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 which not many are familiar with which may lead to costly mistakes?  What’s worse, if I were to suggest employing term loan for it? 

First, you are not allowed to use term loan for the purpose of down payment for another property, as that circumvents existing rules on loan-to-value (LTV) for property purchase which is to ensure you can afford the property with 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.

(This 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 residential properties in Singapore with runway prices.)

Most people perceive REITs as stocks that come with risks due to its 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, offices 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.  Just do a simple search online, or seek proper investment advice.

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 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.  But not when you can simply leave the job to professional REIT manager and their property managers?  All that’s required is a paradigm shift in thinking: do you always need to own the asset 100% before you get to enjoy the rental income as well as the capital appreciation in your investment?  In fact, 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 and eschew yourself of all the dangers lurking behind overseas property investing and, for that matter, all other risky pursuits from crypto to high-beta stocks.

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 or commercial office and having to do all the work and assume all the risks by yourself?  Period.

2. How you should look at price volatility?

The only issue with REITs 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.  To which, I would simply say – don’t ever think of selling when it comes to blue-chip S-REITs with majority of assets in Singapore. What’s the chances of them going bust even in extreme of economic cycles?

Let the prices swing.  Why should you be concerned if the tenants in the malls and offices are still doing brisk sales and paying you good rent?  Would you sell your residential investment property just because property cycle reverses and prices tumble?  Unless of course you need the money back. So, the bottom line is – never invest with money that you need.

Having said that, price is still an important consideration at the point of entry.  Your buy price determines your yield.  Though dividends paid by REITs are set to grow over time (not always), 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 minimally double that of the mortgage rate (see next section).  And never buy your REITs during stock market peaks when this yield gets compressed and you also run the risk of suffering capital loss 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 exciting world of property investment opportunities right here in Singapore and eschew yourself of all the dangers behind overseas property investing and, for that matter, all other risky pursuits from crypto to high-beta stocks.

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

The one question we often get asked is “should I pay down some of my loan when I refinance my mortgage”.  My short answer has always been a definitive no.  This long article now serves as my full response to that question. 

If you’re getting a mortgage, it means you believe in the upside potential of residential properties in Singapore.  By the same token, you would likely believe in the upside potential of commercial properties like malls and Grade A offices in the same country, especially when the REIT managers are household names with substantial holdings by Temasek.

Imagine you have $100,000 spare cash today which can be used to pay down on your mortgage (which means you don’t need the money back).  It’s insufficient to buy and own 100% of a commercial property in Singapore, 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 you choose to buy “bite-sized” commercial properties via REITs with a potential yield at 6% instead, not only are you reducing interest (assumed long-run average of 3%) every month, there’s a net 3% positive yield every year. 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.

For a typical loan of $700,000 for a private property, that 3% 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.

To demonstrate this even more clearly, let’s look at a $700,000 home loan with 20 years of tenure left on three scenarios below (assuming 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 6% 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 6% 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	$3,328	$3,882	$4,437
Assumed Interest (3%)	$18,000	$21,000	$24,000
Assumed Yield (6%)	Nil	$6,000 (6% on $100k)	$12,000 (6% on $200k)
Effective Interest paid	$18,000	$15,000	$12,000
Effective mortgage rate	3% ($18k over $600k)	2.1% ($15k over $700k)	1.5% ($12k over $800k)

Comparing option A and B, notice how even though the total mortgage interest you pay in a year goes up from $18,000 to $21,000, yet you cut your interest cost down by approximately one-third to 2.1%!  In terms of cash flow, there’s no significant impact.  You may be paying $550 more every month ($3,882 – $3,328), but that’s more or less covered by the dividends earned from $100,000 REITs at 6% yield or $6,000 in a year.  Even though there’s no savings on cash flow basis, you’re 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 $24,000 a year but now you halve the mortgage rate to 1.5%!  Once again, the 6% yield on a bigger commercial property fetches $12,000 or $1,000 a month which more than covers the additional monthly repayment in terms of cash flow. 

No doubt not everyone likes the idea of leverage to buy stocks, but 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 3% or 2.1%?  So, never pay down on a mortgage.  Period.

Finally, here’s the best part – your mortgage gets paid down eventually at some point which means you would’ve gotten your commercial property “for free”, yet you will continue to receive the 6% dividends (tax-exempted) as retirement income.  With a dearth of good options and the dismantling of CPF Special Account (SA) for all those over 55 from 2025, where else can you find reliable income at significantly higher yield than 4.08% with just a marginal increase in risk by sticking to blue-chip names?  And where do you think the exodus of SA funds will go to when the storm on interest rate blows over?

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 gets paid down fully at some point which means you got your commercial property “for free”, yet you will continue to receive the 6% dividends (tax-exempted) as retirement income.

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

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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.

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