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Saturday, 21 January 2017

Why I chose a 30 year bank loan over a shorter one



OK, this post no short cut.

For the proper perspective and context, you really have to read this old post:


My aim is to have my cake and eat it – a 3 room HDB flat for free!



As you can see, although I can pay 100% of HDB resale flat in full using my CPF OA, I chose to take out the longest 30 year bank loan.

What? And pay the bank 30 years of interests for nothing???

That's what the "save more" would spot first.

These are the same people who would switch their savings accounts and credit cards every 1-2 years just to hop on the latest bank promotions - even though they knew the banks are making them jump through hoops just to earn that extra 1% in interests...

The same ones who are having fits of ecstasy as they do their voluntary CPF top-ups or CPF transfers from OA to SA. 

They see the world in 1 to 2% increments.

They pray to the God of Compounding.



Needless to say, I belong to the "earn more" camp. As a hybrid investor/trader with aspirations to become a full fledged speculator one day, I am turned on by words like: carry, margin, leverage, and all things they warned you never to try.

During my corporate days, I quickly learned the less I do and the more I talked, the more money I made.

If I can leverage on Other People's Talents (OPT), surely I can do the same with Other People's Money (OPM)?

I danced with the Demon of Debt; I do the leading of course!



Today's post is not about the nuts and bolts or dollars and cents of financial literacy.

We can debate until we all turn into smurfs (blue), and we still can't agree. Which is the right answer all along.

We all are different.

One man's meat is another man's poison.

You are risk averse; I am gambler. We choose the vehicle that suits us best!



But there's one non-financial aspect of decision making that eludes most "financially literate" people.

Vagary.

You may have done your sums to take on a 10 year bank loan, calculating how much extra bank interests you have saved by having a shorter bank loan, and once the bank loan is fully paid, the extra CPF interests you would be compounding from the 10th year forward...

What happens when you get retrenched and your cash investments have lost money?

Of course you can approach your bank to consolidate and reschedule your bank payments.

But you would be going in cap-in-hand.

To some people, once their self-beliefs (ego, pride, face; etc) have been shaken, they never fully recover from this fall...


By taking on a 30 year maxed-out duration loan, it may not make financial sense to some, but it was the most "conservative stance" psychologically speaking to me. 

I know if my investments made money, I can easily repay my bank loan anytime once the early payment penalty is over.

For my case, because of SERS, I've be repaying my 30 year bank loan 11 years early in 4 years' time.

I am approaching my bank in a position of strength.



The funny thing about blogging is sometimes we do meet kindred spirits. The young mother
who wants to start her own thing would understand.

Its never about money or sticking the middle finger to our bosses. (If you can't manage difficult bosses, how can you manage difficult customers?)

Sometimes the path that "appear" dangerous to others could be the "safest" ones for us.

Especially for those of us who never want to go cap-in-hand...




36 comments:

  1. The power of financial independence is the option to show middle finger to bosses, customers or peers. No?

    ReplyDelete
    Replies
    1. CW,

      I think people who think like that may have misunderstood the "fxxk you" moment.

      This F U moment is meant for people who tried to screw with you - like that Financial Snake-oil more interested to hit his monthly KPIs than looking out for your best interest.

      Financial independence is not an "entitlement" so we can "bully" and "put down" people at lower social status than us.

      Having money does not give us the right to shout and abuse the people who clears our trays at the food courts, serve us at department stores, or are doing their best at clinics and hospitals.

      I am glad (although a bit sad at the same time) many hospitals and retail outlets have signs telling customers although they treat customers as "king", the moment customers start abusing their service staff, the F U moment will apply.


      "option to show middle finger to bosses, customers or peers. No?"

      Bosses and customers I can empathise. But peers?

      One simple word reveals so much...



      Delete
    2. There are also nasty peers who backstab us and telling bosses behind us. Even we are aware of who are they we may not dare to confront them outright. Corporate world with bell curve you think no nasty peers meh when some want to Cheong at all costs.

      Delete
    3. CW,

      The motivation was there all along. The spark or catalyst came from Rich Dad Poor Dad.

      Hope you are feeling more happy mixing with us :)

      Delete
    4. i agree with CW here because some of us are just make to talk "straight" and also not interested in office politics.

      i had shared the most i could survive working in a place was about 5 years on the average.

