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Post by oldman on May 10, 2014 8:41:45 GMT 7
When you take a loan, you are already living beyond your means. You are borrowing money that you currently do not have so that you can buy something today instead of having to wait till the time when you have saved enough money to buy that item.
If you need that item urgently, you may then not have a choice but to take the loan. But hold on. What items do you really need so urgently that you cannot wait a few more months or years?
If it is a car, you can still use public transport as an alternative. Cars are expensive not only to run, but also to maintain. You need to pay the road tax, insurance, servicing and petrol as well as any accidents or mechanical issues that will crop up from time to time.
On top of all these car expenses, you will still have to pay back the loan capital and interest rates over the period of the loan. The car loan will come with interest rates that may be sound small but everything adds up.
If you borrow $60,000 at a flat rate of 2.6%, this means that you pay the bank 2.6% of $60,000 every year for 5 years for the interest rate component. This will work out to be $1,560 every year or $7,800 for the 6 years. Then, you have to also to pay back the capital of $60,000. Adding both the capital and the total interest rates will give you a total amount of $67,800. Divide this by the 60 months (5 year loan) will result in a repayment of $1,130 every month for 5 years.
However, as you are progressively paying off your loan capital every month, the amount you owe actually gets less and less as the months go by. Theoretically, as you owe less, the interest rates that you pay should be less and less as well. Hence, there is this difference between the flat rate and the actual effective interest rates that you pay. For the example above, the flat interest rate of 2.6% per annum for 5 years actually works out to be an effective rate of 5.092%. In other words, you are actually paying 5.09% for your car loan.
Imagine instead, the amount you could have saved on monthly car expenses and interest rates if you did not have a car. It is for the same reason I am totally against the borrowing of money to finance the purchase of furniture or anything else for that matter. Credit card debt commands an effective interest rate of over 20% and is an instrument for financial disaster.
How can one justify that such loans are affordable is really beyond me. A loan is taken because you cannot afford to pay for the item fully. If you cannot afford to pay for an item fully, you cannot afford it. If you cannot afford it, how can taking a loan be affordable?
By taking a loan, you are in effect, enslaving yourself to money. You now have to continue working for at least, the duration of your loan. You cannot afford to lose your job as you know that you are now very dependent on your job to pay off the loan.
If you take a housing loan for 25 years, you are committing yourself to being employed for at least this amount of time. In today's environment, we face worldwide competition. No company can be sure that they will be around for the next 10 years, let alone 25 years. How can we be sure that we will be gainfully employed for the next 25 years? In the past, competition is more local than international and our fathers and forefathers can be assured of long term job prospects compared to our world now.
My guess is that in the future, banks will re-look at the duration of housing loans and bring these down. It is not a bad thing as this may make current housing prices less affordable than it currently is. If this is the case, then house prices may fall to reflect the lower level of affordability.
I think the term affordability is more a bank created term to determine if they are willing to lend someone the money. Instead, we use their term affordability and apply it to our own circumstances and think that what is termed affordable to the banks is also affordable to us. What we should instead do is to work out our own sums and decide for ourselves what is affordable and what is not.
Saying all that, I think it is still reasonable to take a housing loan that does not overstretch oneself. We still need a roof over our heads and we either pay rent or buy a house, or if you are lucky, you can still live with your parents. As house prices go in a cycle, we must always remember that we should not rush into buying a house. We must never be afraid of missing the boat as sooner or later, the boat will come again and house prices will fall. We must time the purchase of our house carefully as this is likely to be the single most important financial investment we will make in our lifetime. If you rush and buy your house at a height, you may live the rest of your life working hard to pay for an over priced property. We should instead be patient, wait for the property market to tank and then, take a loan that we can truly afford.
For everything else other the property that we live in, it is better to save the money and then buy these things when you can afford to pay for it totally in cash, without any loans. This also applies to taking loans to invest. Unless you are a professional investor, it is unlikely that you will know how to use loans properly to invest. Everyone will think otherwise and many will end up not only with failed investments but overwhelming loans that may cripple them financially for the rest of their lives.
