This is part of a 4-part series on the clever use of home equity loan for savings and investments, we look at how you can buy a second property in Singapore without incurring Additional Buyer’s Stamp Duty (ABSD).  In fact, I will broaden this discussion in this long article to include the question “should one be paying down their Singapore mortgage using spare cash?”  Not paying down is akin to taking up a home equity term which means the idea in this article will also be applicable to those with HDB loans.

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)
• Build retirement income in a different way

To avoid paying ABSD, the answer is obvious – buy only commercial properties.  ABSD is only applicable on residential properties in Singapore.  What is not so obvious, however, is how do you invest in commercial properties in Singapore successfully where many are not be familiar with. Mistakes can be costly here.

First up, you are not allowed to use term loan as down payment for another property, as that circumvents existing rules on loan-to-value (LTV) for property purchase which requires that you have the minimum cash required for the purchase.  However, no one says you can’t use term loan to buy properties “indirectly”.  By that, I mean investing in Singapore-listed Real Estate Investment Trusts listed, or S-REITs, on the SGX.

Most people perceive REITs as stocks which are risky due to price volatility.  However, since I am comparing it with properties in Singapore, I will qualify that the REITs in question should be those that own and hold largely 70-80% of their assets in Singapore, which would make you joint-owner to some of the biggest shopping malls, office and industrial buildings which you are familiar with right here where you live.  To further reduce risk, I will suggest restricting this list to only blue-chip household names like Capitaland, Mapletree, Keppel, Frasers, etc.  Better yet, look for those where Temasek owns a substantial stake if you like. Just do your homeowork online, or seek qualified investment advice.

(This article should not be construed as financial advice.  Do read my disclaimer at the end.  This article is my personal sharing and merely sets out my perspective on REIT versus real property investing, and why everyone should consider the pros and cons before madly chasing after real properties in Singapore at record high prices.)

1. How you should look at blue-chip S-REITs?

Imagine you just got to know a friend whose family own one of the largest malls in Singapore that you frequent.  He invites you to come in as a joint-owner by investing $100,000 for a certain number of shares so you can start sharing in the net rent (after deducting overheads including interest) that’s collected and distributed every few months.  How often do you get such an opportunity?

That’s exactly what REITs are all about. Yet, most people don’t see it.

Investing in commercial properties directly may not be everyone’s cup of tea, and you assume the risks all by yourself.  But if you can leave the job to professional REIT manager and their property managers, who also collect and distribute all the rent back to you, that’s a game changer!

All that’s required is a paradigm shift in thinking: in property investment, do you always need to own the asset directly 100% before you get to enjoy both the rental income as well as capital appreciation in due course?  If you don’t pigeonhole your thinking in that way, you’ll open up for yourself a whole new exciting world of property investment opportunities right here in Singapore. That could be much safer than seeking gold pursuing investments in overseas property, crypto, high-beta stocks, and all other risky ventures.

Just think about this.  Wouldn’t it be much better for you to own part of a bustling mall that you and your family frequent every weekend, or part of a sought-after Grade A office tower you work in every day, than to own 100% of a small strata-titled retail shop and having to do all the work and assume the risks all by yourself?

2. How you should look at price volatility?

The only problem with REITs, unlike real properties, is the volatility as prices can swing wildly due to stock market gyrations and you will incur capital losses if you are ever forced to sell in a depressed market. Incidentally, you do face the same risk with real property investment which are illiquid if when property cycle downturns (if ever).

Would you sell your investment condo unit at a capital loss if property market does correct at some point? Maybe not, if you still continue to get good rentals to help cover part of your monthly mortgage.

On that same note, why should you be concerned with price volatility if the tenants in the malls and offices are still doing brisk sales and paying you “good rent”?  Unless of course you need your money back quickly. So, the issue here is not price volatility but this – never invest with money that you need back.

Having said that, price is still an important consideration at the point of entry.  Your buy price determines your yield.  Though distributions or dividends paid by a well-managed REIT ought to grow over time, you should still aim to enter at a price which gives you a yield that’s much higher than your cost of funds or mortgage rate.  Personally, I will aim for one that’s minimally double that of the mortgage rate you are paying (see next section).

Never buy your REITs during stock market peaks when this yield gets compressed and where you also run the risk of being “under water” for long periods (albeit only on paper if you are not selling).

If you don’t pigeonhole your thinking in that way, you’ll open up for yourself a whole new exciting world of property investment opportunities right here in Singapore. That could be much safer than seeking gold pursuing investments in overseas property, crypto, high-beta stocks, and all other risky ventures.

3. Why I say “never pay down on your mortgage”

That’s one common question we often get asked: “Should I pay down some of my loan when I refinance my mortgage”.  My short answer has always been a definitive no, especially when interest rates drops drastically today. This long article now serves as my full response to that question. 