      Because office politics will see to that.

      Delete
    5. temperament,

      LOL!

      If we both hairstylists, you'll have a harder time having regulars ;)

      You just go, "How you want your hair this time?"

      While I'll go, "Chen tai tai!!! So long never come? Forget me is it? No heart you one... Wait! Wow! Your complexion so radiant? What did you do? New yoga instructor is it? Details! And don't you dare leave anything out!"


      Delete
    6. You always can out-talk anybody if you want to lol.

      The example you give is "clean politics" i suppose.

      That's O. K., there are still some straight talking customers left for people like us too.

      Ha! Ha!

      Delete
    7. Lol!

      The BOSS may not be happy with people like us though no fault of yours.

      Delete
    8. temperament,

      Just trying to lighten-up the mood mah ;)

      What can I say?

      I'm not a bleeding heart. And I'm not going to offer you a hug...






      Delete
    9. No hug needed from anyone lah.

      Remember, i survived working for people until 53.

      i actually relise some people better off working for themselves even as a hawker or even taxi driver much earlier then age 53.

      In fact i had been a part time to full time Taxi driver for a short period of my life.

      Even then i told LTA to fly kite because of too much complaints received by them from customers.
      Ha! Ha!

      That's may be the stimulant for me to jump into the market at the age of 40 lol.

      Now i am considered as an Eccentric by many people.

      One who can not fit in to the crowd most of the time.

      Actually i think i am one since young.

      i am a "Touch Me not" for most people.

      i really don't care if you can't accept me as i am.

      i am what you see not what you think lol!

      Delete
    10. temperament,

      We are what we are.


      I did say we have the most "interesting" characters in this watering-hole, didn't I?

      You are welcomed here :)

      Delete
  2. Hi SMol,

    U loss your weekend job? LOL.

    When u got money, do anything as long as not upright stupid, happy can already.

    When u got little money, u just fancy doing all the stunts. And get the kick when u see "progress"

    Quarreling on the snail feelers

    ReplyDelete
    Replies
    1. Sillyinvestor,

      You noticed!

      Took 2 days MC due to bad cough. Coughing my lungs out!


      Just having fun arguing with the STOP sign ;)

      Delete
    2. Oh no, u take care. Many sicked.

      Jio u coffee once of these days. Able to catch my breath and chew my food these days.

      Delete
    3. Sillyinvestor,

      I know. Caught it from another promoter last weekend...

      I weak.

      Will jio you out after the 15 days of CNY :)



      Delete
  3. Hi SMOL,

    I also took the min downpayment, and max loans duration for my housing. The idea is that if my monthly mortgage is low, I can tahan for a longer period of time without a job. The problem is not that I can't pay, but i might have problems paying in the short run due to cashflow issues.

    Years down the road when my situation is improved, I started downpaying like crazy. Position of strength, like you said :)

    ReplyDelete
    Replies
    1. LP,

      Wow! You even more gung ho than me!

      I took the plain vanilla 20% down payment route.

      Yes, we were thinking alone the same wavelength ;)

      Who knew being "aggressive" is being "defensive"?

      LOL!


      On the flip side, when it comes to CPF, even though I'm at age 50 years young, I would not do voluntary contributions to CPF even though I can get it all back in 5 years' time.

      What if the market has a 50% Big Singapore Sale within these 5 years?

      I find the price for safe guaranteed CPF returns too expensive for my taste!

      Delete
    2. Hi,

      I am an avid reader of your blog and you do have the knack to create paradigm shift in my mindset. In this small chat, I will be discussing about CPF Special Account

      I used to like CPF special account a lot but after reading your blog, I believe in moderation and agree with your points on currency, politics in 20 years etc. By the way, if there is a 50% big Singapore Sale with these 5 years, I can invest anything above 40k in balanced fund unit trusts. Balanced funds only as special account only allows balanced funds. So while I am waiting for the big Singapore sales, I get tax rebate and 4% interest.

      Delete
    3. Welcome blanc fable (you wine drinker you)!

      Everything in moderation indeed.

      Especially with wine, women, and song!


      Cash in hand has the least restrictions - we can do whatever we like with it - don't have to ask permission from anyone.

