Loan Or not to Loan

[charmonix]

For example, if someone has 100K of cash and plus the cpf. it is sufficient to pay a 3 room hdb.


I heard two different opinions:
(1) Pay up the hdb fully

(2) Loan 100K and use the cash for investment
- looking at fixed deposit, the interest isnt sufficient to offset the home loan interest.

Unless the person is good at investment, i think option (1) is better. anyone thinks otherwise?

[Dennis Ng]

For example, if someone has 100K of cash and plus the cpf. it is sufficient to pay a 3 room hdb.


I heard two different opinions:
(1) Pay up the hdb fully

(2) Loan 100K and use the cash for investment
- looking at fixed deposit, the interest isnt sufficient to offset the home loan interest.

Unless the person is good at investment, i think option (1) is better. anyone thinks otherwise?

My comments:
My personal opinion is it is good to loan Why?
Reasons:
1. Housing Loan is cheapest loan you can ever get. If you can get HDB concessionary rate loan at 2.6%, take FULL advantage of it. It is one of the few benefits of being a Singaporean. It is silly not to take it up in my opinion.

2. Your financial situation can drastically change anytime in future
You like many people out there, whenever you have some ?extra? cash or CPF, you might be tempted to ?reduce? your housing loan by making a lump sum prepayment. However, have you ever considered that by not keeping extra cash or CPF as a ?emergency? fund, should there be any unforeseen circumstances, such as a retrenchment or accident or illness, that you might easily deplete all your savings? If you did not use up your cash or CPF to reduce your housing loan, the ?extra? cash or CPF would come in handy to meet such contingencies. Another ?smarter move? you can consider is to use part of the extra cash to ?stretch your money further? by taking up disability income insurance and medical insurance to transfer part of your risks to the insurer, so that you can free up some cash or CPF for investments instead of reducing your loans.

3. Reducing your loan does not increase your Net worth
Anyone with some accounting knowledge will understand that by using cash or CPF to reduce your housing loan, you?re not in any way improving your financial wealth, which is measured by your net worth. Let me use an example to illustrate:

Mr A owns a condominium with a market value of $500,000. He has an outstanding housing loan of $400,000 and no other liabilities. He has other investments worth about $100,000 and has $100,000 in cash/CPF Ordinary account balance. He is considering to use the $100,000 in cash/CPF fully to reduce his housing loan from $400,000 to $300,000 after reading books which ?teaches? him to be debt-free as soon as possible. Will doing so really improve his net worth position?

This is his current Net Worth Position:

Assets:
Cash/CPF $100,000
Other investments $100,000
Property (market value) $500,000

Total assets $700,000

Less total liabilities:
Housing Loan $400,000

Net Worth $300,000

By using his cash/CPF to reduce his housing loan, this would be his revised net worth position:

Assets:
Cash/CPF $0
Other investments $100,000
Property (market value) $500,000

Total assets $600,000

Less total liabilities:
Housing Loan $300,000

Net Worth $300,000

As you can clearly see from the above example, using his cash/CPF to reduce his housing loan, he is simply reducing his asset to reduce his loan. The net result of doing so makes no difference in his net worth position, which remains as $300,000.

Cheers!

You can email to me at dennis@leverageholdings.com or infor@HousingLoanSG.com for any clarification or discussion or you can call us at 63399 255 during office hours.

Dennis Ng, http://www.HousingLoanSG.com

[Guest]

Good illustration. Is this is true for both hdb loan (2.6%) and banks (>3%)? Thanks for the opinion.

[Dennis Ng]

dear guest,

whether you're talking about HDB concessionary rate Loan or Bank Housing Loans, Housing Loans remains the cheapest loan a person can ever get.

Let's take a look at interest rates of various loans to illustrate this:

1. Housing Loan - now about 3.5%
2. Car Loan - flat rate 3% (actual effective rate 6%)
3. Share financing - 6%
4. Secured Overdraft - about 6% to 7%
5. Renovation Loan - 7% to 8%
6. Personal Unsecured Loan eg. Ready Credit by CITIBANK: ranges from about 13% to 20% (Note Ezycash by GE Money charge between 18% to 20% interest).
7. Credit card 2% per month or 26.82% effective rate.

So can anyone think of any loan that charges cheaper interest rate than Housing Loan? I rest my case.

[Guest]

Hi Dennis, thanks for sharing your view. It is a good one and i am convinced.

Do you think a shorter loan period (10 years) compare to (15 years) is better in this scenario?

[Dennis Ng]

Dear Guest,

actually I would suggest a 20 year loan instead of 10 year or 15 years. Becos for your saving to grow "leveraging" on the power of compounding, a longer time is better than a shorter time.

However, too long a loan period eg. 30 years to 35 years, you would end up more interest than necessary.

