Tan Kin Lian's Blog: Taking a mortgage

Monday, May 24, 2010

Taking a mortgage

First of all, I'll like to thank you for some of the sound advice that you have posted on your blog. I'm an avid reader of your blog and also someone who had bought and like your financial planning book. I am currently staying in a 3 room HDB flat and planning to upgrade to a 5 room HDB this year. I have some questions that I would love to hear from your advice

1. Mortgage - floating vs fixed. What is your take on this given the current situation?

Reply: I think that the mortgages in Singapore are all on floating rates. I am not aware of any bank that offers fixed rate morgage. If you have found one ,give me the terms for analysis

2. Mortgage - lock period, is a short or long period better?\

Reply: same comment as for 1.

3. We are not sure if we should repay our loan as fast as possible (i.e. using our entire monthly cpf contribution for repayment) or if we should stretch our loan tenure for a longer period for reasons such as to use our CPF for any investments (e.g. NTUC growth, etc) with the hope of getting returns higher than our mortgage rate or to build a buffer in ordinary account for repayment in case anyone or both of us goes jobless, so that we do not need to fork out cash.

Reply: You should keep 6 months of repayment as a buffer in the CPF. If you have cash flow problem, you can pay from this buffer.

4. Is it better for us to deduct everything we have in our CPF for housing purchase or should we transfer some if not all of our CPF for investments such as NTUC growth, etc with the hope of getting returns higher than our mortgage rate?

Reply: Do not invest in a new Growth policy, as it is rigid and does not offer an attractive yield.

5. Me and my wife's used a sum of our CPF to purchase NTUC growth prior to buying our 3 room HDB. Now that we are planning to buy a 5 room HDB, should we terminate our NTUC growth plans and use that amount to pay for the HDB? We have sufficient CPF to pay for the 15% downpayment, but I'm thinking of paying more and borrowing less from the bank. Would you know for early termination, would I at least have my sum invested back? Is what I'm thinking of doing advisable?

Reply: You can a poor deal with you terminate the Growth policy. It is usually better to keep it to maturity, rather than terminate it early. You should ask them to quote you the cash value now, and the projected cash value on maturity to make a proper decision.

17 comments:

Anonymous said...: Invest in NTUC Growth is a bad mistake with all the risks and miserable marginal growth. This is NOT the way to accumulate fund. To justify investing your CPFOA you MUST get at least 6% . Growth is so much riskier than OA and yet the return is at best 3.5%(first $20K in OA gets 3.5% GAURANTEED) and NOT projected 4%. Another downside of Growth is if you need fund to service your loan because of loss of job partial or full surrender will suffer a loss.
NTUC agents are NO investment experts or planners but salesmen who play on your risk aversion. Recommending Growth is an inappropriate as far as your need and circumstances are concerned. 10 years is a long term.; May 24, 2010 9:18 AM
My opinion said...: Paying off the loan is first priority.

But as Mr Tan has said: leave 6 months worth in the CPF for unexpected events. Anytime there is a windfall such as salary bonus ( which attracts CPF contributions )
consider paying off the loan in large blocks of 15K or more.. this usually happens annually.

I understand that we all want to take advantage of the 2.5% CPF rates etc. but over the longer term, the loans will eat away what ever gains that the CPF may return.

Always clear debts first.

Individuals are not the same as companies or Gov where they can spend and spend and offer bonds and defer payment. Ultimately, they too will have to pay... thats what is happening in the USA,Greece and many more countries... including Singapore ( we too have a budget deficeit - S$ 3 billion! )

That means TAX anything that they can to pay up.. as an individual, can you tax yourself? Yes, and it is called: S A V I N G S !!

Meanwhile, Gov and companies, as they increase the tax on you.. they happily go about in their lifestyle as per normal..

Trust me... pay off the loan.. do not beleive others who suggest that arranging for a 30 year loan means you have "better" cash flow.; May 24, 2010 9:39 AM
Anonymous said...: When the original poster sells his 3-rm flat, the CPF monies used for that purchase/mortgage will have to be returned back into his CPF a/c, together with accrued interest. This amount can then be used for the downpayment of the 5-rm flat (together with the existing CPF monies).

At most can just get bridging loan for this amount, between the time of purchase of 5-rm flat and completion of sale of 3-rm flat.

