The last quarter of the year is a time to take stock and plan for the upcoming year.  With interest rates in Singapore at multi-year historical low (and I’m talking about decades here for fixed rates as low as 1%), objectively speaking it is the best time to make use of “good debt”.

Good debt refers to leverage with reasonably low interest rates when annualised, usually collateralized debt like a mortgage with effective rate at 1 to 3% per annum.  Contrast that with unsecured lending like credit cards & revolving credit lines which can charge you interest from 6% to 24% per annum.  With the latter, the bulk of what you will be repaying every month goes mostly to interest for the bank, which is why it’s a bottomless pit.

In a traditional Asian culture, we frown upon debt from young with old adage like “live within your means”.  The imperative is always to pay down as quickly as we can and become debt-free in life.  There’s certainly a lot of truth in that, but as in all things in life we need balance.  There’s a place for good leverage when deployed correctly especially for investments rather than consumptions.  Another adage has it that – you need money to make money.  That’s “the first pot of gold” you often hear in interviews of successful individuals or businessman.  That’s also why startups burn cash initially to scale up at all costs in order to get to that critical mass needed before any profit visibility (they also “borrow” but pay with equity stakes).

This article explains how you can “cash out” on a property for various purposes.  Take note you can only take out a an equity term loan on a private property in Singapore, not HDBs unfortunately.

1. What is Mortgage Equity Withdrawal Loan (MWL)?

If you’ve been paying down on a mortgage for some time, and meanwhile your property has appreciated in value, there’s a good chance you can now “borrow against” the equity value of the asset.  Equity value, as the name suggests, is that part of the valuation where it’s fully owned.  To illustrate, when you buy a $1m property today with LTV (loan-to-value) at 75%, the equity value will be the $250,000 you put down in cash or CPF.  Supposing if the valuation rises to $1.5m after 10 years, and meanwhile your loan has been repaid down to $500,000, the equity value in the property now rises to $1.5m less $500,000, or $1m.  You can now take out more loan against this $1m as your collateral’s value has gone up, subject to regulatory guidelines and margin of safety imposed by the bank.  The best part – it’s at the same interest rate as your prevailing housing loan rates.

The official terminology used by MAS for this additional facility is MWL, or mortgage equity withdrawal loan.  You are “withdrawing” against the increased equity value of the collateral.  In the industry, it’s more commonly referred to as term loan, or equity term loan. You can continue to withdraw more and more term loans over time as long as the equity value is growing.  So, it is not surprising to see someone with a small housing loan (the original purchase loan) but add on of 5 term loans (on the same property) drawn down at different times and hence varying interest rates and lock-in periods.

2. What are some good uses of MWL?

In general, I would say any use oriented towards investment or savings rather than pure consumption would be of good leverage.  Here’s a list of what we often hear:

• Buy a Universal Life plan
• Invest in income-generating assets with low risk like REITS, bonds, etc
• Invest back in the lender’s stock like DBS but only at the right price; we call this an offensive mortgage strategy (we last made the call back in Jan 2016 when DBS dropped to $14; we’ll only make the call again in the next down cycle if DBS retraces back to $16-18, watch this space)
• Start a business (this carries the highest risk but has the highest return)
• Invest in children’s overseas education
• Redeem a car loan (hire purchase charges a much higher EIR, made worst with today’s COE prices)
• Do other debt consolidation (if needed)

The one idea we like to expound in this article is to make use of MWL to capitalize on CPF Life – the national retirement scheme in Singapore.

Recently, DBS launched a Home Equity Income Loan for retirees above 65 years who owns private property but are cash poor.  At a fixed rate of 2.88% p.a. and with interest compounded annually for the entire duration of the loan, it is debatable if the scheme is truly beneficial in the long run for families, or just another way for banks to upcharge but book the entire interest income later.  In all fairness, it does offer retirees who qualify an immediate avenue to monetize on the current property where they continue to live, beef up to the higher tiers of CPF Life payout and receive up to $4,600 a month for a couple.  Plus, most importantly, not having to worry about servicing a loan or repayment until much later (most likely taken care of by their estate and dependants).

We do think, for those who qualify for MWL, you can make creative use of it for a better outcome, after all you are already servicing a mortgage every month.  Most homeowners servicing a mortgage for some time would logically be in their 40s who’s also the sandwiched generation – raising teenage kids as well as taking care of aging parents past 65 years old.  The latter could now be receiving monthly payouts from CPF Life under one of the three schemes when they join: Basic Retirement Sum (BRS), Full Retirement Sum (FRS) and Enhanced Retirement Sum (ERS).

