The Couple Who Want You to Settle It
Couple: 36 and 34, Hong Kong, combined gross income HK$118,000 a month, he earning HK$78,000 of it. Daughter aged 2; a second child planned next year. Flat worth HK$12.5m with a HK$8.9m HIBOR-linked mortgage (H+1.3%, about 4.5% all-in today), 27 years remaining, monthly payment HK$42,000. Cash HK$1.3m, investments HK$0.6m, combined MPF HK$1.1m. They send HK$15,000 a month to his parents. His cover is group-only: HK$500,000 critical illness and HK$2m group life, both tied to his employment. She has no cover beyond MPF. He wants to place HK$1m into a second flat "because property always wins"; she wants to pay down the mortgage. Their emergency fund is two months of expenses. They have asked you to settle it.
1. Is the invest-or-repay question the most urgent issue here? Show the numbers.
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No - there is a solvency problem behind the disagreement.
The dependency. He earns 66% of household income. If he died tomorrow, the household would receive HK$2m of group life - which also disappears if he becomes too ill to work, since it is employment-linked - against a HK$8.9m mortgage, HK$15,000 a month to his parents, childcare for two children, and the loss of HK$78,000 a month.
Needs-based estimate: mortgage HK$8.9m + his parents' support for 20 years (HK$3.6m, before discounting) + income replacement for his share of household spending (say HK$45,000 a month for 22 years, discounted at 3% ≈ HK$8.5m) + education. That is well over HK$20m of need against HK$2m of cover and HK$1.9m of liquid assets - a shortfall above HK$15m.
Critical illness cover of HK$500,000 is a few months of his income. Her exposure matters too: if she dies, the household must buy the childcare she currently provides, and there is nothing in place.
Emergency fund of two months is inadequate for a single-income household with a mortgage and a second child coming. The correct first recommendation is term life on both lives (his at a multiple covering the mortgage plus income, hers sized to childcare), own-occupation critical illness on both, and a six-month reserve - funded from the cash, not from the HK$1m he wants to speculate with. Then the invest-or-repay question becomes answerable.
2. Now address the HK$1m. Compare the second flat with mortgage prepayment and state what data you still need.
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Prepayment. Repaying HK$1m on a 4.5% mortgage saves HK$45,000 a year of interest, after-tax and risk-free. In Hong Kong there is no capital gains tax, so no tax wedge distorts the comparison - it is purely return versus liquidity. The cost is that money repaid cannot be recalled without refinancing, which is why prepayment must come after the reserve is funded.
Second flat. Three figures decide it:
- Carry: HK$1m of a HK$7m flat at a 3.0–3.2% gross rental yield earns roughly HK$32,000 a year against HK$45,000 of mortgage interest - negative carry before voids, management and repairs.
- Entry cost: the 15% ad valorem duty on a second residential property is about HK$1.05m on a HK$7m flat, roughly four to five years of gross rent, consumed on day one.
- Leverage: maximum 60% loan-to-value and a stressed repayment test, plus a second child arriving next year.
On these numbers the second flat is a negative-carry, illiquid, heavily taxed bet, and prepayment dominates it. A partial prepayment within the bank's penalty-free limit, keeping six months of expenses liquid, is the defensible first step.
Data still needed: the mortgage's prepayment penalty and partial-repayment terms; the HIBOR reset terms and worst-case payment; her maternity income assumptions; the parents' support horizon; and their respective risk-tolerance questionnaires.
3. How do you resolve the disagreement between them, and what do you document?
Read the worked answer
Separate the objective from the subjective. The arithmetic - carry, duty, penalty-free limits - is not a matter of opinion and should not be debated as one. The genuine disagreement is about liquidity and security, and it is rational on both sides: he is extrapolating a 15-year property run; she is about to lose income and is looking at a HK$42,000 payment that resets with HIBOR.
Reframe the decision into three buckets rather than one: (1) protect - term life and critical illness on both lives, six-month reserve; (2) repay - a defined partial prepayment within the penalty-free limit; (3) invest - a diversified, monthly-contribution portfolio with the surplus, no second property until the second child is settled and the reserve is intact.
Practical steps: meet each of them separately once, because the wife has been outvoted in these conversations; run both risk-tolerance profiles and show them where they diverge; give them a one-page decision with a cooling-off week so no one feels overruled.
Document: the needs analysis with the shortfall figure, the mortgage calculations, both risk profiles, the recommendation and its alternatives, and - critically - the fact that his group life and critical illness are employment-linked and will be lost on any change of job. Note that she will be the one carrying the household if anything happens to him, which is why the protection bucket is not negotiable between them.