Take your time to pay down your HDB housing loan.

In the guest blog by Klein recently, he offered his reasons why we should not repay our HDB housing loans too quickly. One of the reasons is that we would be losing more in interest income from the CPF-OA than we would be saving by avoiding the 2.6% HDB home loan interest rate.

Now, this is unconventional thinking, at least to me, which seems to make sense. This was another reason for me to share it here in ASSI with everyone. Of course, it does not mean that I think it is the way to do things but it does offer an alternative which is worth considering.

In my reply to a reader on this matter, I have offered some numbers which could make things a bit clearer, I hope.

Let us assume that a person had an outstanding HDB home loan of $100,000 which was meant to be repaid over a 10 year period and let us assume that he chose to pay down this $100,000 in loan using money in his CPF-OA in one lump sum. How much would he be saving in interest payment?

Using an amortising calculator, $13,670. This would have been the total interest payment of the loan over the 10 year repayment period.

Now, if this person had not repaid the $100,000 loan in a lump sum but instead chose to leave the money in his CPF-OA to earn 2.5% in interest income per year, how much would he be able to accumulate over a 10 year period? Compounding 2.5% a year, $28,008.

Of course, I am assuming that this person stays in active employment over the 10 year period and that his monthly CPF-OA contribution is able to cover the monthly repayment of $947.25 to HDB.

Naturally, this person would not be receiving any interest income for this $947.25 that is paid monthly to HDB but he would still benefit from interest earned by that $100,000 in his CPF-OA that is left untouched. Isn't this a better arrangement than not having that $100,000 in his CPF-OA and having to start accumulating funds again in his CPF-OA at the rate of $947.25 a month?

This perspective offered by Klein, if I have understood it correctly, is an interesting one for me as I have never bought a HDB flat before and have never been faced with a choice like this.

When I bought a private property some years ago, I had to pay an interest rate of 5.1% on my home loan while money in my CPF-OA was earning only 2.5% and money in my savings account was earning 0.125% per annum in interest income. In my situation, it made sense to pay down the housing loan as soon as possible, of course.

So, does it make sense for you to take your time to pay down your HDB housing loan?

(Please read the comments that follow this blog to gain a better understanding of the issues involved here. In particular, please read comments by PSTan, kael1n and SnOOpy168.)

Related post:
Tea with Klein: HDB Housing Loans.

Sabana REIT: $90 million 4% certificates.

Someone asked me what do I think of the $90 million 4% certificates due in 2018 being issued by Sabana REIT. Well, it is a good thing. Why?

Sabana REIT has $100 million of debt due this year. So, the money raised will come in handy.

OK, there is another thing good about this and that is the cost of debt which is lower than the 4.5% paid on the $80 million convertible Sukuk due in 2017. Faced with the spectre of higher interest rates now and in the future, the fact that Sabana REIT is able to issue debt with lower cost is a good sign.

In fact, if we look at Sabana REIT's all-in average borrowing cost, it has been reducing. This was from 4.4% in Dec 2011 to 4.3% in Dec 2012 to 4.1% in Dec 2013. Seems like the management is doing a good job at least in this department.

Related post:
Sabana REIT: Buy but remember the Sukuk.

Tea with Klein: CPF, SRS and HDB housing loans.

I received a couple of emails from a reader this weekend and I want to share them here because I like sharing high quality content, especially those which are thought provoking and inspiring.

Hi AK,

I read this post: http://singaporeanstocksinvestor.blogspot.sg/2010/10/do-you-want-to-be-richer.html

If u never mention about the OA transfer to SA account and get the compounded interest, I wouldn't have thought about it. Thanks.

Hopefully, I can meet the minimum sum with this when I retire and float the money out so I can have money to spend between 55 to 62 else it's going to be tough working in my old age.

On using the medisave to pay for integrated shield plan, I finally found someone who shares the same view cause when I told my collegues and friends about it, they just shrugged it off. In fact, I got laughed at a bit. Well, that's life. (See: http://singaporeanstocksinvestor.blogspot.sg/2013/12/how-to-get-free-medical-insurance-in.html)

I like this quote u have as well:

"Find your strengths and build on them."

AND

Hi AK,

Thank you for taking the time to read and reply my mails again.
 

