This is part of a 4-part series on the clever use of debt for savings and investments, we look at the clever use of home equity loan for building retirement income.

The official name for it is Mortgage Equity Withdrawal Loan (MWL) as coined by MAS, or what is commonly referred to as term loan in our industry. It’s only available for private properties, not for HDB (until the law changes).  The idea is you can “cash out” with taking more loan secured against the equity portion (as opposed to debt portion) of your property value if you’d been paying down the principal sum of your mortgage loan over a period of time, whilst the valuation has also risen. You are “withdrawing” from this increased equity value over time, hence the name. Don’t miss the other articles in this 4-part series to find out how MWL can be used to:

• Benefit from CPF Life even before turning 65
• Consolidate all your debt (including your CPF OA accruals)
• Buy a second property in Singapore without incurring ABSD

Many people aim to buy a second investment property for retirement where they hope to either sell for a big capital profit later, collect passive rents for retirement when the mortgage is paid off, or pass on to their offspring for the same purposes.  Most people are comfortable with the idea of leveraging or getting loan to acquire assets only when it’s a property.  Understandably so as that’s a tangible piece of real asset you see, touch and even live in it.

What if I tell you there are retirement income insurance plans out there which can offer you:

• the same passive income close to $3,000* per month (on a $1m lumpsum premium) where the payout commences from as early as the 2nd year;
• payouts that last for a lifetime and beyond (for example 120 years) if you buy the plan on a new born child as the insured person and where the plan allows you to transfer both the insured and the beneficiary (policy holder)
• immediate whole life insurance coverage of $1m (as opposed to term cover which ends by a certain age like in your 70s)
• premium financing of 70% such that you only need to commit a lumpsum of $250,000 – $300,000 upfront

Most people look at only the potential gain from a second property but forgot about all the costs involved over a typical mortgage term of 25 years which include the following major items:

• Buyer’s Stamp Duty (BSD) – $32,600 (based on price of $1.2m for a small unit today)
• Legal fees involved – $2,500
• Management fees – $105,000 (estimated conservative $350 x 12 months x 25 years)
• Investment property tax – $120,000 (assumed AV of $36,000, tax at $4,800 p.a.)
• Additional term insurance cover for $1m protection – $30,000 (ave. $1,200 p.a.)

That’s almost $300,000 of mandatory cost items over a 25-year holding period while you service a second mortgage using the rent which is typically insufficient to cover the monthly repayment fully, let alone when there’s vacancy period.  I have not even factored in all the property upkeeping costs, agent’s commissions, rental income tax you have to pay, as well as the $5,500 in legal fees to decouple on your current matrimonial house so you can avoid ABSD on a second property.  To recoup all these costs, you will need about 25% appreciation above your purchase price of $1.2m in 25 years which is tenable provided you are not forced to sell against your will in a depressed market.

We are not qualified to give financial advice on retirement income insurance plans which has seen rising interest and demand due to a rapidly-greying population. Speak to a qualified financial advisor or one of the partners if you need one. Most of these plans are deemed to be paying too little to be worth a serious look, especially when stacked against the more alluring property investments.  However, things get more exciting when you start to make clever use of home equity loan which is an excellent tool for building passive income streams for retirement.  Instead of getting premium financing mostly on floating rates with the high spreads from a limited number of banks without the ease to refinance, why not gear up on a term loan and stay within the confines of 75% LTV limits on your current property (subject to other guidelines, check with us)?  By doing that, you can boost your payouts to near $3,000 per month with a $1m investment, which is not unlike buying a second investment property.

The purpose of this article is to open your mind to think laterally instead of chasing after higher and higher property prices today for that elusive second or third property at all costs.  In fact, ironically it will be in our interest as mortgage brokers for people to be buying more properties. However, at MortgageWise.sg, we take a more enlightened perspective. If the end result for you taking on more debt commitments plus all the work involved in managing properties and tenants is simply passive income streams which you like to leave behind for your loved ones, there may be other alternatives available.

Let’s compare using the simple case of $300,000 cash outlay or equity you have on hand either for down payment (25%) on a second residential property at $1.2m or as part of a $1m premium paid upfront for a retirement income insurance plan.  We will assume that you are able to get $700,000 home equity loan on your existing own-stay property.