So they shouldn't really need to surrender the Growth policy prematurely just to increase the downpayment. Premature termination will surely result in lousy yields especially if it is the shortest 5-yr tenure. Even for the 10-yr tenure, if you terminate before the 8th year anniversary, the yield is most likely the same as CPF-OA i.e. you might as well have left the money sitting in CPF a/c.

Most important factor is whether the 5-rm flat is affordable or not.; May 24, 2010 9:48 AM
C H Yak said...: My own experience pertaining to Qn (1) & (2).

Even for "fixed" package, the rate is usually tagged to SIBOR (interest = sinbor + fixed rate) ... and usually fixed for just 2~3 years. Because it is tagged to SIBOR it is fixed + floating the first years; thereafter it is totally floating based on SIBOR.

Whether to select longer or shorter "lock-in" period; there are 2 considerations.
(a) Whether borrower intend to re-pay principal within lock-in period.

(b) The likelihood to re-finance after the lock-in period; or even within the lock-in period if "penalty" clause is favourable.

The lock-in period restricts repayment of principal and re-financing. There is also a "penalty clause" to consider; and also whether the bank offers waiver of legal fees for re-financing. Most bank in order to keep their clients will also do "re-pricing".

I think SIBOR is at its current low, hence it is attractive to get a good package for fresh or re-mortgage. Fix it and lock-in for say 2 years if interest rate is very likely to shoot up within these 2 years...then review in 2 years' time. The likelihood of a interest rate hike is high considering the "bubble" in the property market and S'pore good economic report, but is uncerrtain now due to the Euro Zone debt situation. It is also likely to go up to curb inflationary pressure in Asia. But if the property bubble in China burst, and other Asian economies also follow...and if the Euro Zone economies deteriorate ... will the SIBOR go lower? If we can predict it to go much lower, then a totally "floating" package may be better...as the initial interest rate is relatively lower than a fixed package.

Ironically, those in big mortage debts; but can be guaranteed of employment, will of course hope the world economy will not recover to full steam....LOL...the issue of how to sustain employment.; May 24, 2010 10:18 AM
Anonymous said...: You lose money if you terminate now.
You may not lose face value but real value which you could have earned if it was in CPF balance account.
Growth is a risky product for you considering your circumstances and needs.At first glance it may not be apparent but analysing the features relative to your needs it is a very risky vehicle for you. You will be wasting your time besides loss after 10 years.Time is money and Growth doesn't give you the money for holding for 10 years. You could have used the time for less risky investment which gives much higher return.; May 24, 2010 10:19 AM
Anonymous said...: I think there is one very important question Mr Tan left out... why is the person upgrading to a 5 Room Flat in the first place? Most families these days are single kids and a 3 room flat is more than sufficient. So unless one has a really good reason, please don't spend unnecessary money on this crazy uniquely Singaporean upgrading frenzy!; May 24, 2010 10:53 AM
Anonymous said...: When I applied for my housing loan with HDB ( 20yrs ago ) I couldnt care more or less about SIBOR, floating,fixed etc.. damn confusing and too many permutations.. too many ' what if'

So, I just paid up monthly using CPF and whenever I had more than 15K in the ordinary a/c, I transferred the amount out to pay lump sum.. my original loan period was for 15 years ( my family & friends strongly advised me to take the loan for 25 years but I disagreed )
Within 9 years, I was debt free. I then enjoyed seeing more money in my ordinary account and earning interest... not paying interest!

Many people kept saying that "dont worry! your CPF money is yours and the loan will be accounted for anyway when the time comes at 55 ( or 65 now ).. Just upgrade or downgrade to make money!!"
I disagree and I believe CPF is my retirement income..

I am still staying in my original HDB.. accrued over 250K in CPF.. not sufficient to retire but I know I will not depend solely on my kids..

Think long term... very long.. over 25 years please!!

people who are buying properties now may realise too late that in 15 years time, their properties may have lost value or just stayed stagnant.. leaving it in CPF would have guaranteed a 2.5% return.

Unless all of them have paid their purchases in cash ( I doubt ).. wait for the spectacular show, akan datang in about 5 years.