Well, transferring to the SA, I feel is really a good idea that is if I cannot make the 35% investible grow more than 4% per annum. Even if I can grow it at 4% what about my other 65% that's running at 20k @ 3.5% the rest at 2.5%? That's a lot of growth I need to cover. So, by transferring to SA, my risk-free rate becomes 4% rather than 2.5%.

 

I am 34. So, about 21 years later, I need to make sure I can meet the minimum sum. I am not too good at finance stuff so maybe some of my calculations are wrong. I just find finance a bit hard to learn. (Right after I saw your article, I moved it all to SA. There is much I need to learn and not many people will teach.)

 

Yes, I agree with u about using the system to beat the system. One example is when u talk about SRS. Though there is a 5% penalty but for a safe investor that can get a 3-4% dividend he can recover the cost in about 1 to 2 years. Thereafter, if he chooses, he can take it out. So, that's at least 3.5% savings in tax and a slight capital gain. But sadly people really want cash in the bank and regard the taxes they pay to IRAS as a small sum.

 

I really do not understand how saving $420 a year in taxes is not an incentive for them. Of course, if they did contribute to the SRS, they must not take the money out of their SRS accounts when they still have income or else they might jump to the next tax bracket or simply just pay more tax.

 

To me, the tax savings is like 4 months of free internet n hp bills.

 

In fact, this is how I see it:

 

1. CPF minimum sum, at age 65 drawable (in the form of CPF Life). So, that covers my late life. Gives about $1,200 pay-out per month, I think.

 

2. SRS, so that I can cover my journey from age 62 to 72. So, say I don't work, I can withdraw $20,000 non-taxable + personal relief $1,500-$2,000, that makes $22,000 total tax free. There's supposed to be a 50% tax rebate. So, I think maybe $40k tax free? Not sure how to calculate this though.

 

This is, of course, a bit of an idealism as I don't think I can save $220,000 in 20 years. Old cow cannot pull cart. so I think if I spend within my means with some occassional entertainment, that's ok.

 

When I see the folks working at menial jobs at an advanced age, my heart sinks a bit. They really don't look happy, some of them. Did a general survey at my workplace. It seems most people think they will not end up working after 60+ as a cleaner etc. I have my doubts and goverments around the world don't have a solution at all.

 

So, I think I better plan ahead. Better to be labelled a scrooge than to be screwed.

 

Of course, as one's situation gets better, going on long tours and stuff would be good. In short, make sure one is on firm ground before thinking about having fun.

 

 

The 1.5%/year difference in interest rate compounded monthly gives me 35 cents more per $1 after 20 years. That is like 35% more compared to if I put it into the OA and I beat the inflation by 1% even though I don't believe inflation is 3% given the price increases. I have a personal inflation index based on what I spend on.

 

Secondly, I think even if people do own HDB flats, they should not be too concerned about paying back too fast because people do fear about holding debt. But what I think most of the people around me don't realise is paying back the HDB too early they are doing themselves a disservice. Why?

 

1. There is insurance on the HDB flat. So, if one party happens to die, the loan is repaid. So, if there are dependents like kids they will get less cash compared if they didn't pay the HDB back so fast.

 

2. Every dollar given back to HDB, that dollar will not help them earn any interest.

 

3. The interest on housing loans runs on reducing balance while the interest on OA runs on simple interest. So, even if the HDB loan is 0.1 percent higher it still doesn't make sense to pay too much because the interest accumulated would outrun the savings on a lower CPF loan.

 

4. The fear of the hdb repossessing the flat is a bit irrational. If by some stroke of bad luck there is job loss or illness in the family resulting in skipping payments, I mean this can be negotiated or rather put it simply if they have more money in the bank they can wriggle through the situation but if they paid it all to HDB then I don't think they can get it back. However, if it was because of debtors, then, of course, the above would not be a good choice for them.

 

The weird thing is after explaining to friends about this, I do not know why they still want to pay their loan back as fast as possible.

 

 

If you have any ideas or experience which you would like to share with readers here in ASSI, please feel free to email to me at ak71@sillypore.com. I would be more than happy to share high quality content here in my blog. Like I always say, I don't know everything. :)

Related posts:
1. SRS - A brief analysis.
2. Build a bigger retirement fund: CPF-SA.
3. Dirty CPF-HDB scheme to trick Singaporeans?

Extra cash for better control of your finances.

Last year, in July, I blogged about how a bank offered a solution for us to "get on top of our finances". 



Today, I received an offer from another bank to give us "better control" of our finances.

