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Best Mortgage Strategy – Attack To Defend

As UEFA Euro 2016 is about to kick off, let’s talk in footballing lingo this week as I present to you what I think is the ultimate strategy for managing your mortgage costs in the long run (only applicable to private property owners) – go offensive instead of pure defence, just like in a football match, you can’t win the game without scoring, no matter how well you defend your own goal post.  What do I mean?

Finding ways and means to contain the rising mortgage costs as US Fed hikes rates in the coming years is like trying to defend and not let in too many goals.  However even if you manage to negotiate or time yourself perfectly to enter into a mortgage loan at the lowest interest on a fixed rate package, you will still be paying the higher prevailing mortgage interests when that expires.  With rising borrowing costs over time, eventually everyone will be paying 3% to 4% at one point or another.

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What if I tell you there is a way to actually score a goal (against the lender) and one that does not need to stay passive on containing mortgage interest costs?

It is not a new idea and one which we started propagating at the beginning of the year when DBS counter went down to its most recent low of S$13.02 on 12 Feb 2016 and OCBC went down to $7.45 on 11 Feb 2016.  Clients who have actually taken our advice would be sitting on a tidy gain of up to 22% and 18% with DBS and OCBC closing at $15.93 and $8.84 on 8 Jun 2016 respectively (provided you catch the lowest point back in February which is unlikely).  Not bad in just 4 short months!  In fact it was reported on 25 Feb that DBS CEO Mr Piyush Gupta himself had bought 200,000 DBS shares at $13.88 a piece in an exchange filing totaling $2.8m.  That would be a profit of $410,000 on same closing price of $15.93 excluding transaction costs.  Does that tell you something about his own outlook of DBS under his steering?  And would such a “national bank” whose name is synonymous with Singapore be allowed to fail in extreme financial market meltdowns?

The answers are obvious.  And it is on this basis that we first made our call on 29 Jan 2016 that this could be the best long term strategy to managing of mortgage costs – take out a small equity term loan of 20% on your outstanding mortgage if your property valuation has appreciated steadily over the years, set aside 20% of that additional funds to service the higher monthly repayments, then invest the balance 80% back into shares of the very bank that is earning from you!  We use DBS in our example, but it could be OCBC or UOB.  It does not matter even if your mortgage is with a foreign bank, just choose one of the big 3 bank counters here in Singapore.

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For those who are keen to understand more how this works, we ran the numbers back in our 29 Jan article on two scenarios where one is more probable and the other if things do not turn out as well:

  • Buy DBS at $14 and it takes 2 years to recover back to pre-crisis level of $21 and meanwhile SIBOR rises in an expected snail pace of 50% p.a.for next 2 years (along with corresponding increase in DBS FHR18 assumed at half the pace at 0.25% p.a.)
  • Buy DBS at $14 and it takes a much longer 5 years to recover back to $21 and meanwhile SIBOR increases at double the expected pace of 1% p.a. over 5 years and FHR18 at 0.50% p.a.

Find out what happened in both scenarios by reading our article again – you could actually “hedge” against the entire rising interest costs over the next 2 to 5 years!  And doing all that without pumping in a single cent from your own pockets as you are simply drawing down term loan on your mortgage!  In other words the whole exercise is self-funded and you are just servicing the same instalment and paying the same interest per month over the next 5 years.

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Of course for those who are willing to assume more risks, you might even be able to defray all your mortgage interests from the returns generated if you take out more than 20% on term loan.  We do not advocate that as we are not in the business of investment and asset management and we are not qualified to do that.  We can only advise on mortgage solutions and hence we will only go as far as recommending that you buy the shares of the very bank that is earning from you, and only because banks are blue chips and we are talking a longer term hold of 2-5 years.  And since mortgage is a long term commitment, it matches the longer term horizon needed for this strategy to work.  Caveat emptor so know your risks too and our strategy will only work when:

  1. There is a sufficient drop in share price to allow for potential upside. For DBS we put this at $14 which is near its book value from what we read.  Maybe $15 might still work but $14 is better.  And we think if you get your funds ready, with Brexit round the corner and rate hikes in 2nd half of 2016 you might just get another shot at it.  So do not miss.  We will stop issuing this recommendation as a viable “offensive” mortgage strategy when it goes back up to $16-18 range.
  2. You are on a DMR (Deposit Mortgage Rate) loan peg like FHR18 that we believe will rise at the slowest pace out of all the other mortgage pegs in the market; better yet go lock in fixed rate for 3 years and one that comes with the lowest “constant” spread Bingo!  There is no better time to do that now than with DBS’s newly-launched package for June.  Speak to our consultants today as it may just end anytime when the quota is met.

When it comes to investment and financial decisions, remember opportunity waits for no one.  You got to be ready.  Just like to score the goal in offensive play, you have to get your timing spot-on.  And you can never catch the rock bottom – apparently DBS at $13.88 is good enough for its CEO, and that is also what we think too near $14.  Act now but caveat emptor!

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements.  Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
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