For those unfamiliar with CPF Life, the payout starts after the age of 65 (for lifetime) and is dependent on how much one set aside in his or her CPF Retirement Account (RA) at age 55 (or subsequently but higher min sum required). Based on projection using the CPF Life Standard Plan (default plan) computed as of 2020, this is how it looks for those turning 55 in 2022:

	Basic Retirement Sum (BRS)	Full Retirement Sum (FRS)	Enhanced Retirement Sum (ERS)
Min in RA by age 55 in 2022 (2021)*	$96,000 ($93,000)	$192,000 ($186,000)	$288,000 ($279,000)
Projected monthly payouts** from age 65	$790-850 (ave $800)	$1,470-1,570 (ave $1,500)	$2,140-2,300 (ave $2,200)

* the minimum sum to set aside increases every year by ave 3% to factor in long-term inflation and improvements in standards of living.  Figures in bracket shows you the min. sum required in 2021
** we use the lower end as the average for ease of our discussion (as shown in the bracket)

Besides knowing how much you will need to set aside for your own RA by age 55 (should you be aiming for higher payout from ERS), what you could also do is to plan on cashflow for your folks in their golden years. With fixed rates averaging 1.25% today, it makes total sense.  Let me explain.

First check using CPF Life Estimator to see how much is needed to boost their payout for either one or both of your parents.  If they did not set aside at age 55, much more is needed now to achieve the same level of payout.  Take for example a male turning 65 next year 2022, who now has $100,000 in his RA, his current payout under the Standard Plan (level payout with no deferment) would be $590.  If he tops up with $150,000 at age 65 so that he has a total of $250,000 in his RA, his payout immediately get boosted to $1,390 (estimated).  That’s $800 more.  If he tops up his RA to the maximum allowed, which is capped at the limit for ERS in the current year (using 2022) at $288,000, this payout rises to around $1,600.

My guess is most of us will need to top up an average of around $150,000 to $200,000 for each parent.  It varies depending on age as well as their level of savings already in their RA.  Use the calculator provided by CPF to find out.

For those servicing an outstanding private property loan of about $700,000 over 20 years remaining, to gear up on an additional term loan of $150,000 (total loan now $850,000) at 1.25% fixed means to increase the monthly repayment from $3,297 to $4,004.  Though the increase in loan commitments per month is about $700, the real cost or the interest-component is only about 22% of $700 with interest at 1.25%.  In the example earlier, notice the monthly payout actually increase more than that by $800 from $590 to $1,390 estimated. In cashflow terms, you are essentially switching from giving your parent $700 per month, to giving it to the bank!  But, is there a difference?

Yes definitely.  Though interest can fluctuate over time no doubt, but with proper mortgage planning especially when you work with us, it can be well-managed to stay way below 2.88% in the long run.  And consider the two other salient benefits:

• Your cashflow stays more or less the same at $700 outgoing per month (assume you are giving that amount or more to your parents as living expenses), but you are recouping a big part of it by paying down the term loan over time.  In other words, you get back most of this $700 monthly expense eventually when you sell the property.
• Even on property sale, CPF Life payout for your parent will continue for a lifetime at the enhanced level of payout.
• (If applicable) Save on all the admin expenses and hassle of monetizing your parent’s private property at a higher interest rate, yet end up with a lower property bequest value (after lumpsum repayment to the bank)

Note however, unless you are maintaining the $700 to your parent now that you can recoup it, the net amount your parent receives remain the same. Unless of course you find that “sweet spot” where CPF Life payout increases significantly more than the additional mortgage monthly repayment. Still, we hope this article has started you thinking in the right direction how to use MWL to maximise CPF Life payouts.

Though interest can fluctuate over time no doubt, but with proper mortgage planning especially when you work with us, it can be well-managed to stay way below 2.88% in the long run.

3. Do I qualify for MWL?

Before you get all excited, know this – it is not easy to get MWL especially if you have bought properties within the last 5 years.  This is because the valuation of the asset must have appreciated substantially over long periods in order to have the room for withdrawal.   There are two important conditions you need to meet:

• Most banks will only disburse term loan based on the formula: 
  
  (For single-mortgage borrower)
  68-75% of market valuation LESS CPF utilized to-date with accrual interest LESS outstanding housing loan
  
  (For borrower with > 1 mortgage)
  45% of market valuation LESS CPF utilized to-date with accrual interest LESS outstanding housing loan
  
• You need to be strictly within 60% of TDSR (total debt servicing ratio).  The only exemption is when the final LTV, after MWL and including CPF usage, is below 50%.  Still that is subject to various banks’ lending policy.

The best time to cash out on MWL would be during a refinance when you ensure that both housing loan and MWL would be on the same interest rate with lock-ins ending almost at the same time.  Note MWL funds are disbursed to your bank account usually about 3-4 weeks after completion of the refinance.

To find out more about MWL, speak to our experienced team of mortgage consultants who can guide you on the understanding and the steps involved.

Before we end, we need to give you this important caveat on MWL – whatever you choose to invest in, do not ever lose the capital and end up with a bigger loan to service.  That’ll certainly be an awful feeling, and would be the last thing we want to see happen.  MWL can be a double-edged sword – how you use it is important.

The best time to cash out on MWL would be during a refinance when you ensure that both housing loan and MWL would be on the same interest rate with lock-ins ending almost at the same time.  Note MWL funds are disbursed to your bank account usually about 3-4 weeks after completion of the refinance.

Compare Singapore home loan rates using a comprehensive, fast and free service from MortgageWise.sg, in operations since 2014.  Be it to refinance home loan, buy your next Singapore condo , or even explore commercial property loan, speak to our dedicated team of mortgage consultants at your service today!