housing in singapore... and that thing called mortgage

I may have given everyone a false impression that I'm very rich as a millionaire. Well, I didn't give a true representation of net worth, because I do have debt over my head and that is a source of stress. Unfortunately, Singapore's housing prices are relatively high and most people require a 25 year mortgage at least to get by. This is what my spouse and I signed up for.

It is probably also worth noting that our choices remain important. While we could choose to buy resale HDB flats, we did not do so then because we had to save up for our wedding and the reception, there was the concept of COV (cash over valuation), and we'll need to spend quite a bit of money on renovation. A quick and dirty estimate was $50K + $60K + $80K = almost $200K of cash upfront. This is on top of what we'll need to pay in cash as down payment, which would easily be 5% of $600K = $30K (assuming we pay the remaining 15% & stamp duties using our CPF savings). The truth is, we did not have this amount of cash upfront. Well, I did but my partner didn't, and I figured there was no need to stress ourselves over this.

Instead, what we did was to make the choice to stay with our parents post marriage. We're lucky our parents were understanding and had spare rooms to accommodate us, so all we did was to change our beds into Queen size ones and bought some loose furniture for extra storage. At the same time, we bought a private apartment off plan so we only needed to pay for the unit based on construction progress. Interestingly our unit was built rather late and we only started paying our installment a year later, at about $300 a month and increasing to $600 just earlier this year. As the construction developed further and as interest rates rise, we are now paying closer to $1,000 a month in mortgage, and set to rise to $3,000 once the loan is fully drawn. I'm not sure if anyone realises, but cash-flow wise we are much better off as otherwise (in the HDB scenario), we'll need to incur $2-3K in mortgage installments every month from day 1.

Being the finance person I am (I'm the CFO of the family, naturally), I simulated scenarios where interest rates are higher than they are now, and I estimate mortgage interest rates to be at 3.75% by 2H 2017. Honestly, I hope this will not come true but I always try to expect the worst. It isn't entirely impossible too, as interest rates are closer to 2% now and the US has yet to increase rates. Also, let's not forget that housing interest rates in Singapore were about 5-6% just a decade ago. When this happens, we will need to fork out about $4,000 a month for our installments.

Affordability

Now, with median household income at $9,000, is a $4,000/month mortgage affordable? Why I used median income is because our apartment is actually just under $1 million and I've seen many average-earning professionals/workers committing to much larger mortgages. Moreover, if one of us loses our jobs, we will not earn anywhere close to $9,000. But let's say we earn $9,000 and have this 25-year mortgage.

$1,800 goes into our CPF every month, of which 2/3 goes into Ordinary Account and can be used for property payments i.e. $1,200. This means we need to fork out cash of $2,800 every month out of net take home pay of $7,200 (39%). Not that bad, but rather tight - a general rule of thumb is not to exceed 35% of net take home pay. This is because there are so many other needs for our income - savings, food & general expenses, insurance, and even allowances for parents and kids (if any). Not to mention we should always have a stash for emergency expenditures.

In view of this, we actually decided against buying a $1.2 million property (not that expensive, considering most suburban condos are priced at $1,200 per sqf and we're looking for a 1,000 - 1,100 sqf unit). This mean we have to forgo location or convenience by way of being near an MRT station. Instead, we spent just under $1 million for our property and decided to spend $110,000 on a car instead, especially since car parking will be included in the monthly charges.

Our Plan

Ok, now that we've got a car, we need to incur $900 monthly for the loan repayment, and another $700-900 for the car's operating expenses (road tax, petrol, parking, maintenance). This takes out another $1,800 from the remaining net take home pay of $4,400. (For the record, we paid for the car almost entirely upfront from our savings, so we only incur the operating expenses monthly.) Having a car is indeed a luxury, we admit, but it also allowed us to go places, try out hard-to-reach dining places, spend more time visiting parents, and enjoying more couple time as we chat in the car in the drive to/from work (we used to take public transport separately).

We've also made a plan to save up $2-4K each month as a couple. Yes, so essentially we are both relatively thrifty and can get by with under $1K a month each on all our basic necessities excluding insurance. (A side note here - it is important to marry someone with similar values as you, including monetary values, as it takes two to make decisions that bring you closer to your dreams and the life you wish to live.) This 'savings' actually does pay for our joint expenses such as dinners outside and our weekend plans and is basically what we can save up after spending on our needs. So although this accumulates to about $35-45K a year, we plan to prepay our loan by about $20-25K a year. It is for this reason that we decide to still stick with a floating rate SIBOR loan, although I must say the interest rate volatility does upset me quite a bit.