Hell, if I am asked to help bail these people out!!; May 24, 2010 12:01 PM
Anonymous said...: Anon,May 24, 2010 10:53 AM
agree with you absolutely..don't buy what you don't need. Over stretching is bad and you will soon find out. Investment? A home is a use asset and keep it separate from investment.; May 24, 2010 12:09 PM
Anonymous said...: The long lock in risk doesn't compensate you adequately. It is not much better than leaving it in your CPF which is Risk FREE.
You have been advised wrongly. You were sold a product and not a solution.; May 24, 2010 12:33 PM
Anonymous said...: Hi Anon 10:19AM,

Could you plse advise me what are the less risky investments which gives much higher retun than NTUC growth?
Thanks,

John; May 24, 2010 1:08 PM
Anonymous said...: Anon May 24, 2010 1:08 PM,
What is risk to you?
An investment that does not meet your need is risky, right?
Following this line , does ntuc growth meet your goal? In this case I beleive in the first place , the goal was not addressed. It was pushed as a product. How would you know that the product is risky or not risky depends on your goal.If it does not meet and you bought it hoping that it will guarantees your disappointment because it will fail..sure die, right?
Risk tolerance is a subjective assessment of one's attitude to risk and there are number of factors that decide the risk tolerance and it can be changed
The product growth itself... in the first 3 years you will lose some of your CAPITAL and real value. After which the return cannot match CPF until after the 8th year. At the 10th year, are you guaranteed to get the projected amount? I can safely say you will NEVER get the 4% as projected unless by luck.
For this client he is definitely NOT a HNI and his objective is growth of his CPF to meet future needs.Growth is not suitable becuase it will not do the job adequately consider the risks he has to take, and the time horizon.
He is taking more risk for less return.It makes a mockery of the risk/reward trade off.
Compared to an investment in UT or ILP the probability of loss or gain depends on asset allocation and risk reward profile of the portfolio. It may be a loss or a gain in the early years. For Growth it is guaranteed loss.
For ILPs or UT risk tapers off over time and possibly zero at the 10th year and with big gain, in all probability 8% to 10%.For Growth risk increases with time.
Growth is condemned to only meet inflation at the best.Preservation only and NO accumulation.HNI may consider this product.

The Watchman; May 24, 2010 2:31 PM
C H Yak said...: Q Anon.May 24, 2010 12:01 PM

"Many people kept saying that "dont worry! your CPF money is yours and the loan will be accounted for anyway when the time comes at 55 ( or 65 now ).. Just upgrade or downgrade to make money!!"
I disagree and I believe CPF is my retirement income."

UQ

Agree totally, because the price is so expensive, and appreciation is meagre. Whether cash or CPF is used, it is not a worthwhile investment...but an expensive luxury. Hopefully there will still be "stay of value" and no "depreciation".; May 24, 2010 3:31 PM
Anonymous said...: 8 yrs ago I had taken out a HDB loan which fixed, I prefer that fixed rate from HDB althought presently the current rate of interest is low, over the longer term interest rates are historically higher than HDB rates, and I also like the knowledge of knowing my "fixed" commitment and dont have to worry when rates are re-set, ( normally, to the disadvantage of the borrower).; May 24, 2010 7:57 PM
Anonymous said...: Hi ,
for good advice,you can consult this gentleman,Mr.Leong Sze Hian .
He give good advices free of charge.
I've listen to his radio progm in SPH,Radio 1003 on every Tuesday morning from 9.00am to 10.00am.for almost a year.This guy is good,he listen to your question.
He is here:
http://leongszehian.com/

a retiree; May 24, 2010 10:03 PM
Anonymous said...: Many years ago I transfered my money from ordinary to special account. Presently I am getting appro 5-6k yearly interest compounded. In all my ordinary and special account provide me with appro 10k annual interest.Next year I will be 55. I have cleared my HDB loan 5 years back by progressively paying up as much as I can. I have also paid up my car loan within 5 years as I don't believe in 10 years loan.. Life is all about enjoying carefree and debt free golden years.; May 27, 2010 8:08 AM
Anonymous said...: Wow that's great! Congrats on being debt-free.I'm going to get my house next yr, really hope that when i reach 55, i can be debt-free like u! tks for sharing. :)

Many years ago I transfered my money from ordinary to special account. Presently I am getting appro 5-6k yearly interest compounded. In all my ordinary and special account provide me with appro 10k annual interest.Next year I will be 55. I have cleared my HDB loan 5 years back by progressively paying up as much as I can. I have also paid up my car loan within 5 years as I don't believe in 10 years loan.. Life is all about enjoying carefree and debt free golden years.; June 04, 2010 12:14 PM
M. Ortgage said...: You have given a very nice tip while taking mortgage And we all should take care of these tips.; June 19, 2010 12:57 AM

Monday, May 24, 2010

Taking a mortgage

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