making money from property

Last Chance To Profit From Historical Low Interest

Cash Out On Higher Valuation With Historical Low Interest

With the impending rise in interest over the next few years once US Central Bank starts hiking rates from 2015, it presents a rare opportunity for those who are no longer under any lock-in period on their existing loan to profit.  Let me explain.

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At the moment there is still one last bank in the market (all the rest have adjusted their rates up) that offers a 3-year mortgage fixed rate package at an all-time lowest interest of average 1.42% p.a.in the first 3 years.  Now with upwards bias on interest outlook, Singapore Dollar Fixed Deposit rates have started to trend up in the last couple of months with the highest rate at 1.55% for a 24-month placement from one foreign bank.  Which means if you can still do a cash out (take additional term loan on top of your outstanding housing loan at the same mortgage interest) on your property loan, after all most of us have been diligently paying down our mortgage over the years, even if you do nothing with the extra cash and just place it as fixed deposits, you will profit at a minimum margin of 1.55% minus 1.42% or 13 basis points.  Assuming a cash out of $300,000, this works out to be $400 p.a. or $1200 over 3 years.

It is unlikely any one of us will be excited enough over a $1200 profit to make all the effort to do a cash out.  Fair statement.  However remember I am giving the baseline profit here. Your “cost of funds” is already locked in at 1.42% per year over the next 3 years.  Interest rate will only rise against the backdrop of an improving economy, better corporate earnings which should translate into higher wages, more spending and investment into stock markets, etc.  Stand ready to profit from the stock market bulls as Dow heads into the new year looking to hit the all-time record of 18,000 level!

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To capitalize on this recovery, where else can you find such a cheap source of funds where you can lock-in the interest.  There can only be upside.

However before you take action on this strategy, do remember 2 things :

1. You will need to service the higher monthly instalment in the next three years

Another good thing about locking in your interest at such a low rate of 1.42% is that for each dollar that you pay the bank every month, only 1/3 goes to the bank’s pocket as interest and 2/3 comes back to you in the form of principle reduction.  Essentially you are paying yourself.  Better yet if your rent can cover fully this monthly instalment albeit rental market in Singapore is projected to go even softer.

Say if you have bought your investment property 5 years ago and you have taken up a loan of $600,000 back then and your current outstanding loan is at $514,000 with the property now valued at $1.1M, you can take out the maximum of 70-80% of the valuation (LTV) less outstanding loan and total CPF used to-date, provided you met TDSR as a pre-requisite.

Using 70% as an example, this means you can cash out as an equityterm loan on your property :

70% of $1.1M – $514,000 – $0 (assume no CPF used) = $256,000

Your total loan outstanding goes up to $770,000 with $256,000 in the form of term loan at the same interest as your mortgage.  At an interest of 1.42% p.a. your monthly repayment goes up from $2048 to $2921.  You will need to be able to service this higher instalment which is fixed in the next 3 years.

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2. What goes up will come down, thread very carefully

It will be irresponsible of me to ask people to cash out on their mortgage without highlighting the risks involved, especially those who are investing into stocks and shares which we know are highly volatile.

There are 2 major risks here – first at the end of 3 years your fixed mortgage rate expires and if you are unable to refinance to an acceptable rate, you will need to get back your capital to pay off at least the term loan portion of your mortgage in order to square off your position.  Should the stock market plunge (no one predict the market 100% ) you will stuck!  Second, should the stock market plunge be accompanied by a property market crash, some banks might start to call for top ups on loan margins when market valuations drop drastically.

Due to the risks involved, I would seriously encourage you to look at real estate investment trusts (REITs) rather than just pure stocks with your capital.  As these vehicles pay out dividends or DPU quarterly which can range from 5% to 8% p.a. they form a better defensive play in getting you higher return from both yield (eg. 5% minus 1.42% or 3.58% p.a.) as well as capital appreciation.  There are still risks associated inherently with REITs like higher interest costs, drop in asset valuation, drop in rental income, etc. but it is comforting to know none of the REITs in Singapore suspended DPU payout during the Great Recession.

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Invest wisely which I think some of you know much more than me.  I am just reminding you where is a potentially cheap source of funds at your disposal.  Speak to experienced mortgage brokers today on how to get the best cash out package from the banks and to this end our team here at MortgageWise is ready to assist.

Do not forget to sign up to our newsletters to receive blurps on interest rate movements and analysis for better mortgage planning.

 

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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 successful careers in banking & real estate before becoming an entrepreneur.
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