      Money in CPF OA has more restrictions as big daddy treats us as little children... Individual stocks not safe you hear? So I limit you to... Gold no yield so I limit you to... Unit trusts and ILPs you can have as many as you want. What? I where got "support" these industries? You dun anyhow say! Wait I ask you to drink kopi...

      Money in CPF SA may give us a "generous" 4% yield but big daddy now treating us like idiots. Balanced funds by its very nature would include bonds and equities. This may limit the downside risks; but it also limit the upside gains... No free lunch!

      Its like going to MacDonald's to order just fries but they insist you must buy the set meal instead. Terms and conditions.

      That's why corporations would rather offer higher yielding corporate bonds to retail investors than to accept lower interest rates from bank loans with all the covenants attached. Such a hassle! Tie hand; tie leg.


      The $64,000 question what are we?

      Are we investors? Or are we savers?

      Do I trust my investing acumen? Or maybe I am my own worst enemy?

      If I seek financial freedom, do I want more chains and balls tied to my hands and legs?

      But if I am seeking wealth preservation, then balanced is good! Or those permanent portfolios and Risk Parity stuffs ;)


      At the end of the day, we have to get our answers from WITHIN, not WITHOUT ;)


      Delete
  4. Had to Google what "vagary" means lol. So yeah, I basically went for 30-yr because kiasi, in case of vagary. Sitting here twiddling my thumbs for the past five years, but no big Singapore sale! Small sale, got lah.

    ReplyDelete
    Replies
    1. Kevin,

      LOL!

      Its usually better known in its plural form as in The Vagaries of Life!


      It can be trying for those who have not gone through a bull/bear cycle personally. I've gone through two - Nasdaq crash of 2000 and Lehman crisis of 2008.

      I don't know WHEN, but I know it will come.

      Meanwhile I just wait. And stay liquid ;)


      Delete
  5. At SA account of 40K, i assume Blanc Fable is in late 20s-30s.

    For 20s-30s, what is the average tax savings one would save?
    7% to 11.5% assuming good earners of net 80-120K pa

    For 11.5% tax savings, if one can achieve 5.5% ROI for the net balance after tax, it takes 9 years to break even to 4% ROI of SA. If one takes a long term view of investment, it is achievable to beat the RA 4%. Does it make sense to top up own CPF for tax saving? or keep as emergency cash/investment war chest?

    ReplyDelete
  6. correction, Blanc Fable refers to invest above 40k in balanced fund unit trusts.
    Mine example is referring to one at 20s-30s so may not be applicable to Blanc Fable.

    ReplyDelete
    Replies
    1. Hi AT-AT,

      I am 32 this year but I used to cash top up and transfer OA to SA to get 4% or tax rebates of 7% or 11%. The main reason is that I am not confident to hit 4% year on year. SMOL has hit the point previously on silly investor's scary 4% compounded retunrscomment.

      As mentioned, SMOL has paradigm shift my thoughts and I truly appreciate it. To reduce damage done on CPF OA to SA transfer, I said moderation. Oh well...

      I was trying to sound out his thoughts on balanced funds after 40k in SA but I have the feeling that SMOL feels that having cash is a much better option. However, I have a feeling when market really crashes, bonds can appreciate quite a fair bit too with a mix of high yield 8% + capital appreciation. Another feeble attempt to reduce damage....

      Still, he is more right that full equity exposure is better. On whether you want to top up to reduce tax, one must be able to find instruments to outperform that 4% and not being tied up forever. If you cant, you will find Special Account very attractive!

      Delete
    2. blanc fable,

      Remember, I am speaking from a perspective of a FULL TIME investor/trader.

      Liquidity or cash flow is my lifeblood ;)


      You are right on balanced funds.

      Market crash, your bond part will make money, but those gains will be offset by losses in your equities part ;)

      Vice versa when the market recovers and you cry knowing all those equity sexy gains are now eaten up by bond loses :(

      After fees, what do you know? Maybe leaving CPF SA untouched at 4% maybe a better move all along!?

      Delete
    3. Let our own track records guide us.

      The majority of retail "investors" would have preferred NOT using their CPF to invest knowing what they know now. After 20 years of buy and hope, still in the red...