Very few of my friends around me have thought about prepaying their home loan or, if they have, felt that they could not afford it. (Of course, there are some who prepay to the max.) To this, I will say two things: 1. There's always a way to save up, no matter how little it is. We are not particularly high earners but we do not spend that much, so every dollar saved is a dollar earned towards prepayment; and 2. mortgage interest rates are probably one of the lowest secured interest rates you can ever find. Therefore, if one is able to earn a higher rate of return than the mortgage interest rate, over a similar base as the mortgage, then one should definitely not prepay the mortgage. For us, we under-invest and thus find prepayment a very attractive option.

The reason I say this is because I'm not sure if people generally appreciate the savings as a result of prepayment (look, I don't think the banks want you to learn this). Most mortgage bankers provide a simple mortgage table spreadsheet and if you can duplicate the spreadsheet and insert the prepayment amounts, you may learn something new. I did exactly that and realised that for every $1,000 I prepay, I could potentially save up to $500 over the loan term (say 25 years). At least, this is for my case since interest rates are about 2% annually. Extrapolating this, it means our mortgage installments will only briefly exceed $3,000 (like $3,150) over 18 months before falling to below that level forever - using the same interest rate assumptions as before of course.

Isn't this amazing and yet a powerful tool? It means we fork out $1,800 in cash (net of CPF) instead of $2,800 and gives you an extra $1,000 to spend - or rather, save - on prepayment again. See where this is leading to?

The Big C

C for conclusion, and also C for the biggest C in our lives which is condominium. In short - and thank you for bearing with me as you read the long-winded story above - this is how a median income family can actually quite comfortably afford to live in a condominium. Naturally, if you stay in a HDB with a lower mortgage, this can apply too and it may mean you attain financial independence faster. For us, the high upfront payments for the resale HDB meant we could only go to the private housing route, and yet as we think about it, it can be well within our means if we do know how to manage the finances around it properly.

Here's an illustration of how the monthly financials look like:

Household Income (gross): $9,000
Take-Home Pay: $7,200
CPF (Ordinary Acct): $1,200

Expenses -
Mortgage $1,800 ($1,200 paid via CPF, totaling $3,000)
Car $1,800
Insurance $1,000
Household Expenditure $1,500 (condo charges of about $400)

Total monthly savings = $1,100 (or $2,900 without car)
Total annual savings = $1,100 * 12 + 2 months bonus (net of CPF) of $14,000 = $27,000 ($49,000 without car)

Either use the savings to prepay or to indulge in a bit of holidays and enjoy staying in a condo for the rest of the year. On that note, we're really excited to receive the keys to our unit in a few months' time. We need to spend a bit on the furniture and hopefully can keep this to within $15-20K, and will use the remainder of our savings we're going to prepay. Currently we've set aside $10K before end of the year for prepayment. It is my hope we can keep our loan to within 15 years - our current target is 13 years.

Time flies... a stock take

Wow, it's been a long while since I last took a glance at this blog. Five years in fact. How time flies. In this period, I focused a lot on my career, took on a lot of stress, and (thankfully) got married. In between, and fairly recently, I've turned into a millionaire (in local currency, not in US$ yet).

Most of my wealth creation is through savings from active income. And as I looked back at old posts (not that there were many to begin with), I realize my investments have stagnated since the last time I blogged. Well, I still performed transactions here and there, but not very actively. I'm therefore keen to revive this blog for a few reasons: (i) to help me plan my investments better and improve clarity of thought; (ii) so that I can actively look at market updates and remind myself of how much I love investing and finances in general; and (iii) monitor my progress. It's true they say, you can only manage what you can measure.

It's interesting how I reviewed old posts and notice how my analysis of Starhub's dividends maintaining at 20cents per share was right. Of course, this requires review now with the changing competitive landscape. I also looked at one of my first posts in May 2008 where I planned my wealth growth - I still have a hard copy of this stored somewhere to remind myself of my initial struggles and my eagerness in achieving the plan. It's now 2015 - a good 8 years have passed - and I'm proud to say that I'm close to my 2022 target. Or rather, I've doubled what I had said I wanted to achieve in 2015. This is a good result, indeed. At least, I can tell myself I didn't waste my youth in vain on my career as I managed to earn quite a bit in active income. I also now indulge in more luxuries than before, where I would scrimp and save every cent (it took me two years to consider and almost a year after I passed CFA before I rewarded myself with an ipad, of which my spouse still uses it now).