I suggest that you email to us at info@HousingLoanSG.com or call us at 63399 255 to discuss your specific situation in detail so that we can help you plan better.

[Guest]

This is his current Net Worth Position:

Assets:
Cash/CPF $100,000
Other investments $100,000
Property (market value) $500,000

Total assets $700,000

Less total liabilities:
Housing Loan $400,000

Net Worth $300,000

By using his cash/CPF to reduce his housing loan, this would be his revised net worth position:

Assets:
Cash/CPF $0
Other investments $100,000
Property (market value) $500,000

Total assets $600,000

Less total liabilities:
Housing Loan $300,000

Net Worth $300,000

Hi Dennis,
It might be true that the number remains the same for both cases, but we all know that a loan with longer tenor will choke up more interest payment over time. Hence, in order not to spend too much on 'interest' should we not pay off our loan asap so to avoid the 'extra' interest payment?

Vino

[Dennis Ng]

Dear Vino,

if you want to make lum sum repayment on the loan, you need to "give up" an equivalent amount of cash or CPF, depending whether you use cash or CPF.

Have you ever considered that for Housing Loan, you're charged interest on a reducing balance basis. eg. if you take a $200,000 loan and interest rate is 4%. You're being charged 4% on the loan outstanding. 10 years later, your loan outstanding is about $121,500. 10 years later, you're charged 4% not on $200,000, but on loan outstanding of $121,500 only.

However, if you set aside some savings and make your money grow, the interest is being given to you on principal plus interest.

eg. if you have $100,000 and earn 4%. Year 1 you earn interest of $4,000. However, by year 10, your $100,000 has grown to about $142,000 and the interest you earn in year 10 is increased to about $5,700, not $4,000 anymore?

By now, can you see it makes sense not to be in a hurry to pay off your housing loan?

Feel free to call us at 63399 255 or email to us at info@HousingLoanSG.com if you want to find out ways how to plan your Housing Loan properly and get the BEST deal in Housing Loans.

[Guest]

I agree that the housing loan is the cheapest.

However, assuming this person does not have any form of loans (ie no cr card bills, does not own a car) and also does not intend to do any form of investments as she is not investment savvy, no time, whatever.

And she has enough cash to pay in full for a 3 room flat, should she still loan from the bank? She does not qualify for HDB concessionary rate.

One pro I can think of is to just putting aside some spare cash for rainy or sick days...........and also buy insurance for the house, and let say if she became terminally ill or handicapped, then her house will be fully taken care of.

My question is now, how much to loan? and for long, still 25 years?
Valuation 240, Price paid is 268 (paid 28k using cash).
Age 35.

Thank you.

[Guest]

And she has enough cash to pay in full for a 3 room flat, should she still loan from the bank? She does not qualify for HDB concessionary rate.

I believed the best way in this case is to take a SCB's Mortagage One or Citibank's Homesaver loan package. Put all your cash in it and just service the principal only without paying any interest at all.

Why? A loan that gives u liquidity and with no interest payment.

Dennis, is that how the Mortgage One loan package works? I really hope so.

Vino

[Guest]

hi dennis,

mathematically speaking you have a good point but you never include "risk" in the equation...

[Dennis Ng]

Dear guest,

I think you have to re-read every single article I write on why Housing Loan is the last loan to every repay before you say I didn't factor in risk in my argument.

I have to say that the main difference between me and many Financial Planners out there is that I "walk my talk". Whatever I say, I'm doing it. I say it does not make sense to repay Housing Loan and I'm not repaying it despite having more than enough money to fully repay my Housing Loan.

Housing Loan is the cheapest leverage a person can ever enjoy. By paying it down a person is simply "getting rid of this cheapest leverage". I have seen people who paid off Housing Loans and have car loan instead. That does not make any financial sense at all since Car Loan interest rates is about double that of Housing Loans.

[Yan]

hi hi dennis

it seems that u have missed out my post, cld u pls help to advise me? thanks alot.

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I agree that the housing loan is the cheapest.

However, assuming this person does not have any form of loans (ie no cr card bills, does not own a car) and also does not intend to do any form of

investments as she is not investment savvy, no time, whatever.

And she has enough cash to pay in full for a 3 room flat, should she still loan from the bank? She does not qualify for HDB concessionary rate.

One pro I can think of is to just putting aside some spare cash for rainy or sick days...........and also buy insurance for the house, and let say if she became terminally ill or handicapped, then her house will be fully taken care of.

My question is now, how much to loan? and for long, still 25 years?
Valuation 240, Price paid is 268 (paid 28k using cash).
Age 35.

Thank you.

[Dennis Ng]

Dear Yan,

you can email to us at info@HousingLoanSG.com or call us at 6339 9255 and we'll provide our comments and analysis to you.