      Moderation is right - until you have discovered for certain whether you are a money making or money losing investor.

      Then we go all in with conviction ;)

      Delete
    4. Always use cash 1st for the stock market.

      Then OA for CPFIS. (May use for IPO)

      Never want to touch SA if possible.

      Paid my 1st 3-room HDB with 5 year loan from HDB.

      Paid 2nd HDB's maisonnette with OA fully.

      Never like to be in debt unnecessary.

      Perhaps i never need to make full use of liquidity because basically i am not a short term trader.

      i think it's funny when you think not using OPM is an opportunity cost in your trading or investment endeavour;

      But i think not having to paying interest for loan for 30 years is like i saving that amount of money "already".

      Another words i always think if i can afford, someone pays me is best rather i pay someone.

      But life is not so rosy most of the times for us.

      Delete
    5. Hi Blanc Fable,

      Thanks for sharing. When i was 32 years old, even with some years of investment experience, i was losing money!! You are still young, take your time to discover what works for you.

      Delete
    6. temperament,

      I'm glad you've chimed in ;)

      Always good to get the opposite of the story as counter-balance.

      You are the classic opposite of me in this example of debt.

      You abhor debt.

      If no choice has to take up a loan, you can't wait to pay it off ASAP to sleep better at night.

      You probably feel the interests paid to banks painful like hell as in taxes. LOL!

      There was a time when my margin account needed to pay 6% interest. When I made a 15% return on my trade, I don't focus on this extra 6% I have to pay, I focus on the extra 9% I've made ;)

      That's why the cheapest broker or cheapest low cost ETF or unit trusts don't excite me. I'm always on the look-out for the 25% of those unit trust managers that BEAT the index!

      I guess we are wired differently ;)

      Hence we do what we do! And its OK :)



      No, I don't see not using OPM as an opportunity cost.

      I'm not afraid to PAY for PERFORMANCE is the more precise description.


      Voluntarily giving up access to our funds as and when we need it, now that's what I call an OPPORTUNITY COST ;)

      Delete
  7. Hi you,
    I do voluntary contributions to cpf just Coz I'm puking blood as I pay tax.

    Darn mrt.

    ReplyDelete
    Replies
    1. Voluntary top up to all three CPF accounts or just MA?

      Delete
    2. pf,

      The tool for tax savings is SRS. That's designed by high wage earners for high wage earners.

      Or start a business as in Rich Dad Poor Dad. That's how Warren Buffet pays less tax than his secretary ;)


      I know. Who likes to pay taxes?


      I thought I'm the cryptic one. What has mrt got to do with taxes or CPF top-ups???

      Delete
  8. Hi SMOL,

    Take care and get well soon!

    Interesting topic and interesting comments.

    I've transferred a small sum from OA to SA before just to try-try. After that, I left everything untouched. Don't wanna kay zhua and self-sabo myself by taking actions in which I do not know the full ramifications of.

    It will be more interesting if there's an OA to MA transfer. As a sickly person, I need all the medical "defenses" I can get.

    ReplyDelete
    Replies
    1. Unintelligent Nerd,

      Thanks!


      The commenters at this watering-hole are getting more and more intellectually stimulating ;)

      In your line of work, its called do a sample test first. Mine would be let's do a pilot run. In the military, we say send in the recce party first ;)

      Its always better to test it out ourselves first - Trust but Verify :)


      Medical "defences" are diet and exercise.

      And the rest we leave it to the big guy upstairs if we are religious, or Mother Nature if we are atheists.




      Delete
  9. Hi Smol

    That's where prevention is better than cure in Medical"defences"

    In summary, people need to know what they are doing with loans and how they can "utilize" it based on their situations.

    It's better to clear the debt if they can't "play" the debt.
    "Playing" is another level of game.Huhu.

    ReplyDelete
    Replies
    1. Small Time Investor,

      Although we shouldn't get trapped by words, I often use this technique of poking - are you investor or saver - to force the reader to face their reflections in the mirror.

      Are we in the wealth accumulation or wealth preservation mode?

      And most importantly of all as you have pointed out, WHO we are is the key.

      Are we a one trick pony or do we have access to all the "toys" available and we know how to "play" them all?




      Delete

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