I probably didn't perform as well as I could have on the investment front, but managed to still reach my goals nonetheless due to conservative model underwriting, lol. Based on the bare records I had on my trades, I figured I had obtained an IRR of about 10.6% over the past 8 years - no mean feat, yet a large part due to luck as a number of investments were made during the global financial crisis. A summary over the 8 years is below:

Initial Capital (2008): $110,000

Increases in Capital over the years (net of sales): $180,000 - mostly injected in year 2011 with some withdrawals in 2012

Trading gains/(losses): $35,000 - definitely more active in early years, with gains of about $2,000 annually over the past 2 years while I sold down stakes in earlier positions

Dividends: $100,000 - definitely the piece I'm most proud of, as I'm trying to build up a stable stream of passive income

Ending Value of Portfolio (2015): $345,000

My passive income hovers at about $18,000 a year, or $1,500 a month. Initially the goal was to attain $30,000 / $2,500 a month but as my needs increased and with higher costs of living plus desire for travel, I believe I should only settle when my passive income hits $48,000 i.e. $4,000 a month in today's dollars. This means I do have some way to go in achieving financial independence, which is sad as I do wish to take some time off work (still very hectic and taking a toll on physical health).

Luckily for me (I guess), there's still the component of interest income which is $5,000 a year or $450 a month as I'm fairly conservative in my portfolio (only ~35% invested). This means I'm probably halfway through my goal now, and the purpose of blogging more frequently is to take a more active approach towards reaching $4,000/month without having to double the capital required.

Going forward, to meet the personal objectives of this blog, I'll only focus on the passive income bits and not on overall wealth. Let's see where this journey takes me to, I can't wait to begin - everyday is the start of a new journey.

AUD trade & some thoughts

I'm really glad that the price for Starhub has traded rangebound, just as I had predicted (and hoped!).

Just also wanted to share another area of my investments, that of foreign exchange. I never had luck with foreign exchange; I had 1000 HKD that I kept from my previous trip exchanged at a rate of 1S$:4.5HKD and am sitting on paper losses today.

However around the middle of this year, I was very bullish on the Australian dollar (AUD) as I was confident the Reserve Bank of Australia would raise rates. I bought in at about 1AUD:1.24S$, and interest was pretty decent at an average of 4% p.a.

Unfortunately just a few weeks after I made this trade, the exchange rate fell to 1AUD:1.18S$, and I panicked. I had contemplated buying more to get an average rate of say 1.21 but I did not (which of course I regret on hindsight). In fact I had almost liquidated the holdings at a loss.

Thankfully for me, I held on and only just squared the trade at a rate of 1AUD:1.28S$. Overall the trade presented me with returns of 6% (3.5% on currency gain; 2.5% on interest) or almost 12% on an annualised basis! Nice gains of a few hundred dollars and I'm pleased =) Of course if it were a few thousand dollars it would have been nice, but let's not be greedy.


Analysis on AUD
Overall, I'm still confident of the AUD; and I was proved right as the AUD strengthened to the point where it has now breached parity with the USD.

However what I had considered but downplayed is the relativity of the exchange rate. Sure enough, the AUD strengthened against the USD, but so did SGD (my home and base currency). I had thought the SGD would not appreciate that much, nonetheless as Singapore uses its exchange rate as its monetary policy tool, the MAS decided to increase the slope of the NEER band to rein in import-led inflation. Therefore, for me to have made better returns on the trade, it means the AUD has to rise much faster than the SGD. While it had for the past few months, I wasn't sure if it would continue and I decided that it's time to take profit.

I made the trade in the form of a fixed deposit, so am glad to have made profits overall. The returns are calculated net of the bank's bid-ask spread. Of course if the rate of relative increase in the AUD had been much lower, I could jolly well have been hit with a loss. Overall, I felt that this investment was too risky and decided to call it a day.

But I still like the AUD because it has high interest rates - and for some reason AUD seems to go against interest rate and purchasing power parity which makes it seem like a free lunch somewhat - and it is a way for me to get exposure to the booming commodities sector. So if exchange rates favor the odds again, I'll be back into the trade.


Thoughts on Portfolio

Made a few trades this week and had wanted to do more stock analysis, but haven't had the time, so will do so later. But recently I've been reading up more and trying to learn more so I've had many investment ideas.

On my portfolio, I may not be able to hit net worth of $288K by end of this year, which I had initially thought was possible. I realised quite a bit of losses on my fund investments (and Fundsupermart platform fees did not help!). But I always remind myself that I started small (my average income for the first three years of work was under $50K p.a., including 13th month AWS) and I spend around half of it or more as my annual insurance premiums alone constitute $4K every year. If anyone remembers my earlier post - done after my financial planning in mid-2008, my target net worth at end-2010 is $200K. This has now been surpassed thanks to a strong recovery in Asia and to increases in employment income. I also spend my spare time (and some nights) running a small side business. So I am now ahead of the original schedule by just under 2 years, and with inflation rising at 3% p.a. I'd much rather be a millionaire at a younger age of 30 or 35 instead of the original 38. This hopefully would place me much ahead of my peers and allow me to choose the jobs that I want to do - no, I won't stop but I want a choice - and to roam the world as and when I please while I'm still healthy. Perhaps it is now time to relook at the cash flows and financial plan all over again :)