Dennis Ng from www.HousingLoanSG.com, a leading Mortgage Consultancy portal, has been helping and advising many people with regards to housing loan. One of his advice is not to repay your housing loan early, even if you have the capability to do so. Why? You must be thinking it is so contrary to what was often preached – be debt free as soon as possible! Dennis does have very valid points:
1) It is the cheapest loan
Housing loan is the cheapest loan you can ever get from banks. The interest is about 3-4% and you compare it to car loan (7%), unsecured personal loan (14%) and credit card loan (24%). You can see the contrasting difference! Don’t you think you should leverage on the cheapest loan available to you?
2) Your networth remains the same
Repaying your housing loan early does not increase your net worth. This is because you are just taking your cash from your bank and putting it into the house. Worse, you are actually freezing your cash.
3) Losing your life and money
Having a mortgage insurance can help you in the event of death or total disability, where your loan will be paid off by the insurance. The cash or CPF monies can be left for your beneficiaries. If you have repaid the loan using your cash and CPF, you would have lost this advantage.
4) Opportunity Cost
With the cash in hand, you can invest and generate better returns. Rather than being cash strapped, you have the purchasing power to pick up real bargain stocks when the market crashes. Again, it will not be possible if you have your money locked in the house.
5) Use Interest Offset Loan
With an interest offset loan, you can earn interest on your cash to offset 100% of your housing loan interest you pay on your loan. This equates to repaying your loan, but with the liquidity of your cash where you can deploy when good investment opportunity arises.
6) Buy Single Premium Endowment
If you do not know how to invest and would want to avoid all ‘risky’ products, you can buy a single premium endowment, maybe for 20 years at 3.5% annual return. This would be able to offset your housing loan interest.
I have also posted questions to him and they are all documented here:
1) It is indeed a great insight you have provided. However, I feel that most people do not have the luxury to choose to repay their house early. They are often cash strapped and can only meet monthly repayment schedule. The problem is to even get to the position of having the ability to repay housing loan early. Do you agree?
I don’t quite agree. There are quite a number of people who are in a position to make lump sum repayment to Housing Loan, some do it every year, using the Bonus they receive.
My main message is even if you have extra Cash/CPF to make Prepayment to your Housing Loan, you should refrain from doing so, because Housing Loan is possibly the ONLY Good Debt available to almost everyone, and one can speed up one’s path to Financial Freedom by keeping one’s Home Loan.
I define Good Debt as a debt whereby it is possible for you to get a higher return than the interest you pay on the loan. Using this definition, the other common Good Debt is Business Loan, however, this is only applicable to people who are in business.
5 years ago I had about S$250,000 in Cash. I owed about S$200,000 in Housing Loan then. I’m glad I chose to invest S$200,000 of my cash instead of paying off my Housing Loan. Over the last 5 years, because of the Major uptrend in stocks and property, I managed to turn the S$200,000 into about S$800,000 by leveraging on the Bull market in stocks and later, property. (I also saved total of about S$200,000 in the last 5 years, thus, I managed to reach my first million in year 2008, in the midst of a Financial Crisis.
If I had used the S$200,000 to pay off my Housing Loan. Today, I’ll be financially very far behind compared to my current status.
I observe that most Singaporeans do not have much money to retire because firstly, they over-commit, then they took the next 20 to 30 years using their precious Cash/CPF to pay off their Housing Loan. Thus, ending up Asset Rich (fully-paid house) and Cash Poor when they reach age 60. ie. buying a bigger house than they can comfortably afford.
Some also made the mistake of buying property near market peak. Those who made the mistake of buying near the peak in the previous property bull market in 1996 and saw prices crashed by over 40% had to wait for close to 10 years for prices to recover to their purchase price. They did not realize that the single Mistake they made (buying High) set them back by 10 years of precious time.
Imagine another person who did not make the mistake would be 10 years ahead of them, and because of the Power of Compouding, once you’re behind financially by 10 years, you can never really catch up.
2) You mentioned about Interest Offset Loan. Would you be able to elaborate further on how it works and how to go about applying for it?
Basically, they allow you to put money into a Current Account linked to the Housing Loan. The unique thing is that the Current Account pays the same interest rate as what they charge you on the Housing Loan. Ie. if bank charge you 3% on your Housing Loan, they will pay you 3% on any amount you deposit in the Current account as well.
Thus, if you owe S$1 million in Housing Loan and placed S$1 million in the current account linked to the Housing Loan, effectively you’re paying 0%, (similar benefit to paying off the Housing Loan). However, you have the benefit of “liquidity”, should you need to use part or all of the money in the current account, you are free to withdraw anytime and you’re only charged Housing Loan interest rates.
3) Lastly, buying a single premium endowment wouldn’t it be as good as locking your money somewhere else than in your house? I believe there is penalty for redeeming the endowment early. I feel it is not a good alternative to repaying housing loan early, unless I am wrong.
Of course, a single endowment policy is not exactly a fantastic investment alternative. I used it as an example in case
people give the excuse that they do not know how to invest, thus rather than risk losing their money investing, they rather use their Cash/CPF to pay off their Housing Loan.
The good thing about Endowment policy is you can match the time frame of the Asset (Endowment) with your Liability (Housing Loan). The good news is that due to “power of compounding”, over a long time of say 20 years, even an annual compounded returns of 3.5% can work out to quite a lot.
Eg. a S$300,000 earning 3.5% annual compounded interest would grow to S$679,655 over 20 years. and S$842,038 over 30 years!
If people say they don’t know how to pick stocks, another alternative they can consider is to invest their money into Exchange Traded Funds (ETF). ETF are basically funds that are traded like stocks in a stock exchange. Advantage is you can track the performance of an index by a small investment outlay eg. S$1,000, and the annual fees are much lower than typical Unit Trusts. One example is STI ETF.
Most people look at things too “short term”. Eg they only compare the Housing Loan interest they pay over the next 3 years, vs the returns they get, 3.5% over 3 years. However, they did not realize that over a longer period of time, say 30 years, things would look very differently.
What is our objective? Our objective should be to ensure that when we reach aged 60, we are financially better off. Most people only look at short term, eg. can I make money in 1 year’s time? And this is one main reason why many people fall into scams, because most people are too impatient and want to get Rich Quick.
Most Get Rich Quick schemes turn out to be Scams. The sad fact is that it seems like people do not seem to be smarter over time. Charles Ponzi conned people about 100 years ago, now people are still falling into similar Ponzi scams, 100 years later.
Therefore, I strongly believe that if people can be taught to increase their level of Financial Literacy and financially knowledge, they will be able to retire comfortably. I myself only earn an average income of S$6,000 in the last 15 years, or total of S$1.08 million. (For your information, my starting pay in 1993 was only S$1,500). However, over the same time period, I managed to save, invest and accumulate S$1 million, excluding my house, by aged 39. Thus, I hope that by sharing my knowledge and experience, I can inspire more people that it is possible for an average middle class Singaporean to retire by age 40.
This year I planned to launch seminars and workshops to teach “How to Save, Invest and Accumulate Your First Million Dollars”, because I firmly believe that if I give people a fish, it can only fill them for one day, but if I “teach them how to fish”, they will never go hungry again.
Dennis Ng is an active contributor to the media, especially on My Paper and 95.8 FM Capital Radio. He is a qualified CFP, Accountant and ex-banker. He co-founded LEVERAGE HOLDINGS Pte Ltd, a leading loan consulting firm in Singapore. For more information, visit www.HousingLoanSG.com