21 July 2005

Perhaps Mr Wang Has Been Impulsive

Analytics88 earnestly claims that he did not send me hate mail. Very well. Mr Wang the Magnanimous shall give him the benefit of the doubt. And temporarily put away his Ridsect spray. The financial discussion shall continue. But first, a quick summary.

KiddyBoy posed this question, requesting Mr Wang's comments:
"I have a friend, just married and lives in a lovely but huge HDB flat. Just two of them. Price of flat stunned me, almost 300K. Friend tells me loan is for 30 years (no choice leh, he says), and by my quick calculation, total interest payment can buy a Subaru WRX (My dream car!) at today's prices."
Mr Wang pointed out by making prepayments from time to time, the term of the housing loan can be shortened and the aggregate amount of interest paid would be reduced:
"A 30-year housing loan need not actually be repaid over the full 30 years. Along the way, you can make prepayments. This means that if you have extra cash, you can prepay part of the loan ahead of time. Thus you can repay the full loan sooner than 30 years. By prepaying part of the principal loan amount, you also reduce the interest you have to pay each month."
(By the way, if you have a HDB loan, you can make prepayments as and when you like, and there is no prepayment fee or penalty). Lay is worried about future contingencies such as unemployment and medical emergencies:
"All is well if you have your job for life and your pay goes up in a straight line and you are healthy. However, my reasoning tells me that it is good to leave some flexibility to reschedule the loan when a shock (illness, retrenchment) occurs. What does Mr Wang and the other blog readers think?"
Mr Wang then talked about the importance of having emergency reserves:

"I agree with you that it is not safe to assume that you have your job for life; will steadily earn more and more as the years go by; and will remain healthy indefinitely etc.However, this actually means that you cannot seek to pay off your housing loan so aggressively.

For example, if each month you put as much money as you can towards repaying the loan, you shorten the life of the loan but you also make it impossible for yourself to build any emergency reserves. You can aim to repay a 30-year loan in 20 years, but if you stretch yourself too hard, then you are in deep trouble if, in Year 5 or 6, you become unemployed and you can't even meet next month's mortgage payment or even next month's water bill (because you never had any savings - you'd thrown all your money into repaying the housing loan as fast as possible).

That is why I prefer the prepayment strategy. You prepay as and when you have more than enough, and you only prepay the amount that you're comfortable with. For example, if you got a big bonus in December, then you can prepay in January using your bonus."

Analytics88 the Cockroach says that Mr Wang has "bad judgment", "stale analysis", should "watch his words", has made a "retarded reponse", is "obviously not the smartest pencil in the box", is "short-sighted and self-righteous", is a "chimp" and is "not in the same league" [with what, Mr Wang does not know. Intelligent cockroaches perhaps].

Anyway, Analytics88's alternative strategy is:
"One should use the prepayment funds and invest in instruments yielding 6%. That gives you a spread of 4% beating any prepayment options hands down."
Commenting on Analytics88 strategy, Singaporean said:
"There are no risk-free instruments that pays 6%. The closest to risk-free in Singapore is the Singapore Government Bonds, and the yields are barely 4%. Buy into US Treasuries, and you take on forex risks, and even then, you dont get 6% yield.

Even corporate bonds issued by LTA or HDB, dont pay you 6%, and you better be rich enough to fork out 100k a pop. And yet they are immensely popular. I wonder which morons who are so rich would subscribe to such bonds at 4.25% when 6% opportunities are everywhere.

Yes, you can do better than 2.5% with ease with cash. But 6% is unrealistic without taking on excessive risk. With CPF, with all the fees agent banks charge and government regulations, you'd be hard pressed to break-even, let alone profit.

So, enlighten us, Analytics88, where can we find an instrument that guarantees 6% returns at such a low risk that we can bet our house on it?

And what makes you think the HDB loan rates will stay forever at 2.5%? If you take a bank loan and property prices crash and send you into negative equity, will the bank force sell your property if you fail to top up with cash?"
With bated breath, Mr Wang awaits Analytics88's answer.

"That wasn't the best move, Mr Wang.
He's a cockroach, for cryin' out loud. I would've used the Ridsect. Or an old slipper.
Hell, pluck out the legs and feed him to the fishes."

6 comments:

analytics88 said...

Keep the records here. As I have mentioned, given my intellect and knowledge, I don't have to email you secretly. Besides, let all those who can read, come and judge on the basis of both our arguments.

I dislike you deleting the comments. it reeks of cowardice. Come and debate in the open.

