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.

Setting my financial goals... baby steps towards financial independence

I have had people asking me, how come I think of retirement planning when I just graduated from university? Most college graduates are working hard at repaying their study loan in the short term.

I must say I am one of the luckier ones. My parents had nil CPF balances (used it to pay for the HDB housing mortgage loan as our flat was bought at the property peak and hence loan amount was very high), so my loan was paid off in cash in full. (To be honest, it was tough on my parents.)

However, for young people like us, time is on our side! Whether you are 25 or 30 or 35 now, there is a good thirty years to retirement at 62, the official retirement age. Using the Rule of 72, generating a 6% annual return means your investment amount doubles in 12 years!

How did I start planning for retirement?

Initially, I started setting aside some money each month, around $400, and plonked them into mutual funds. The funds made money at first, and I continue putting money into these equity funds month after month (in a time of rising prices). However, the recent credit crunch has made me lose a substantial 10% of my investments as of now (it was down over 15% at one point). This is another good thing about starting early: you have the time and patience to ride out business cycles! So I have not sold any of my funds, as I believe it will appreciate in the medium term of 3-5 years. Nonetheless, it made me reassess my net worth and I have since placed a smaller percentage of my net worth in mutual funds (also known as unit trusts), choosing to invest directly in the stock market instead.

So how do I keep track of my retirement plans now?

The first important thing, I believe, is to set a retirement goal. I decided early on that I want to earn my first million dollars by the age of 35 - that would ten years from now, and this is my long-term goal. To monitor my progress towards this large goal, I have set many shorter term goals in between. The hallmark moment came when I first reached a net worth level of S$100,000. That was the first time my net worth crossed the sixth-digit mark, and is a significant milestone in my financial planning management, given that I earn less than half that amount in annual income (not to mention that interim capital losses delayed this special moment).

The following are my net worth targets based on conservative annual returns, i.e. 5% annual returns instead of 6%. Thus, the age that I will reach my S$1 million goal is around 38 years old.

Jun 2008: $120,000
(unfortunately, I am not near this level yet. This is because I made some personal choices, and decided to spend a rather substantial amount on current travels.)

December 2008: $135,000
(Hopefully, with discipline, I should be able to reach this level or near it towards the end of the year.)



To be honest, by then, S$1 million would not mean much, since inflation has been running high lately and probably most of us lower- to middle-income earners are already millionaires by then! However, that point is definitely memorable as it marks a significant step towards financial independence. Using S$1 million capital as base, one could easily double it to S$2 million in 12 years using a reasonable 6% return, and this means this same S$1 million turns to S$2 million when I turn 50 years (38 + 12), notwithstanding that I continue to save up and invest during these twelve years. This should result in financial independence earlier on in my life, so I could choose to work in areas I am interested in, including unpaid jobs.

The Dreams of Financial Independence

I believe my dreams are what motivate me to defer current consumption in favor of future consumption. I want to be financially free, to be able to travel the world and befriend friends from all over the world, learning and understanding customs and appreciating differences in culture. Most of all, I would like to spend my last years in rural areas, leading a simple lifestyle with a slower pace of life, and teaching children during my spare time.

Each of us have dreams, and we should dare to dream. Because only when we dream, then we are able to make dreams happen!

So continue to check back this blog regularly as I make updates on my financial position, and my journey towards financial independence. Importantly, I hope it motivates you to save harder or gives you a pat on the back if you have done well in terms of net worth growth! Join me as I struggle between difficult consumption and investment choices, as I am sure we all do. And let's all work hard towards achieving our dreams!~

The Road to Financial Freedom

The other night, I was talking to a friend, W, over the phone... and I was inspired by the amount of savings she manages to accumulate each month.

W receives salary of around $2,300, and is able to put aside $1,200 in her online savings account each month. That is an impressive savings rate of >50%! And since she gives a monthly allowance to her parents of roughly $600, that essentially means she gets by with only $600 each month!

Let's do the sums. Assuming W starts off with a net worth of $20,000. The forced savings of $1,200 will increase her net worth to $34,400 at the end of one year (ignore compounding for now, since interest rates in Singapore continue to be very low). If, a year later, her salary increases by $500 and she is able to put aside $1,500 in forced savings. Two years later, her net worth increases to $52,400. These calculations did not include bonuses, so assuming bonuses of $10,000 for each year - her net worth at the end of two years increases to $72,400!

To make a comparison, assume another friend, K, earns $3,400 a month, and spends $2,800. She justifies the extra spending as she has to be on par with her colleagues in terms of dressing, and dines out frequently with her friends. After taxes, she manages to save $500 a month. A 15% savings rate is a decent amount, especially for fresh college graduates just starting out. Starting with the same net worth of $20,000, she ends up with $26,000 at the end of one year. A year later, her salary increases by $800 and thus she increases her savings to $1,000 a month. At the end of two years, her net worth increases to $38,000. Her bonuses amount to $30,000 over two years, of which she saved $20,000. Her net worth at the end of two years becomes $58,000.

Earnings (Annual)
K $ 70,800
W 47,600 (48.7% less)

Net Worth
End of Year 1
K $ 36,000
W 44,400
End of Year 2
K $58,000
W 72,400

This may be a simplistic example, but it teaches us an important lesson in financial planning - that net worth is determined not by how much you earn, but by how much you spend! K earns on average 50% more than W each month, but her net worth is 25% less than W's! Extrapolating this trend, it's not hard to figure out who ends up richer. Since both of them live in the same city and are subject to similar costs of living, differences in net worth is a result of differences in consumption and saving habits. And it's all the more inspiring because this is a real-life example so you know it can be done!

So, instead of thinking negatively and complaining about how little you earn from your job, change your thoughts to positive ones! You now know that you can use your cents to build up future riches!

Here is a useful formula to follow: Expenses = Income - Savings.
W makes a conscious effort to spend only what is left after saving up a specified portion of her income. K uses Savings = Income - Expenses, and while the formulae are equivalent, she spends first and saves up whatever is left. This typically leads to overspending, because people tend to spend when they see positive balances in their accounts!

Make it a habit to save from today, or else you'll make it a habit to spend! Which would you prefer? :)