	Buy a 2nd Property for Investment at $1.2m	Buy a $1m Retirement Income Insurance Plan  (using $700,000 MWL)
Own Equity	$300,000	$300,000
Debt Exposure	Possibly doubling of debt with two mortgages	Increasing first mortgage back to its original LTV (with term loan)
Transaction & other costs	Decoupling legal fees, BSD, property taxes, condo management fees, etc.	No additional out-of-pocket expenses
Time & effort	Need to scout for the right property, manage tenants for the next 25 years	No additional time & effort
Returns before retirement	Rents may or may not cover 2nd mortgage repayment fully; need to pay out of pocket during periods of vacancy	Consistent payout* which commences early helps to cover the additional monthly repayment quite significantly (most if not all the interest component)
Returns after retirement	Mortgage is fully repaid with passive monthly rental income for life, which rises with inflation.  However, upkeeping costs rises with an aging property.	Mortgage (with term loan) is fully repaid.  Retirement payout can last up to 120 policy years in some cases but it is fixed with no inflation hedge
Potential for capital gain or profits	Sell the property for big profits during property cycle peaks	Any gain in surrender value is minimal
Legacy planning	Keep the property for lifetime and transfer it to the children	Policy ceases at maturity with total payout ratio of 3x to 5x of premium paid
Protection	Need to get a term insurance cover for the higher debt exposure with a second mortgage	No additional cover needed if there’s a high cover on the first mortgage; a further $1m extra whole-life cover if the insured person is yourself (see below)

Term insurance coverage is cheap as that’s pure protection without any cash value.  Hence, most investors will get a term cover to protect against the added liability from a second mortgage.  However, term cover expires at the end of the term when you reach your 70-80s.  No doubt you will have less need for protection at 70 but what if, through the clever use of home equity loan, you could switch from a term plan to a whole life plan that comes with retirement income of $3,000 per month for as long as you live? Yet, still leave behind a large death benefit in cash for your loved ones?  More importantly let me go to the crux of the matter, through the use of home equity loan, you could get this high coverage on a whole life plan early in your late 30s or early 40s while you are still in the pink of health!  Some people leave such critical decisions to boost their cover too late resulting in policies which come with exclusions.

This is the alternative path for retirement planning when you start to see the benefit of employing home equity loan to boost insurance payouts when you are willing to forgo the capital upside from a second property which also come with risks.  When you buy a retirement income insurance plan, you have a choice to put the insured person as yourself or your youngest child.  In the former, it provides you with good passive income for retirement when your mortgage is fully repaid, and a substantial death benefit in cash for your loved ones upon your demise.  This is not unlike leaving behind a property, which is illiquid. Of course, to be fair, you are forgoing the potential asset value growth and inflation hedge on a property.

In the latter, your child becomes the predominant beneficiary who takes over the free cash flow (when you transfer the payouts to him as policy holder) over his or her lifetime and who in turn leaves behind a lumpsum death beneficiary for your grandchildren.  It becomes both a retirement plan for yourself while you are still the policy holder, as well as a multi-generational gift which spans three generations with some policies stretching to the maximum of 120 policy years yielding a payout ratio of over 5x on the initial $1m (only $300,000 is your own money) invested.  That’s your “capital appreciation” in kind if you like.

Before I end there are three caveats on such retirement income plans I need to give: first, there’s counter-party risk if the institutions providing it should fail; second, unlike properties, there’s no opportunity for the kind of crazy capital appreciation we see in property investments; lastly, unlike freehold properties, the plan will expire at some point upon maturity.  

In the final analysis, not everyone will opt for retirement income plans over our love affair with properties here in Singapore.  The risk reward considerations differ from person to person.  How you choose may come down to which one you value more – capital appreciation versus income generation.  Perhaps for those undecided, have some of both.

More importantly let me go to the crux of the matter, through the use of home equity loan, you could get this high coverage on a whole life plan early in your late 30s or early 40s while you are still in the pink of health!  Some people leave such critical decisions to boost their cover too late resulting in policies which come with exclusions.

Need more personalised advice?  Not only do we help clients navigate through the myriad of mortgage rates quick and fuss-free and get you the best home loan Singapore, we show you how to become Mortgage-Free in 6 Years! So, be it for residential or commercial property loan, work with us today and you’ll also be helping to support our social cause!

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*includes a guaranteed and a non-guaranteed component where the former is often much lower averaging a rate of return of 1.1% (on the premium paid). Still, most good insurers make good on their projected rate of return through declared bonuses 

Disclaimer: MortgageWise Pte Ltd is not in the business of providing financial advice nor are we licensed or regulated by MAS under the Financial Advisory Act (FAA) in Singapore. All information presented are opinions and any representations given, whether by way of example, illustration or otherwise, are purely portfolio allocation advice and not recommendations or inducements to buy, sell or hold any particular investment product or class of investment product.  All opinions are generic in nature and are not tailored to the particular circumstances of any reader.  Seek advice from a qualified financial advisor before making any investment decision.

Though every effort has been made to ensure the accuracy of the information and figures presented, we make no representations or warranties with respect to the accuracy or completeness of the contents in this blog and specifically disclaim any implied warranties or fitness for a particular purpose.  We shall not be held responsible for any financial loss or any other damages suffered whatsoever, directly or indirectly, if you choose to follow any of the advice or recommendations given in this blog.