If you still insist on taking loans, the best time to take one is during a recession. This is when property and stock prices will be at their lows. Sure, it is much more difficult to get loans during this time. So, if you intend to take loans during a recession, make sure that you are loan free during the boom period. This way, the banks may view you as someone with a low credit risk as you do not have any existing loans.
Regardless, if you have existing loans, do consider paring these down as there is no greater feeling than to be loan free. When you have a loan, you are burdened financially to repay this loan. This means that you will not want to take any risk on your current occupation and will bend backwards to keep that job. But life cannot be about working to pay off debt. To live life fully, you have to be free and be able to think beyond the constraints of your current job.
Be debt free and you can spread your wings and fly.
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Post by me200 on May 10, 2014 9:13:47 GMT 7
I concurred that there is "right" time to purchase your house.
During the property height in 1996-97, my neighbour bought a condo unit at $660 psf. Fortunately, I pull my break as I felt the price was too high.
2 years later (1998) I bought the same condo unit (1 floor above him), I only pay $520 psf. That's a 21% cheaper. 
With cheaper purchase price, I took 15 year loan as compare to my neighbour 25 year!
Saying all that, I think it is still reasonable to take a housing loan that does not overstretch oneself. We still need a roof over our heads and we either pay rent or buy a house, or if you are lucky, you can still live with your parents. As house prices go in a cycle, we must always remember that we should not rush into buying a house. We must never be afraid of missing the boat as sooner or later, the boat will come again and house prices will fall. We must time the purchase of our house carefully as this is likely to be the single most important financial investment we will make in our lifetime. If you rush and buy your house at a height, you may live the rest of your life working hard to pay for an over priced property. We should instead be patient, wait for the property market to tank and then, take a loan that we can truly afford. For everything else other the property that we live in, it is better to save the money and then buy these things when you can afford to pay for it totally in cash, without any loans. |
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Post by zuolun on May 10, 2014 13:14:18 GMT 7
oldman, Loan and affordability depend on the theory of relativity. In the early-60's, the max. HDB loan tenure was 15 years. Over the past 5 decades, it has been stretched to 35 years or > double until MAS pulled the rug and reduced HDB loan tenure to 25 years in 2013. According to L&T's review dated 8 Oct 2012, "MAS said (i) over 45% of new home loans have tenures exceeding 30 years, and (ii) average tenure of new home loans has risen over the last 3 years, to 29 years from 25 years." Should MAS adjust back the loan tenure to a certain extent (35 years or longer), loan and affordability would be entirely viewed differently to HDB home buyers. L&T's review dated 8 Oct 2012:*The government has understandably introduced more measures in the aftermath of Federal Reserve’s QE infinity launched weeks ago. * MAS will cap the tenure of all new home property loans at 35 years, as well as lower the loan-to-value ratios for new loans with a tenure of more than 30 years: a. 60% for a borrower with no outstanding mortgage, down from 80%; b. 40% for a borrower with 1 or more outstanding home loans, down from 60%. * MAS said (i) over 45% of new home loans have tenures exceeding 30 years, and (ii) average tenure of new home loans has risen over the last 3 years, to 29 years from 25 years. * We would expect a mild impact on property and bank stocks as a result of the 6th set on measures by the government in the last many years. * In the property sector, we maintain preference for Reits. * Indeed, Sunday Times said in its piece Home Buyers Unfazed By Loan Curbs, showrooms were packed with brisk sales. |
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Post by zuolun on May 10, 2014 15:20:06 GMT 7
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Post by zuolun on May 10, 2014 15:44:36 GMT 7
This article remains fresh on my mind, to date.
Everyone has a potential to be a bankrupt in Singapore: Mortgage repayment
27th August 2005
My wife and me have paid upfront for the 127k for our 4 room flat with every single cent in our CPF ordinary account. Guess what the nightmare isn't over yet. It gets better.
As you all know, CPF pays an interest of 2.5% to the balance in the ordinary acccount. When you use all your savings in your ordinary account to pay upfront for your flat, you think your nightmare is over? Far from it.
Do you know that the moment you borrow from your CPF account to pay for your flat, the interest starts compounding? What interest? The 2.5% interest. Every month CPF will calculate the accrued interest each month as if the amount you have loaned remained with CPF. It will update your statement monthly to show you how much you owed in interest.