Imagine you have $100,000 spare cash today which can be used to pay down on your mortgage. That also means you don’t need the money back anytime soon if at all.  It’s insufficient to buy you another investment property in Singapore (otherwise you probably would!), so you thought of repaying the mortgage.  Even if you could, the net return after deducting all the holding costs from management fees, property taxes, agent’s commissions, repairs, etc. is likely paltry, even negative at times. However, if I were to tell you now that you could use this $100,000 to buy “bite-sized” commercial properties in Singapore via REITs with a potential yield of 5 to 6%, you might re-evaluate your options rather than paying down.

First, not only can you reducing mortgage interest (assumed long-run average of 2.50%) every month, there’s also a 2.50% positive net yield every year. For a typical loan of $700,000 for a private property, that 2.50% positive yield translates to an extra $3,000 per annum based on a “$100,000 commercial property” you bought via REITs.  That’s shaving off 0.40% p.a. on your entire mortgage interest. (Of course, REIT prices can rise over time leading to lower yield for new investors, but that also means interest rate would most likely have fallen.  Hence, this doubling factor will likely hold even in low-interest environment.)

To demonstrate this more clearly, let’s look at a $700,000 home loan with 20 years of tenure left on three scenarios below (assuming interest costs on a straight-line basis):

1. Pay down your mortgage by $100,000 using your spare cash
2. Use your $100,000 to buy a small commercial property via blue-chip S-REITs that pay 5% yield (based on your buy price)
3. Use your $100,000, plus taking up another $100,000 term loan (only for private properties), to buy a small commercial property worth $200,000 via blue-chip S-REITs which pays 5% yield

Per Annum	Option A Pay down $100,000 No “Second” property	Option B No Term Loan $100,000 property	Option C Term Loan $100,000 $200,000 property
Total Mortgage	$600,000	$700,000	$800,000
Monthly Repayment	$3,179	$3,709	$4,239
Assumed Interest (2.50%)	$15,000	$17,500	$20,000
Assumed Yield (5%)	Nil	$5,000 (5% on $100,000)	$10,000 (5% on $200,000)
Effective Interest paid	$15,000	$12,500	$10,000
Effective mortgage rate	2.50% ($15,000 over $600,000)	1.80% ($12,500 over $700,000)	1.25% ($10,000 over $800,000)

Comparing option A and B, notice how even though the total mortgage interest you pay in a year goes up from $15,000 to $17,500, yet you cut your interest cost down by approximately one-third to 1.80%!  You may be paying $530 more every month ($3,709 – $3,179), but that’s more or less covered by the dividends earned from $100,000 REITs at 5% yield or $5,000 in a year. So, there’s marginal impact on monthly cash flow.

Even though there’s no real savings on a cash flow basis, you’re actually enjoying a lower effective mortgage rate by reducing the interest component in your monthly instalment.  More importantly, you get capital upside potential on your “$100,000 property” over the next 20 years, which will not be there if you choose to simply repay the mortgage in A.

What if you take an extra $100,000 in term loan and get a “bigger $200,000 property” in option C?  The total interest paid rises further to $20,000 a year but now you actually halve the effective mortgage rate from 2.50% down to 1.25%!  Once again, the 5% yield on a bigger commercial property fetches $10,000 in a year or $833 a month, which more than covers the additional monthly repayment ($4,239 – $3,709 = $530) in terms of cash flow. 

No doubt, not everyone likes the idea of using leverage to buy stocks, but this is a form of good debt in action. The question to ask is – If you have $100,000 in spare cash which you won’t need it back any time soon, would you rather be paying effective interest of 2.50% or 1.25%?  So, never pay down on a mortgage.  Period.

Finally, here’s the best part – your mortgage eventually gets paid down at some point as they all do, which means you would’ve gotten your commercial property “for free”! Yet, you will continue to receive that 5% dividends (tax-exempted and hassle free) as retirement income for life!

With a dearth of good options and the dismantling of CPF Special Account (SA) for all those over 55, where else can you find reliable income at significantly higher yield than CPF return?

You may think the title of this long article is gimmicky.  It’s not.  It simply requires a paradigm shift in the way you look at property investing.  Why pay so much transaction costs over time buying a real property when the same money can yield a 5-6% yield hassle-free and 100% tax-free?

Your mortgage eventually gets paid down at some point as they all do, which means you would’ve gotten your commercial property “for free”! Yet, you will continue to receive that 5% dividends (tax-exempted and hassle-free) as retirement income for life!

(Disclosure: I hold positions in many of the blue-chip S-REIT names mentioned.)

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