I will be travelling over the next week. In the response to the final undelete comments, take a look at Shenton Global Advantage, small caps no sector focus.

You were very close, Gilbert. Don't force my hand. The axe almost swung the other way.
___________________________________
Ball.of.Yarn said...
i like your comment about the home you and mrs.wang built together.

I moved only recently, and that for the first time in my life too. as i made my way out of the iron gates for the last time, I felt the unbearable weight of sadness again. that was my home and a place that had seen me grow into the person I am today, and I had to give it up to someone else who looked at it with like a piece of property, something that could be haggled down like meat in a market.

nice philosophy indeed; better a small cosy home than a large, cold house.
7/19/2005 6:58 PM

Lay said...
Of course, I won't advocate selling/buying with such frequency such that the fees add up.

However, I also don't think maxing out duration and loan amount is a good idea, which is what PhD-colleague does not want to do anyway.

Agree with the prepayment thing. At next opportunity, will advise Friend about this possibility.

However, it boils down to the fact that it is better to work towards a debt-free life quickly and thus not worry about shocks (like retrenchment, illness) right?

Agree will ball.of.yarn -> what is the point of expensive flat if you have to work your ass off to pay off the loan?

Anyway, bringing in the issue of costs makes it very tempting to start crunching the numbers. Heh.

This is the one and only KiddyBoy!
7/19/2005 8:38 PM

schizophrenic said...
well, mr wang is absolutely right again!!! he missed out on the issue of inflation, though. i'm one of those victims who got caught in the hdb transfer market. not exactly me - it's my dad (but he is totally broke now, so my siblings and i have to service the loan for the next 15 years at $1000+/month in cash and that's for a 4-room unit only).

the methodology proposed by the phd colleague in the article is similar to that used by my father (except that it started more than 20 years ago in my dad's case). we've moved around a number of times and were caught by the inflation as singapore progressed - from 3-room (new, $15k in 1979) to 3.5-room ($54k in 1986) to 4-room ($85k in 1989) to 4-room (new, $98k in 1997) to 4'a'-room ($220k in 2002).

granted that the rate of inflation may not be as high as before, the phd colleague mentioned by kiddyboy is risking paying today's prices using today's money if he upgrades a couple of times in future. he would therefore be worse off compared with the scenario of paying yesteryear's loan using today's money.

of course, the phd colleague may be better off if future policies by the government cause a significant drop in property prices. however, he will not be disadvantaged if he purchased a large unit now using an extended loan period as long as he pays using cpf and the amount paid up is less than the selling price in future.
7/20/2005 10:16 AM

Mr Wang Says So said...
One thing to bear in mind is that you always need to have a roof over your head.

If you buy a property and live in it, don't get too excited when the market heats up and the market value of your flat increases. Even if you sell and make a profit, you still have to buy another place to live. And since you cannot be homeless for too long, you need to buy the new place around the same time, which means you are also buying in a rising market.

From a pure investment point of view, property actually has many disadvantages unless you're really very wealthy. You have to plonk a lot of money into a single asset and you can be locked in for a long time. Also, unless you're so rich that you can buy your property without borrowing anything from the bank, your investment is actually leveraged, and usually a lot. Which means that you're borrowing to invest. That's dangerous.
7/20/2005 11:12 AM

Lay said...
Let me frame the issue in a narrower way.

The question is thus asked, For a home purchase (ie. not investment), is it a good thing to max out the duration of the loan and the monthly instalment?

My answer is that it is not. All is well if you have your job for life and your pay goes up in a straight line and you are healthy. However, my reasoning tells me that it is good to leave some flexibility to reschedule the loan when a shock (illness, retrenchment) occurs. What does Mr Wang and the other blog readers think?
7/20/2005 1:29 PM

Mr Wang Says So said...
I agree with you that it is not safe to assume that you have your job for life; will steadily earn more and more as the years go by; and will remain healthy indefinitely etc.

However, this actually means that you cannot seek to pay off your housing loan so aggressively. For example, if each month you put as much money as you can towards repaying the loan, you shorten the life of the loan but you also make it impossible for yourself to build any emergency reserves.

You can aim to repay a 30-year loan in 20 years, but if you stretch yourself too hard, then you are in deep trouble if, in Year 5 or 6, you become unemployed and you can't even meet next month's mortgage payment or even next month's water bill (because you never had any savings - you'd thrown all your money into repaying the housing loan as fast as possible).

