Read? Will You Try To Pay Off Your Housing Loan ASAP If You Have One? (5)
Pg 36, invest, thesundaytimes, Oct 2013
Using CPF to pay off mortgage in 7 years for a 25-year HDB housing loan of around $194K in 1995
Another "not-so-savvy-investor" like Uncle8888.
How to compute the opportunity cost of being debt-free too early?
Start early. Slow and steady?
Start later but sprint faster?
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What for pay off asap? Need to assess the interest rate and the opportunity cost of using the money for 2nd property investment.
ReplyDeleteUltimately, really depends on the loan amount.
By the way, I have changed my blog name from SG Web Reviews to SG Wealth Builder (www.sgwealthbuilder.com).
Please make the necessary amendments.
Thank you.
From Net Worth point of view, there is no different when the property is fully paid compare to still have outstanding loan. For example:
ReplyDeleteWith outstanding loan:
Asset (House) = 200K, Cash (CPF) = 150K
Liability (hse loan) = 150K
Equity (Net worth) = 200K
Fully Paid:
Asset (houese) = 200K, Cash (CPF) = 0
Liability (Loan) = 0
Equity = 200K
However, when he fully paid the house, he has Zero cash (CPF) which can be serve as opportunity fund to make more money (if he is savvy in investing).
He can buys mortgate insurance to mitigate his downside risk (if die prematurely). If he die, then the insurance company will pay his outstanding housing loan and the unuse cash (CPF) money is still intact.
Imagine if the cash (CPF) is atucally his cash in the bank. This cash can help his family to tie through the difficult period when the person die prematurely.
i believe to use OPM, you must have assets on standby to cover the OPM's loan; in case your OPM's investment headed South. Otherwise how to sleep soundly. Bankruptcy maybe waiting for you. Of course if your investments headed North, then you get rich much, much faster.
ReplyDeleteBut if you continue to use OPM without assets backing, then you may return to SQ. 1 sooner or later.
So built up your assets first with as little as OPM as possible.
In fact, i use very, very little OPM. If i have taken the risk in using OPM in investingi in Property, i will be definitely very much richer. But who can guarantee that we (my wife & i) would not get job retrenchment in the past?
In fact my wife's company has had countless job retrenchments.
And each time she had escaped until when she had reached 60. - RETRENCH lol!
Me i retrenched myself at age 53+.
If only i knew then.
So it's the same for everyone of us.
Hindsight is always perfect investing.
Retrench is real with more offshore sourcing and outsourcing by companies to lower costs
ReplyDelete1)Hdb mortgage loan is a fixed interest rate at consistently 2.6% pa, pitched at only 0.1% higher than cpf oa interest rate earned. Although currently the banks offer a lower mortgage loan interest rate, it is not fixed, and there is a risk that it may rise up astronomically in a few years down the road, then you would have to have the inconvenience of searching for another bank that may offer you a lower re-mortgage rate.
ReplyDelete2)Actually, based on the concept of time value of money, you are paying same interest rate at a reduced value due to inflation and the depreciation of the currency purchasing power for 25-30 years. So the longer the loan tenure is stretched you are actually paying less of future debts.
3)Hdb aka govt-backed entity, is more empathetic when it comes to the crunch that you cannot pay your mortgage, whereas banks are 'bo cheng' incompassionate, and would not hesistate to evict you and repossess the flat.
4)If you take a bank loan now, you will not be eligible for an hdb mortgage loan anymore, whereas if you take an hdb mortgage loan now you are eligible to switch to bank loans later on, if you are game enough.
5)Even if you take a maximum loan of 25-30 years, compare it with renting a flat for the same number of years; the hdb mortgage loan definitely wins hands down. You get to keep the flat at the end of the hdb loan, of course, till the end of the 99-year lease. Whereas if you rent a flat, despite paying so much more, the flat does not belong to you.
6)In case uplorry, you also covered by HPS insurance scheme with reasonably priced premium.
Are the above pointers the reasons why we should stretch hdb mortgage to maximum tenure?
Many of us will die rich from insurance payout but the worst is not dead but half dead that drain resources
DeleteWah lao, I'm one of the gong-gong who paid up the whole HDB loan in 3 years. After that let OA accumulate & compound. But soon after ... about 3 yrs later, itchy fingers found a small cheap central freehold condo and buy as rental property. This time, slowly pay back over 10 years. In a way dumping money into a good value property prevented me from dumping money into stocks when I was still ill-educated about financial markets. But now personally find stocks & ETFs easier to manage than rental property.
ReplyDeleteWith Singapore being such a pragmatic society, my prediction is that euthanasia will be legalized by 2030. Solves a lot of the "can afford to die but cannot afford to fall sick" & "half-dead want to die cannot die" situations. I'll be one of those 20% who will be >= 65 by then, so will be prime target. Hahaha!!!
Investment property with rental is a good asset so can stretch the loan to optimize.
DeleteNow around 5% rental yield net of all costs. Good times can hit almost 8%. Do note that I bought it more than 10 years ago during the big property slump. At today's prices the yield will be a miserable 2%.
DeleteCosts to be factored in:-
1. Maintenance / conservancy fees
2. Pty tax
3. Income tax
4. Professional cleaning every couple of years
5. Re-painting every 4-5 years
6. On-going minor repairs / replacement of appliances
7. Mortgage interests (already paid-up so ok)
8. Agent's commissions (do ownself so ok)
9. Having to handle tenant's complains in evenings & weekends & PH (priceless!)
Me just lucky ... born at right time + pushed by parents to take closer look at private property during 2003-2004.
DeleteBut will expect next rental renewal to drop to 4+% yield. Too many competitors & lesser (and poorer) expats.