home loan smart choice

Best Mortgage Strategy

On 29th January last year 2016, we made the call to buy DBS stock (or for that matter any of the three local banks’ counters) by using an equity term loan on your private property, when it goes below $14 after being clobbered by woes in O&G sector.  Here’s the blog article for those who missed it.

We gave two scenarios in the article and in Scenario B, we assumed it will take five years for DBS stock price to recover back to $21.  Guess what? If you had followed our advice then and took that bold step of gearing up on an equity term loan for what we deemed as the “best mortgage strategy”, you need not wait five years.  DBS stock closed just a shade below that two weeks ago on 11 May 2017 at $20.93, in just about one and a half years since we made that call!  Perhaps consider taking some profit now.

Look.  This is not a website for stock investment.  We are not here to ask anyone to use leverage to invest in structured notes, hotel rooms, crowd-funding, or the many other forms of investment schemes out there especially those touting returns above 10% p.a.  To do that comes with huge responsibility which we do not take lightly, neither are we qualified to do so.  I have many people lose their principal sum in investments so what if you have high yields?

Over at MortgageWise, we exist with a single-minded mission and purpose – to be long term partners with all our trusted clients in helping them save on interest costs.  We dabble in all things mortgage, be it onshore or offshore, and nothing else.  This is the promise of our brand.  We do see great wisdom in taking an active approach to mortgage costs management, rather then merely refinancing from one bank to another which is a more passive approach.  Hence, we make that call last January when the opportunity arises.  And we will make the same call again when DBS stock does retrace back to a higher support level next time round – below $16!  You do need to take a medium to long term view of five years for this strategy to work.

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When will that happen again no one knows.  You need to get ready when the time comes.  It will be a good exercise now to take a look at how much you could “offset” your mortgage costs should you be able to buy DBS even at above our target price say at $18 (our recommended entry is below $16) and wait for it to rise up to $25?

Using our concept of equity term loan but employing 80:20 rule in the deploymernt, let us take a look at the revised numbers one more time using a similar example:

Current market valuation: $1,300,000

Current outstanding loan: $600,000

Remaining loan tenure: 22 years

Total CPF used todate towards property: $200,000

Maximum term loan allowed: $240,000 (80% of valuation less outstanding loan less CPF used)

These will be the assumptions used:

  • Refinance with a geared-up maximum term loan of $240,000 on a floating rate FDR home loan today at 1.38% p.a. Hence total new loan will be $600,000 + $240,000 = $840,000
  • Interest rate increase to happen exactly at mid of the year so if FDR increase by 0.50% p.a. during the year and one starts at 1.38% in Jan but ends up at 1.88% by Dec, we will assume the average increase is half (0.25%) and compute monthly instalment for the year based on 1.38+0.25 = 1.63%
  • Buying DBS stock at $18 and target to sell only at $25
  • With $240,000 term loan, we will only invest 80% or $192,000 and park 20% or $48,000 aside to service the higher monthly repayments from a bigger loan.
  • With $192,000 invested one-time at $18, ignoring transaction costs involved, the total profit on exit at $25 will be $192,000 x 7/18 = $74,666
  • In Scenario A, we assume it takes two years for DBS to hit $25 and FDR interest rises by 0.25% p.a. which is the most likely scenario
  • In Scenario B, we assume it takes five years for DBS to hit $25 and meanwhile FDR interest rises by 0.25% p.a. in first two years but the pace increases to 0.50% p.a. in the next three years

Instead of straight-line computation, we will now use more realistic ammortisation model to look at the actual projections over the two and five years’ holding period.  We will use our proprietary Interest Simulator tool to study the actual costs involved.  Once again in this discussion we just use DBS stock as an indication but it can also be OCBC or UOB depending on your preference between the three local banks and which you think has the highest long term potential.

equity term loan difference

Notice the profit of investing just 80% of the term loan ($192,000), at $74,666, is so much more than the additional interest you will be paying from an enlarged loan be it in Scenario A ($7,239) or B ($20,489).  In fact, the profit is so spectacular that it covers the entire interest for both scenarios even in Scenario B where FDR rises at twice the pace in the final three years (total interest $71,711 over five years)!  In essence this means that even if you have to wait for five years to achieve exit price of $25 for DBS, your entire mortgage of $840,000 is essentially “self-funding”.  One caveat though is that you may need to use your own funds to service the higher monthly repayment on a geared-up loan should that 20% of term loan set aside ($48,000) runs out after a period of time.

Now you know why we advocate buying bank stocks as the best mortgage strategy.  You have less to fear even if you are on a floating rate mortgage as when lenders increase your mortgage interest over the years, chances are they are also sending their stock price higher with growth in NIM (net interest margin) – in a way your interest cost will be “hedged”.

What’s more, to increase your profit further, actively manage your interest costs while waiting, by working with a professional mortgage consultant who ensures you always get the lowest home loan interest throughout!  Speak to us today.

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

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