That is why I prefer the prepayment strategy. You prepay as and when you have more than enough, and you only prepay the amount that you're comfortable with. For example, if you got a big bonus in December, then you prepay in January using your bonus.
7/20/2005 2:46 PM

analytics88 said...
WRONG WRONG WRONG

Debt sometimes can be good. Where can you borrow 2% anywhere in the world. That got to be the lowest cost of capital ever.

One should use the prepayment funds and invest in instruments yielding 6%. That gives you a spread of 4% beating any prepayment options hands down.

WANG, you should stick with law and legal issues, I am watching you on your financial advice, it reeks of bad judgement and stale analysis.

You are not a professional in this area, I think you should watch your words.
7/20/2005 4:05 PM

Lay said...
okay, analytics88, what instruments are there that *guarantee* 6% yield?
7/20/2005 4:22 PM

Mr Wang Says So said...
*Yawn*

And you need to retake your PSLE maths.

Suppose you have an outstanding mortgage loan of $400,000 and you are paying interest at 2% p.a.

Then suppose you have $40,000 excess cash which you THINK you can invest in instruments to get about 6% p.a.

Firstly, note that 2% of $400,000 is a lot larger than 6% of $40,000.

Secondly, note that your 6% is not guaranteed. Investing always has risks. Your 6% could jolly well turn out to be -6%.

Thirdly, note in contrast that if you instead apply your $40,000 towards reducing your mortgage principal, you WILL definitely get a reduction in subsequent interest payments. Unlike the case of your investment, this reduction is GUARANTEED. The bank cannot chare you interest on what you don't owe it.

Furthermore the savings in interest payments is not just for this month, not just for next month -

but for every month of the rest of the life of your housing loan. That is, the next 15 or 20 years.

So once again - *yawn*.

If your strategy is so good, banks wouldn't be in the business of housing loans. Instead of lending to you, they would rather just take their own money and go invest directly in the wonderful 6%-guaranteed investments you mentioned.

There are other subtleties in my advice which you obviously missed. But more on this later.
7/20/2005 4:24 PM

analytics88 said...
I can't believe the retarded reponse that I have gotten. You are obviously not the smartest pencil in the box, Gilbert Koh. 6% is a conservative number - on a long term basis 20-25 years. Go and ask any private bankers. I don't mean the posb personal financial planners. You've got to be really stupid to be making -6% annualised over 20-25 years. This strategy is the very strategy banks/corporations use, you earn a spread on your cost of capital and return on investments. Some big i-banks (GS, ML, Lehman) don't do consumer financing, that's why, the spread margin is just too thin. Any that $% spread you earn is not for that one year but every year that your loan is in place. You know what, I'm probably wasting my time on a contract drafting, poetry writing lawyer who has never done multi-million investment analysis before, and probably cannot structure your way out of a paper bag. I can't believe you are so short-sighted and self righteous. You know what, go ahead and continue to pat yourself on the back over the fact that you can afford a private condo. You are not even in the same league to begin with, and you dare to give out investment advice? Sheesh...
7/20/2005 6:05 PM

Mr Wang Says So said...
Sigh .... Okay, lah, Mr Wang will be kind and patient and educate you. I frequently do that for my investment bankers anyway. (And don't even talk to me about private bankers. I haven't met a smart one yet. Most of them don't even understand half of what they say).

Of course, 6% is conservative over 20 - 25 years. However, unless you are VERY wealthy from Day One, you DON'T actually have a lot of money from Day One, to Day 9125.

Let's say a Singaporean couple just got married. They wish to buy a $750,000 condo apartment. Then let's say they also happen to have $750,000 spare cash sitting in their bank account, just waiting to be used.

Now, in this scenario, your idea POSSIBLY makes sense. They can take a big 25-year housing loan, and pay 2% on the mortgage. Then they can take their $750,000 and invest, and aim for 6% over the next 25 years, on their $750,000.

AND as you say, IF they hit their 6% target, THEN they can then make the spread of 4%.

However, being rather foolish, you forget one thing. The average Singaporean newly wed couple does NOT have $750,000 spare cash on Day One. They may have very little savings after paying for their wedding, honeymoon, renovation, furniture etc.

Thus your scenario is quite unrealistic. A much more likely scenario is that your average Singapore couple has perhaps $500 or $1000 left to invest, each month.

It is no longer a question of whether your $750,000 investments can outpace, over 25 years, the bank's interest rate of 2% on $750,000, over 25 years.

It is rather a question of whether your investments,

at a humble $500 over 25 years;

and another humble $500 over 24 years 11 months;

and another humble $500 over 24 years 10 months,

etc etc ....

can beat 2% on your very big loan amount ($750,000 amortising very, very slowly over 25 years).