You are asking "What the... ?"
Yes, you owe yourself interest payments! If you ever sell your flat you need to return whatever you have borrowed from CPF ordinary account with interest.
What if you don't sell your flat? If you decide not to sell your flat? The principal amount owed to the CPF account, with the compound interest will continue to compound!
To date, I owed my CPF ordinary account $3k in interest payments after 1 year of owning the flat. In 30 years time, I will owe myself $140k in interest!
If at that point of time (after 30 years) my 4 room flat gets EN BLOC under the SERs scheme. I need to be compensated at least $267k for the 4 room flat. $127k + $140k = $267K. If HDB decided to compensate less then $267k, I will be making a loss. As under En Bloc scheme, all your funds (whatever you have borrowed from your ordinary account with interest from the day you borrowed) will need to be returned back to CPF first, before you are allowed to purchase your SERS new flat.
If the En Bloc occurs when you are 55, the refunds will be first channelled to your retirement account to meet minimum sum requirement. Where are you going to find the extra cash to service another mortgage? No idea.
I did a calculation based on the 127.5k 4 room flat using the old rule of 20% down payment, and remaining lump sum service by 30 years mortgage.
You need to take out $25,500 from your CPF account to pay the 20% downpayment under the old rule. After 30 years at 2.5% compounding interest rate, the total amount you need to return CPF with accrued interest is $53,487.97.
As for the remaining lump sum, $102,000 that you will pay with installments over 30 years to HDB at 2.6% interest rate. The total sum with interest that you will need to draw out from your CPF is $147,005 to pay up the mortgage.
$147,005 will be split into 360 installments of $408.35 to be withdrawn from CPF every month to service the mortgage. Every month, once the $408.35 is out of your account, CPF will start calculating the interest as if the money has remained inside. Over 30 years, the principal with interest accrued will be $218,617.34 ($147,005 principal/$71,117 interest)
So the final grand total amount you have to return to CPF if you flat is EN BLOC in 30 years is $272,105.31. (20% deposit $53,487.97, 30 year mortgage monthly payments $218,617.34)
Now compare this with the upfront payment of $127.5k compounding at 2.5%. Grand total: $267,349.
The difference is $4,756.
However, if you take a 30 year mortgage, the total amount that you have withdrawn from CPF is $172,505 ($25,500 for 20% downpayment, $147,005 for monthly installments). As you need to use $45,005 of your CPF ordinary account balance as interest payments to HDB.
At the 31st year, $172,505 will compound at a faster rate then then the $127,500 as the principal is bigger.
Everyone has a potential to be a bankrupt in Singapore.
You never finished paying.
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Post by candy188 on May 10, 2014 17:06:10 GMT 7
So much to learn from the Wise!  We are working hard to pay for our overpriced 5-room HDB flat purchased at $750k (storey 21-25, $558 psf) in 2011...    The only consolation is that our CPF is still adequate to service the monthly bank instalment.
I concurred that there is "right" time to purchase your house.
During the property height in 1996-97, my neighbour bought a condo unit at $660 psf. Fortunately, I pull my break as I felt the price was too high.
2 years later (1998) I bought the same condo unit (1 floor above him), I only pay $520 psf. That's a 21% cheaper. 
With cheaper purchase price, I took 15 year loan as compare to my neighbour 25 year!
Saying all that, I think it is still reasonable to take a housing loan that does not overstretch oneself. We still need a roof over our heads and we either pay rent or buy a house, or if you are lucky, you can still live with your parents. As house prices go in a cycle, we must always remember that we should not rush into buying a house. We must never be afraid of missing the boat as sooner or later, the boat will come again and house prices will fall.
We must time the purchase of our house carefully as this is likely to be the single most important financial investment we will make in our lifetime. ~~ If you rush and buy your house at a height, you may live the rest of your life working hard to pay for an over priced property. ===> We should instead be PATIENT, wait for the property market to tank and then, take a loan that we can TRULY AFFORD.  For everything else other the property that we live in, it is better to save the money and then buy these things when you can afford to pay for it totally in cash, without any loans.
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Post by zuolun on May 10, 2014 18:24:14 GMT 7
oldman,
Buying a property with bank loan and buying shares with CFD is actually borrowing money at high leverage to generate greater returns.
