I Am 35, How Should I Plan My Mortgage? (7 Tips)

If you’re a millennium in your early 30s, upgrading to a private property (or executive condominium) for the first time will be a major decision you’ll face soon, especially for those who’d just completed their 5 years MOP (minimum occupation period) on an HDB property.

It can be a daunting experience crossing over from HDB to private housing for the first time.  Suddenly you find yourself owing the bank a million dollars, and the monthly repayment doubles from below $2,000 to $4,000 or more.  Should you upgrade?

Being in the mortgage business for close to a decade, we have the following 7 tips to share when it comes to mortgage planning in your 30s:

1. Frame it right – mortgage is good debt

Mortgage is one of those necessary evils in life if you like.  You’ll need to take one to get a roof over your head, or pay rents. Leverage is also one of the main attractions for property investment, as opposed to other asset classes like stocks, bonds, REITs, etc.  In fact, mortgage is deemed good debt (lowest interest, highest stability) which ought to be deployed to pay off all other debts in life where possible be it car loans, renovation loans, personal loans, etc.

30s is a good time to start acquiring assets using good debt, as your income is expected to grow.  Take for example a private property loan of $1m at a long run average interest of 2.50% over 30 years tenure (interest will not remain high forever), the monthly repayment works out to be $3,951.  For a dual-income household earning at least $10,000 per month, that’s only a mortgage servicing ratio of 40%.  In the scenario where interest rate rises to 4.50% or higher, which is what TDSR stress test is all about, it’s still below the regulatory limits (60%) with mortgage payment of $4,774 per month or 48% (assuming no other debt).  You do have some margin of safety even if your income stays stagnant at the same level, which is unlikely.

But what if one spouse stops working?

2. Deploy maximum leverage

Because of this risk (reduction in income), the tendency is to try and prepay as much as possible whenever there’s surplus savings or bonuses.  But that, to us, is not a wise move for those in your 30s where we think you should deploy maximum leverage, and not reduce it.

This can be a controversial view. But understand it in the context of life stages: you maximize leverage from age 35-45, but start to deleverage from 45-55 and become totally debt free by 55.  Doing regular prepayment does help to reduce debt and lower interest costs, but at what opportunity cost? We are know by now that in order to benefit from compounding interests, you’ll need to start investing early in your 30s.  All the more so, any cash surplus and excess savings should be diverted to help build your nest egg for retirement, rather than paying down good debt.

Even if you are risk-averse and deem no investment safe enough to part with your hard-earned money, there’s at least one “investment” you’ll probably agree with us – put back the CPF withdrawn for housing plus accrued interest.  You can do this any number of times with any amount via CPF login.  The earlier you put it back, the less you’ll need to pay back from your sales proceed (when you sell) and the earlier you start compounding the 2.50% interest paid by CPF Board.  The only drawback is – you can’t touch those funds in CPF Ordinary Account until you hit 55.  But you can always utilize it when you next sell and buy property again.

3. Focus on mortgage management

Instead of repaying partially your loan in your 30s, focus on managing the mortgage interests.  To do that, you need to make the right choice between fixed or floating rate home loans at different phases of the interest rate cycle.  Unless you have the time to track the cycle and watch U.S. Fed’s every move, and receive timely updates on promotional rates from banks, it’s probably easier to work with a trusted mortgage broker while you focus on building your career, which goes back to creating more savings.

You maximize leverage from age 35-45, but start to deleverage from 45-55 and become totally debt free by 55!

4. Build a property portfolio?

With TDSR (applies to all your lending from SG banks) & ABSD (additional buyer’s stamp duties) entrenched as part of property purchase costs in Singapore, gone were the days where you can just put down 20-25% of your own money, get financing for the rest, thereby amassing 4 to 5 properties in a short span of time.

There’s still one segment in the market though that’s accessible without must restrictions – commercial properties be it shophouses, offices, retail shops or industrial B1 units. It’s debatable whether commercial properties are right for the average investor. In recent years, there’s been a plethora of property investment seminars touting easy money through buying and selling and flipping of commercial units. Remember SSD (seller’s stamp duty, within 3 years of sale) were introduced back in 2013 to rein in such speculative activities and these are applicable to industrial propertie (excluding commercial).

It’s not the intention here to advocate commercial property investments for the average Joe. However, if you do have interests to build a property portfolio, industrial & commercial properties onshore are certainly much lower risks when compared to overseas properties investment. In the worst case scenario, you could still access and take care of the property as you live right here in Singapore. Financing, or remortgaging, will also be readily available. There’s no ABSD and tightened limits on LTV (loan to value) for commercial properties where you can still get up to 80% financing, sometimes 90% if you have an operating company. You can buy the commercial property under individual name or company name. In general the latter gets slightly more favourable financing rates. TDSR will still apply if you set up an investment-holding company (IHC) for the sole purchase of buying and holding such properties. However, it will be exempted if the company has some form of operating income for assessment.

As long as you’re always able to secure a good tenant through business cycles, a good commercial or industrial property can still provide good upside in capital value which beats inflation many times over. In fact, some will return much higher asset appreciation as well as rental yields than residential units. As with all things in life, you’ll need to do your homework. And the best time to start working on that knowledge is in your 30s. You might even have personal use of such office/retail/industrial assets by the time you reach your 40s.

Speak to our team here for the best commercial property loan rates and terms for both commercial properties under individual or company names.

As long as you’re always able to secure a good tenant through business cycles, a good commercial or industrial property can still provide good upside in capital value which beats inflation many times over.

5. Refinance quickly for the longest tenure

How else can you bring down the monthly repayment to free up more cash for investment in your 30s?  Refinance as soon as you can as that allows you to stretch the loan tenure by up to 10 more years (The last age for refinancing loan is set at 75 years old versus 65 for purchase loan)

With a longer loan tenure, the monthly repayment comes down but the interest-servicing component within goes up.  The two effect offsets each other.  As most homeowners tend to sell within 10 years, the difference in total interests paid during the period is marginal unless of course you service the loan all the way to the last year.

6. Stay wary of lock-in periods

We are going through a period of great certainty and 2023 might be the most pivotal year for interest rates.

We have seen it repeated over the years: Those who over-commit for more than the usual 2 years of lock-in period tend to overpay and regret.  Retaining that flexibility to get out of contracts early almost certainly gives you an advantage. You can pre-empt any big swings in interest cycles be it due to geo-political tensions, or black swan events like covid-19 pandemic.

7. Buy with the end in mind

This is more a tip on property investment rather than mortgage planning.  If you do plan to buy a 2^nd private property, as most would, you might want to opt for tenancy-in-common for your first property with 1% vs. 99% manner-of-holding.  This is part of tax planning where one spouse will eventually buy over the 1% share and take over the mortgage as income rises, thus freeing up the other spouse for the purchase of a 2^nd property without being liable for ABSD.

We have seen it repeatedly over the years: Those who over-commit for more than the usual 2 years of lock-in period tend to overpay and regret.  Retaining that flexibility to get out of contracts early almost certainly gives you an advantage.

Need more advice?  We don’t just throw you a set of rates, or get different bankers to sell to you.  Not only do we help clients navigate through Singapore mortgage rates quick and fuss-free, we show you how best to position and profit from the interest rate cycle, 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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