Also you are quite an idiot to compare yourself to an investment bank. An individual's costs of funding cannot compare to an investment bank's cost of funding. If you want to draw an analogy between (1) an individual investing on his own, and (2) the bank's proprietary traders making investments, then you are also quite silly. Most Singaporeans are not traders working in a bank. They are teachers, IT programmers, engineers, toilet cleaners, electricians, HR managers etc. They do not sit around all day thinking about how to invest their money.

Whereas my example is much more valid than yours. Simply because it does not compare an individual to a bank (which is quite ridiculous unless perhaps your name is Warren Buffett or Bill Gates). My example merely compares two possible methods whereby a bank can make money. And I am saying that if your method is so simple, banks wouldn't be extending housing loans. They would still collect deposits, yes, so that they can invest in your 6% guaranteed investments, but they wouldn't extend housing loans. Why would they? They would rather plonk their money directly into those investments.

Of course some banks do not do housing loans. Some electronic manufacturers make TVs, some do not. Some insurers sell marine insurance, some do not. Some aircraft manufacturers make fighter jets, some do not. And some banks prefer to trade OTC derivatives; or arrange bond issuances; or advise on mergers and acquisitions. What is your point?

Oh, I forgot. You simply do not have one, poor boy.

Finally, you forget how this whole discussion came about. KiddyBoy is concerned about the aggregate amount of interest he has to pay over the life of a housing loan. I am merely pointing out to him the possibility of making prepayments.

The nice thing about prepayments is that the timing is up to you, and the amount is also within your control. If you have some excess cash, you can prepay, if you like, If you don't like the idea, no one is forcing you. You can invest elsewhere (and who knows, maybe you'll even get your 6%). At certain times, you may not see anything you feel comfortable about investing in - at those times, you would feel more inclined to prepay.

There. You lucky boy. YOu just got a couple of free lessons from Wang Zhen.
7/20/2005 7:10 PM

analytics88 said...
My point of bringing up the i-bank is from your point of "If your strategy is so good, banks wouldn't be in the business of housing loans. Instead of lending to you, they would rather just take their own money and go invest directly in the wonderful 6%-guaranteed investments you mentioned."

You know what, the more you analyse the more I see your weakness and your failure to understand simple finance concepts, it would be good to leave the comments here as such, unless you've got no balls and delete the comments like how you deleted your last "legal mumbo jumbo" blogs from the last A-Star fiasco. C'mon stick to your guns, or else just apologise and say you've made the wrong analysis, what's so difficult?

I'm sure there will be pple that can see the arguements from both sides and, man, I just get a kick from seeing your arguments crumble and plus the name-calling. Just like a drowning man clutching at straws.

You know what, Gilbert Koh... Stick to your contract drafting... Or you can write me another long analysis full of errors.

Man, I am begining to get addicted to this. By the way, it absolutely cracks my colleagues up when I say to them " I live in HDB but I can afford a private condo" You should say that to your IB clients. I'm sure it will brighten up their day.

And it is precisely that laymen might be reading this that I want to point out your prepayment opioion is flawed.

I guessed some "self-proclaim gurus" don't like to be corrected huh.
7/20/2005 7:39 PM

Mr Wang Says So said...
You might be surprised. I love to be proven wrong - then I can learn something. Unfortunately, from you so far, I'm learning nothing.

All you seem to be saying is that one shouldn't prepay a housing loan because one can invest the money elsewhere and do better.

But you can't even answer Lay's simple question. Muahaahaa.
7/20/2005 7:52 PM

Mr Wang Says So said...
But if you are prepared to drop the name-calling, then so will I. I was thinking of doing a prepayment myself on my own HDB loan with some of my excess CPF OA funds. If you can tell me something useful, I would be grateful.

My CPF OA is currently earning interest at 2.5%, My HDB loan is accruing interest at 2.6%. Would you like to tell how to earn a guaranteed or projected 6% on my CPF OA?
7/20/2005 7:58 PM

singaporean said...

Wahahahhahahahah

DBS Shenton Global Advantage? You might as well say Berkshire Hathaway, far longer history, far better track record, far bigger fund.

Every fund manager, including DBSAM and Warren Buffett will tell you this:

"Past performance is no guarantee of future results."

You cherry-pick one best performing fund, and you suggest everybody to maximise their home loans to bet on this?

Hindsight is 6/6, and people fail to see the risks until shit happens.