Look at the E.I.R. and this is in a low interest rate environment!

Using leverage to invest could be a good idea because when it works, gains are magnified. However, when things go wrong as they sometimes do, it could be very ugly.

Now, when people borrow to fund consumption, what do we make of it?

"traditional" problems – such as people living beyond their means and racking up debt on credit cards and auto loans – drive many bankruptcies. Source: CNBC

Debt driven consumption is definitely wealth destructive. Too much of it and it could destroy lives.

"Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying 18 percent." Charlie Munger

ASSI offers the basics to better financial security in 4 simple steps in:

Wage slaves should be fearful! (note publication date).

Now, this is what I call "better control".

Related posts:
1. Get on top of your finances.
2. Two questions which will help us build wealth.
3. The secret to avoiding financial ruin.
4. Mature and sophisticated consumers lease cars!
5. First time car buyer? Get a Mercedes Benz!
6. Cooling measures for cars spurned.

The Dirty CPF-HDB Scheme To Trick Singaporeans?

I would like to share a few comments from a reader on my FB wall when we discussed a very hot article that has been circulating lately. 

Title of the article: "Truth Exposed: The Dirty CPF-HDB Scheme To Trick Singaporeans."



Wah! With a title like this, sure to become viral and it did.






So, what are the reader's comments?

"Well and we have a lot of Singaporeans complaining that they earn too little to make a living... 

"So many are being fanned by this CPF topic and arguing about it everywhere. I would choose to drive a taxi or do some carpentry work instead of arguing over those facts.

"Additional 30 to 50 dollar per day over 1 or 2 years will be a big deal to me..."







And

"A lot of Singaporean are just too spoilt and are unable to see a picture even 5 minutes before them. Lazy and shallow minded, overly comfortable.

"I won't be surprise they and their children remain in the current society status 50 years from now. Children's success are often parent's upbringing and child's willingness for achievement.

"With such mentality, I believe they would and personally feel they should just remain where they are or go lower."





Too harsh but, from my observations, there could be some truth in the comments.

As for what I think about the article, I don't think that it is saying anything new.

The "what" is the same.

It is the "how" that is different.

A new angle on some familiar material.






Make the PAP government look bad and it will excite a whole lot of fellow Singaporeans and probably quite a few foreigners as well.

I made a few comments in FB regarding this and I want to share a couple of them here with readers who don't follow me on FB:

"The CPF provides a minimum safety net for Singaporeans who stay employed for much of their adult lives. 

"The money is primarily meant for retirement use.





"We are allowed to use it for some other purposes including housing in the meantime but please remember that the money is primarily meant for retirement use.

"So, if we take out all the money for whatever reasons, we have to bear in mind the opportunity cost involved although some people might not look at it this way."

AND

"In an environment of very low interest rates in Singapore, the current CPF rates are acceptable. 

"However, if interest rates were to be as high as those in Indonesia or Malaysia, then, it would be totally unacceptable.

"This is the reason for the CPF to be pegged to long term SGS rates. It addresses the issue."


There are always two sides to a coin. 






We can either choose to use the system to help us achieve our goals or vilify it and imagine that it is beating us. 

Read the related posts below (and the very good comments that follow) if you are interested in the other side of the coin.

Related posts:
1. Young working Singaporeans, you are OK!
2. Build a bigger retirement fund with CPF-SA.
3. How to get free medical insurance in Singapore?

Priceless!

Hainanese curry pork chop dinner with my mom: $8.00.

The quality time spent together: Priceless!

Eh, sounds familiar. Oh, I borrowed the format from MasterCard (but not the price tag).

Aiyoh! How can like that?

Bad AK! Bad AK!

Note:
This is not an advertorial. AK did not receive any compensation from the Hainanese Pork Chop Rice store owner (nor MasterCard).

Related post:
Hainanese Pork Chop Rice.

TEA with ENZA: Total Debt Servicing Ratio (TDSR).

Another guest blog that is actually a collection of comments by a very bright fellow I got to know on FB. Reproduced with his permission:

Total Debt Servicing Ratio (TDSR) = Debt Repayments/Income (per month)

Many of our textbooks are based on western spending patterns, which I think isn't feasible for Asians. I would target 25% of TDSR.

IMO, a household cannot have more than 3 durable goods under instalment (because they are going to be a drag over long-run), whereas housing and vehicles cannot, in combination, exceed 20% of gross combined wage median. Always concentrate on paying off one thing at a time since we only have this much of resources.

