A couple recently wanted to hear my thoughts about various investment/financial options presented by a financial advisor (FA). I was initially intrigued because I wasn’t sure whether I’m best placed to provide any such advice, particularly since I don’t know their financial health fully, even if I may be more well-versed about the risks involved in different investment products. But to cut a long story short, I set aside some time to hear them out anyway.
Here’s a quick rundown of their situation.
A married couple, currently M50+/F40+ has three kids. M50+ main source of income is a fixed salary from their own business, while also holding onto other side jobs. F40+ is a property agent.
They own a landed house for own-stay entirely under M50+ only. It was bought about 3 years ago with a remaining mortgage of ~$1.7M under a fixed rate home loan.
[Plan A] Their FA recently suggested to M50+ suggested refinancing their property with a financial institution based on the likely current value of ~$2.3M to unlock ~$600K in cash, which can be used to buy bonds that can then pay out coupons to cover the mortgage payment.
However, being a property agent, [Plan B] F40+ was more keen on using ~$600K for a second property (likely >~$1M) for rental income instead.
They were unsure of which plan might be more suitable for them.
As it was a casual chat, these were the only numbers that came up during the conversation. Of course, more information would lead to a more informed decision, but with just this to work with, I presented them with some considerations to ponder over.
1. Investment Objectives and Life Goals
Before jumping straight into evaluating the two plans, I opened with asking them to think about what they want to achieve from their overall investment plans. Assuming they have their existing needs all accounted for, the next question is how either plan with advance their retirement and life goals in a manner of their liking. No point earning more money if it incurs a lot more risk or work that they are not prepared to take on at their age.
2. Refinancing with a financial institution vs. traditional home equity loan from a bank
Specific to plan A, I asked them to find out what the loan amount, loan tenure and interest rate they would get from the latter and whether these were really much worse terms compared to the 7% interest rate they would get from the financial institution. Indeed, because of M50+’s age, the loan amount may not be large enough for them to execute their plan, thus justifying the need to go with a financial institution. But that’s where finding out more information is important.
3. Bond Risks
The numbers in the plan presented by FA might actually work out. However, while bonds are indeed safer than equities, there are still risks involved. Without knowing more about these bonds, I can only present them with the following thoughts:
– If these are fixed bonds, then this plan can hold out until the bond tenures, and there is reinvestment risk in finding another suitable bond that can provide the same level of interest rate subsequently.
– If these are floating bonds, then there is some interest rate risk as their rates will fluctuate and may also fall below the the amount needed to cover the mortgage payments originally planned.
– Moreover, contrary to popular belief, bonds do not always hold their value, depending on the credit/default risk of the bond issuer and the market environment.
4. Capitalising on the Singaporean right to own a Singaporean residential property
Because of Singapore’s resilience residential property market, the government has been increasing the ABSD in recent years. There is nothing stopping the government from tightening this lever further as a cooling measure if the market becomes too hot again. For that reason, there is now an inherent market value attached to every Singaporean name that does not yet own a residential property, assuming that one continues to believe in the thesis that Singapore remains a viable investment location with its land value continuing to increase in the long run. Certainly, many foreigners continue to think so. If we are able, we should capitalise on it where we can.
5. Investment Property Risks and Costs
That said, there are also risks and additional costs involved with an investment property:
– Being a landlord has other costs such as paying agent fees and also higher property tax for non-owner occupied properties (starting from 12%).
– Rental market is also currently cooling and there will be some buffer time required to do up a place nicely and make it suitable for renting.
– There are also other costs such as MCST to contend with in order to make the rental property cashflow equation (rental + CPF OA contribution > mortgage payment + MCST + property taxes) work. Finding a suitable rental property with good tenancy agreement terms and an equally good tenant is key to avoiding having to constantly top-up with cash just to stay afloat.
I eventually shared that my own preference is towards Plan B, but that’s also because it’s somewhat similar to what we have been planning for all along and thus where our natural bias lies. Again, I want to emphasise that there’s no correct answer and it eventually boils down to one’s own financial situation, risk appetite and investment goals.
What other considerations would you present to the couple?
Making Cents 