Both assets carry the same risk but the former could have a much higher risk due to liquidity problem.
Example 1
My friend purchased 500 lots of Wilmar shares @ 3.30 per share = S$165,000 cash (max. financing for Wilmar @ 90%).
He sold the 500 lots of Wilmar shares @ 3.50 per share for a quick profit @ 0.20 per share = S$100,000 (excluding commission and other charges).
Example 2
My friend purchased a 1,000 sq ft condo @ S$1,650 per sq ft = S$165,000 or 10% downpayment in cash (10% upon TOP, bal. by 30 years bank financing).
He flipped it for a quick profit of 10% b4 TOP = S$165,000 (excluding commission and other charges).
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Post by oldman on May 10, 2014 18:37:02 GMT 7
I fully agree with you. In both cases, you are taking a loan on the total amount. Stocks, even the not so liquid ones, is much easier to sell than a property... especially in a downturn. oldman, Buying a property with bank loan and buying shares with CFD is actually borrowing money at high leverage to generate greater returns. Both assets carry the same risk but the former could have a much higher risk due to liquidity problem. Example 1 My friend purchased 500 lots of Wilmar shares @ 3.30 per share = S$165,000 cash (max. financing for Wilmar @ 90%). He sold the 500 lots of Wilmar shares @ 3.50 per share for a quick profit @ 0.20 per share = S$100,000 (excluding commission and other charges). Example 2 My friend purchased a 1,000 sq ft condo @ S$1,650 per sq ft = S$165,000 or 10% downpayment in cash (10% upon TOP, bal. by 30 years bank financing). He flipped it for a quick profit of 10% b4 TOP = S$165,000 (excluding commission and other charges). |
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Post by me200 on May 10, 2014 20:20:49 GMT 7
Yes, both are using leverage but I think there is different. Buy stock with leverage, one will have potential margin call if the odds is against him. If he can't top up the different, his loss may be bigger than he could handle. on the other hand, one would not face margin as long as he did not fail to pay the monthly installment despite if the property value may have reduce. I fully agree with you. In both cases, you are taking a loan on the total amount. Stocks, even the not so liquid ones, is much easier to sell than a property... especially in a downturn. oldman, Buying a property with bank loan and buying shares with CFD is actually borrowing money at high leverage to generate greater returns. Both assets carry the same risk but the former could have a much higher risk due to liquidity problem. Example 1 My friend purchased 500 lots of Wilmar shares @ 3.30 per share = S$165,000 cash (max. financing for Wilmar @ 90%). He sold the 500 lots of Wilmar shares @ 3.50 per share for a quick profit @ 0.20 per share = S$100,000 (excluding commission and other charges). Example 2 My friend purchased a 1,000 sq ft condo @ S$1,650 per sq ft = S$165,000 or 10% downpayment in cash (10% upon TOP, bal. by 30 years bank financing). He flipped it for a quick profit of 10% b4 TOP = S$165,000 (excluding commission and other charges). |
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Post by zuolun on May 10, 2014 20:27:22 GMT 7
I fully agree with you. In both cases, you are taking a loan on the total amount. Stocks, even the not so liquid ones, is much easier to sell than a property... especially in a downturn. Yes, in a downturn, stocks are actually less risky than properties. For stocks, you can just cut-loss and turn short anytime but not a house just like that. It may take years to sell the house; in the meantime, the pressure to service the housing loan increases and the bank will only lend you an umbrella on fair weather but take away that umbrella when it rains. Wrong judgement buying a property at the peak not only destroys a person financially, it can destroy the entire family when couples frequently quarrel over finances which could end up in divorce or suicide. |
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Post by odie on May 10, 2014 20:59:23 GMT 7