Just ask the holders of DBS Rainbow Equity-Linked deposit, the one with CAO as one of the linked equity.

Or the genuises at LTCM.

Analytics88, why dont you put your REAL NAME down so that we can hold you to your words in a few years time?

One anonymous coward to another anonymous coward:

we should be the last people to accuse anybody of cowardice.

analytics88 said...

Yeah Sure. Why don't you buy the Berkshire Hathaway with your CPF OA. Don't be retarded, or has that become your 2nd nature? Why don't you put your real name then, dafy. It wouldn't happen to be also Gilbert right? Your time horizon is wrong, we are talking abt 20-25 years, why don't you do your homework before opening your mouth. It reeks of ignorance.

The fund was a direct response to Gilbert's last question at 7/21/2005 10:47 PM. Who the hell is asking "everybody to maximise their home loans to bet on this"

In every investment, there is risk and rewards. It is up to the individual to make the move. If you read my comments carefully I said "take a look", ie. study carefully, consider that fund.

It is, however, unqualified recommendation because I do not know Gilbert's risk profile.

You know what, intellect and capability is probably the difference between you and me.

Why don't you take Gilbert's advice and pre-pay your HDB loan. I will like to see you die a pauper in your HDB flat.

The purpose of me pasting the comments is for ppl to judge and think, with regards to the pre-payment issue. You obviously lack the capability to do the latter.

I can tell you honestly, 6% annualised over 20-35 years is nothing among investment professionals.

If you are so smart, what went wrong at LTCM? Since you are so dumb, I might as well tell you the answer. It's the leverage that killed them, you dumbass.

DBS Rainbow Equity-Linked deposit, only idiots would buy into such a narrowly focused fund.

Man, sometimes, I wonder the pple that are behind the screen, You quote all these headline stories, how much of the details do you really know?

There are 3 kinds of pple in the world, some that make things happen, others watch things happened and others wondered what happened.

As mentioned earlier, I will be travelling next week. I don't get paid writing comments on blogs.

The more I write, the more I feel the disparity between me and you.

Mr Wang Says So said...

WaHAHaaahhaaa!

Okay lah, okay lah, Mr Analytics88, you're very, very clever, so much cleverer than Mr Wang. Now please go now and put ALL your money into DBS Shenton Global, for the next 25 years. Just remember that:

past performance is no guarantee of future performance;

DBSAM's equities "star manager" just quit a few months ago;

just like the DBSAM equities "star manager" before him suddenly & unexpectedly quit in 2004;

(they can't even keep their fixed income staff - HC Lim from the Fixed Income side also just quit);

don't forget that over 25 years, any "star managers" you put your faith into are also going to come and go and join and leave your favourite funds;

do take the time to think about allocation across different asset classes (equities; bonds; REITs; cash; MM instruments, you know?);

educate yourself on how and why most actively-managed funds lose out to a no-frills, fuss-free index fund over the middle to long term;

recall that just as there will be periods when growth beats value; there will also be periods when value beats growth;

do watch out for per-transaction fees if you use an agent bank to invest your CPF OA in your Shenton Global;

note that currently the fund isn't very big, and that this raises concerns about the expense ratio;

and do read this interesting book - Fooled By Randomness , the next time you try to pick a winning fund, ok?

Mr Wang wishes you all the best!

singaporean said...

Mr Analytics88,

in your infinite wisdom, you failed to notice Shenton Global Advantage is not a CPF approved fund either.

And can you define leverage to me again? Taking money meant for your home loan to fund a risky investment is not leverage?

Leverage, however you define it, is not the reason why LTCM. LTCM failed because they ignored the systematic risks in their trading as being too unlikely, too six sigma. Like you perhaps, except you havent won any Nobel Prize yet, have you?

I am an anoymous coward, and so are you, Analytics88. So until you prove yourself to be better than an anonymous coward, you have no right to accuse anybody of cowardice.

singaporean said...

Come to think of it, I do have an idea on how to make the excess CPF OA funds work harder, almost riskless, instead of prepayment:

Transfer them to the SA. The SA pays 4% interest, and when shit hits the fan, the SA funds can be used to pay for the home loan. If the home loan rate moves, so will the SA rate. How foolproof is that? An alternative is your Medisave account which also pays 4%.

There are of course, some opportunity costs involved if you are to buy another property or if you have children needing a tuition fee loan in local university.

If I have to try my luck with risky equities (with just 35% of my OA), I would rather trust myself. Afterall, I bought SPC at $2 last year. I am my own star manager. ;)