, such as your liquidity needs and investment opportunities, before making a decision.

Amorti Simulation Decision

Don't rely on feelings, let the data speak. Here's a step-by-step guide to help you make a decision: 1. Enter your mortgage information in AmortiApp. 2. Simulate prepaying with 500,000 yuan. 3. Note the total interest saved and divide by the remaining years to get the Return on Capital. 4. Ask yourself: "Can I earn a higher return than this elsewhere?" If the answer is "No," then go queue up to repay. Deleverage rationally, refuse to follow blindly.

Some key takeaways to consider:

Prepaying your mortgage can save you money in interest payments, but it also consumes your liquidity.

You should calculate your "Spread Threshold" to determine whether prepaying makes sense for you.

Consider your individual financial situation, including your mortgage rate, investment returns, and liquidity needs, before making a decision.

Don't follow the trend blindly - make a rational decision based on your own financial situation.

Common Mistakes to Avoid

When considering prepaying your mortgage, there are several common mistakes to avoid:

Not considering alternative investment opportunities: Make sure you're not giving up a higher return elsewhere by prepaying your mortgage.

Not accounting for liquidity needs: Prepaying your mortgage can limit your financial flexibility, so make sure you have enough cash on hand for unexpected expenses or investment opportunities.

Not understanding the terms of your mortgage: Make sure you understand the terms of your mortgage, including any prepayment penalties or fees, before making a decision.

Conclusion

The "Prepayment Wave" in China has led many people to consider prepaying their mortgages. While this can be a good decision for some, it's not right for everyone. By calculating your "Spread Threshold" and considering your individual financial situation, you can make a rational decision that's right for you. Remember to avoid common mistakes, such as not considering alternative investment opportunities or not accounting for liquidity needs. With careful consideration and planning, you can make the most of your financial situation and achieve your goals.

Some key points to remember:

Calculate your "Spread Threshold" to determine whether prepaying your mortgage makes sense.

Consider your individual financial situation, including your mortgage rate, investment returns, and liquidity needs.

Avoid common mistakes, such as not considering alternative investment opportunities or not accounting for liquidity needs.

Make a rational decision based on your own financial situation, rather than following the trend blindly.