blog.moneysmart.sg/home-loans/on-margin-call-for-home-loans-what-is-it-and-how-do-we-avoid-it/On-Margin Call for Home Loans: What is It, and How Do We Avoid It? Home LoansTimothy Kua January 25, 2013 If you’re unlucky, you may be one of the few property owners faced with a margin call. This is when a bank asks for a cash top-up, as part of the requirements for your home loan. This often catches property owners off-guard, as it typically occurs years after the home loan was approved. In this article, we’ll examine what on-margin calls are, and when they’re likely to happen: What is an On-Margin Call? An on-margin call happens when the market value of your property falls significantly, thus affecting the LTV (loan-to-valuation) ratio of your home loan. When this occurs, the bank might require you to top-up your loan. Depending on which bank you use, there are various ways this may happen. Here are the two common examples: Example 1: Top Up the Difference Between the the Outstanding Home Loan and the Valuation Say I have a house worth $2 million. I took a housing loan to buy it, and after a few years servicing the loan, I still owe $1.7 million. Then comes a property down-cycle, and the value of my house plummets. The bank conducts a valuation, and it determines that my house is worth only $1.6 million. This is actually less than my outstanding home loan ($1.7 million). The bank can then issue an on-margin call, and I would have to top up the difference of $100,000. I could do this using either cash, or my CPF. On-margin calls can be paid with cash, or just from your CPF Example 2: Balance the Loan-to-Value Ratio Say I buy a house worth $2 million. I have a LTV of 80%, so my loan amount is $1. 6 million. After a few years servicing the loan, I still owe $1.3 million. Then comes a property down cycle, and the market value of my house falls to $1.6 million. The LTV of my house has changed: 80% of $1.6 million is just $1.28 million. And yet I owe $1.3 million. I might have to pay the difference of $20,000, to bring my LTV back to 80% of the market value (again, cash or CPF). Different Banks, Different Rules Various banks interpret the rules for on-margin calls differently. The wording on the document is often vague, so it’s best to ask the relevant banker directly. See below for more on this. When Can You Expect On-Margin Calls? With thousands of property loans to deal with, most banks will not spend the time, money and administrative manpower needed for constant valuations. For the most part, banks only start checking under certain conditions. These are: During a sustained property down-cycle Changes or disruptions by a property developer (if you buy an under-development property) Sudden property market crashes If you keep a close watch on the property market, you may have noticed a recent worry about on-margin calls. This is mostly due to the strong cooling measures this January. It’s suspected that property values may fall, and banks may conduct valuations. However, on-margin calls are unlikely for most property buyers in Singapore. This is because we rarely see sudden drops (20% or more) in property market values. There are also a number of ways to avoid on-margin calls: 1. Scrutinize the Housing Loan Conditions Many foreclosure clauses are not openly discussed by the bank. Read them! When signing for a home loan, pay particular attention to the the foreclosure clauses. The loan document will state whether and how the bank makes on-margin calls. If you cannot find it in the document, ask the relevant banker directly. Ensure that the banker’s response is written (e.g. in an e-mail) and not merely verbal. You can also talk to mortgage specialists at sites like SmartLoans.sg, who are familiar with the various banks and their methods. 2. Get a Lower LTV if Possible The maximum LTV (loan to Valuation ratio) is usually 80%. But must you really borrow that much, just because you can? The lower your LTV (and hence the lower your loan quantum), the less likely it is you’ll face a margin call. If you get a LTV of 60%, for example, property values might have to plummet as much as 40% before you get a margin call. This is not likely in land-scarce Singapore. 3. Get a Good Property 75186886_5452ac2644_n It’s nice, but will it stretch your wallet? The lower your LTV, the less likely you are to face margin calls. This should go without saying, but we’ll mention it anyway: Get a good property, and you will not face on-margin calls. It is unusual for a property to depreciate so much that a margin call is required. This tends to happen only to dubious and risky property investments (e.g. units with expiring leases). Follow us on Facebook, so we can warn you when we spot them. 4. Have an Emergency Fund It is recommended that you build an emergency fund, preferably about six months worth of your income. This is not just for property, but also for issues such as medical complications. If you have a healthy savings habit, you should not have problems in the event of an on-margin call. How Strict are the Banks? Most banks will ask that you pay the on-margin call within one or two months. However, banks are known to be lenient with on-margin calls (local banks in particular). It makes very little sense for a bank to foreclose due to on-margin calls, and lose out on the interest they were making from you. As long as you continue to make home loan repayments on time, most banks are open to negotiations or discussions.