You see, Asian parents normally pay for their children's university fees. That is a big chunk.

In the USA and Europe, most parents don't. That's why they can have a bigger TDSR. Of course, the most important thing is SG cars are TOTAL WASTE OF MONEY. Only if we can really waste the "excess money", then should we ever own them. So, if depreciation plus insurance plus road tax plus basic maintenance are below 10% of your wage income, no harm. (which is quite unlikely in SG, all because of the COE.)

Are you too much in debt?

Read other guest blogs by ENZA: here.

Related posts:
1. Don't think and grow rich.
2. Slaving to stay in a condominium.
3. The Millionaire Next Door.

So, $350,000 gets peanuts? Upsize the peanuts!

This is what Privilege Banking customers at UOB get:



Apologies for the bad quality.

These are some seriously small peanuts.

Money in our emergency funds (less than $350,000) if left in a savings account like this will get only 0.1% in interest payment per year! Imagine that.

Better leave the funds in fixed deposits. We will still be paid peanuts but these peanuts are at least bigger.

I suppose this is true not only for emergency funds but also for any money that has been earmarked for some specific purpose in the near future. Don't just leave the money in a savings account.

It is time to upsize the peanuts!

Related post:
A special chest for emergency funds.

Tea with Invest Apprentice: 7 Reasons Why We Need Unit Trusts.

Another guest blog by Invest Apprentice and this should be read as a companion blog to the earlier guest blog. Please see related post number 1 at the end of this blog:

7 Reasons Why We Need Unit Trusts.

1) When we only have a small capital and it's too expensive to buy individual stocks or bonds in a certain market we want exposure to.

Eg. A global equity fund is a quick way to gain exposure and diversification to most of the mega cap companies in the global stock market.

2) When we want to diversify our risks and ETF is not a ready option. Our SGX exchange currently does not offer the range of ETFs compared to foreign exchanges such as the US, where you could literally buy an ETF for any sector, style, country, asset class etc. you can think of. They even have leveraged ETFs for you to “short” the market should you wish to (no thanks for me)! But until the day our SGX offers even half the range of ETFs, to some extent I’ll still have to rely on some unit trusts to diversify into certain sectors or markets.

3) When our research on macroeconomic drivers lead is to identify an undervalued sector or a country's market that is extremely promising, but we lack the confidence or funds to invest directly in specific stocks in that sector or country.

A simple example is the Phillip S-REIT Fund which I bought in late 2011 for my mum. She was new to investing and thus averse to picking REITs directly. That fund reinvested its quarterly dividend and has returned about 40% when I sold it in Feb this year.

4) When we favour the fund manager’s style and endorse the fund’s investing philosophy. For example, I still hold on to Aberdeen funds even though they underperformed their benchmarks last year, because I like the defensiveness of their portfolio selection and hold the view that going forward, defensive sectors like consumer staples tend to fare better in an increasingly difficult market.

5) When we don’t have a better alternative. Usually, this means that the sector/country/asset class we want to invest in does not have an ETF representing it, or the ETF is seriously illiquid in our exchange and therefore difficult to trade.

For example, there are unit trusts that invest in exotic frontier markets like Ukraine (!) and Vietnam which we may like to “try-try”, such as FTIF-Templeton Frontier Markets Fund managed by Mark Mobius.

6) When we want clean-cut portfolio allocation and easier time doing rebalancing. It’s easier to create a diversified portfolio like, “I want 40% into US equities, 30% into Asian equities, and 30% into global bonds, and I want to do that with $5,000”.

7) When we are not looking for spectacular returns, but a better than average market return at lower risk compared to investing in individual stocks.

Wilfred Ling did a breakdown of the various myths surrounding unit trusts. Some of my points are similar to his, although I added my personal interpretations:

 

Hopefully the above gives you a broader perspective on the role of unit trusts in one's portfolio. Personally, I am NOT a unit trust fan myself and I do my own active stock picking. I also use ETFs for investing in broad funds. I am just writing this as a response to the negative hype against unit trusts in recent years, at least among the fellow investors I spoke with or read about.

Every investing instrument has its place in the arena.

Disclaimer:
This is NOT investment advice and I am not a licensed FA. Invest on your own risk or seek a professional FA.

Related posts:
1. Can we trust unit trusts?
2. SRS: A brief analysis.