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Post by zuolun on May 11, 2014 11:37:45 GMT 7
Yes, both are using leverage but I think there is different. Buy stock with leverage, one will have potential margin call if the odds is against him. If he can't top up the different, his loss may be bigger than he could handle. on the other hand, one would not face margin as long as he did not fail to pay the monthly installment despite if the property value may have reduce. Buying stocks with the highest leverage via CFD at max. financing at 90% may trigger a margin call when price falls below the stop-loss level but the auto-force-selling mechanism prevents further huge losses if there is continual sudden and sharp corrections. Buying properties with the highest leverage via bank financing at 80% (after TOP) with no intermittent margin call lulls the house owner into a false sense of security (as long as the monthly installment is paid promptly). In a sudden and sharp downturn, if the house valuation falls drastically, a margin call served to house owner with no top-up money paid could trigger an immediate evacuation from the house by the bank. Is the glass half-full or half-empty? |
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Post by me200 on May 11, 2014 13:47:45 GMT 7
My "experience" with buying stock with leverage. One of my ex-company partner lose his semi-D landed property at distrust 15 and downgrade to HDB 3 room flat because of trading stock with high leverage instrument. The unfortunate event cause him lose his fortune and business. Yes, there is a mechanism of auto cutloss, but how many people really adopt or strictly adhere to this measure? Having said that, one must know himself well if the high leverage strategy is a friend or foe. Quote from Oldman's book "maximizing your margin is a dangerous strategy, as it forces you into stituation that you would not want to be in. when you have margin call; you have to make decisions that you would not have to make it if the money were not borrowed money."Yes, both are using leverage but I think there is different. Buy stock with leverage, one will have potential margin call if the odds is against him. If he can't top up the different, his loss may be bigger than he could handle. on the other hand, one would not face margin as long as he did not fail to pay the monthly installment despite if the property value may have reduce. Buying stocks with the highest leverage via CFD at max. financing at 90% may trigger a margin call when price falls below the stop-loss level but the auto-force-selling mechanism prevents further huge losses if there is continual sudden and sharp corrections. Buying properties with the highest leverage via bank financing at 80% (after TOP) with no intermittent margin call lulls the house owner into a false sense of security (as long as the monthly installment is paid promptly). In a sudden and sharp downturn, if the house valuation falls drastically, a margin call served to house owner with no top-up money paid could trigger an immediate evacuation from the house by the bank. Is the glass half-full or half-empty? |
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Post by oldman on May 11, 2014 14:11:53 GMT 7
Good point. I agree. But as Zuolun correctly pointed out, if you are betting, it is much better to have a cut loss strategy and getting hit with a margin call is not a bad thing as it is a wake up call to cut your losses. At the end of the day, one has to decide whether one is making a long term investment or taking a bet when you invest in a property. For me, I don't like borrowing money to make a long term investment as you will then give yourself time pressure for the investment to perform. My experience is that my investments will seldom do well if I am under the constraints of time. So, I have a very simply policy: if I borrow money, I am making a bet. And if I make a bet, I will cut loss if I read the market wrongly... whether it is stocks or property investments. Yes, both are using leverage but I think there is different. Buy stock with leverage, one will have potential margin call if the odds is against him. If he can't top up the different, his loss may be bigger than he could handle. on the other hand, one would not face margin as long as he did not fail to pay the monthly installment despite if the property value may have reduce. |
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Post by zuolun on May 11, 2014 14:31:23 GMT 7
My "experience" with buying stock with leverage. One of my ex-company partner lose his semi-D landed property at distrust 15 and downgrade to HDB 3 room flat because of trading stock with high leverage instrument. The unfortunate event cause him lose his fortune and business. Yes, there is a mechanism of auto cutloss, but how many people really adopt or strictly adhere to this measure? Having said that, one must know himself well if the high leverage strategy is a friend or foe. Quote from Oldman's book "maximizing your margin is a dangerous strategy, as it forces you into stituation that you would not want to be in. when you have margin call; you have to make decisions that you would not have to make it if the money were not borrowed money."Every CFD punter has to strictly obey the rules else once confirmed no top-up money paid, the stop-loss mechanism will be forcefully enforced by the CFD provider (with immediate effect) thru force-selling to any available buyers regardless of what price on the open market to protect the company's interest. |
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