The Simplified Resource For Investing and Personal Finance

A reader commented that interest rates were at the historical low and that the only way is up. That i totally agree. What i am unsure of is just when. When interest rate increases, price of bonds will go down, especially so for bonds without maturity, a..k.a perpertuals like Genting. Looking at the 12 month Sibor from 1987 - 2012, the highest it has reached is 7.75% and the lowest it ever reached is right now, 0.59%.

Genting perpetual was offered at $1 par value with 5.125% coupon at the time when the 12 month Sibor was about 0.59%. This implies that the market is willing to take on the risk of holding the perpetual with an additional interest rate spread of 4.535% ( 5.125%-0.59%) over the 12 month sibor.

Assuming the market expects this spread of 4.535% forever and we keep it as constant. ( Please note that this spread changes based on the market perception of Genting's risk. Obviously, MAS is causing some negative perception!) Below is the worst case price one can expect given the different 12 month sibor rates.

Yield = 4.535% + 12-month Sibor
Genting Perpetual Price = 5.125% divided by Yield

The questions now are:

When do you think interest rates will rise?

What other investment classes available to retail investors will not be affected by changes in interest rate?

Do you think property (which is leveraged by the way) will also be affected by interest rates or not?

How about equities(Shares)? Will it be affected by interest rate too?

If a severe market crash like Lehman occurs again, which will fall more, Genting Perp or shares in general?

I feel that investing is not only about the possbilities, but also the probabilities. Given the severity of the recession in Europe and the US, how high are the probability of them raising interest rates? Read the news and realise that many countries surrounding us have also been cutting interest rates, like Australia, India, Brazil,Morocco e.t.c. Sure inflation is a concern, but which is a bigger evil, unemployment or inflation?

I for one am preparing ( and hoping) for a Lehman-like crash. If it occurs, i am pretty sure that my Genting Perps will still fall but definitely not as much as shares.

Having said the above, a sharp rise in interest rates to 7.75% is still possible. Thats why keep it as a small percentage of your portfolio.

BTW, the issue i have with MAS is that there are many much more risky ,complicated and non-transparent investments out there compared with perpetuals! Regulate those first before regulating perpetuals! Come on!

I ,being a small fry, have an investment in Genting Perpetual 5.125% retail which i bought during IPO for diversification. It's only takes up about 5% of my investible assets, excluding property. Now that you know that i am vested,i want to say that i totally do not agree with MAS being alarmed by people buying perpetual bonds. By being alarmed and placing restrictions on these kind of investments, it will simply reduce investment alternatives and push retail investors into more exotic and more risky products.

I feel that for retail investors who do not know how to invest, perpetual bonds offer a relatively safe store of value, with Genting 5.125% matching inflation. The risk of perpetuals are as follows: Genting going bankkrupt being the worst case scenario or interest rate rising, making the price of Genting lower.

Let's look at the worst case scenario, Genting going bankrupt. Holding the perpetuals is still safer than holding the shares as pertpetual holders are paid first from the proceeds of any sale of Genting's assets.

Let's look at the risk of interest rate rising and the price of Genting getting lower. How low can it get? Can you forsee it dropping more than 20%? How about Genting Shares,can you forsee it dropping more than 20%? In fact, the longer one holds Genting perpetuals, the less risky it becomes as it's accumulated coupons would have reduced the invested outlay by 5.125% every year, and raising by 6.125% in 2022. How much dividends does Genting Shares give?

When i, a small fry retail investor, bought the perpetuals, i did it to hold it to provide me an income after my retirement or sell it when QE3 is announced and funnel it into shares. It was crystal(Internally Flawlessly) clear to me that i can forget about any meaningful upside capital appreciation. The bullshit about it being a perpetual and the company never going to redeem it is irrelevant. I knew i could sell it in the open market to get back my principal, and true enough it was hovering at 1.012-1.011 in the open market, till MAS came up with restrictions and it fell to 1-1.002, still above IPO price.I also took into consideration Ben Bernake's (US Fed) comments about interest rates staying low till at least 2014 when i bought it.

The announment above, was the last straw that broke the camels's back for me. SRS not being able to buy Genting Perp but allowed to buy shares?????????Huh! My gosh! The longer one holds the perpetual bonds, the safer it is and now SRS, which is for retirement purposes, is not allowed to be used to Genting Perp? Some people do need to wake up.

Having said that, perps is just for diversification. Bonds having maturity is better than perps. Keep perps or bonds to a small percentage of your assets as a store of value only. Market looks like its falling,look at volume and prepare for some firing at shares!

I was sent an Amortisation Tabe for Progressive Payment for a certain new development from a property agent. He is wasting his time as i told him politely i am not interested in property now as i expect it to go down. I am definitely not buying even after stamp duty rebates, furniture vouchers, special discount here and there, extended warranty and prices magically reducing by some weird way of calculation(hmm did i even hear a renovation rebate, valentines discount..) Setting ridiculously high asking prices and then reducing it is an old marketing trick.

However way i see it, i am increasingly more bearish on the property market. Let us look at the Amortisation Table sent by this agent who seems so persistant, i have to give it to him to at least read his emails.

The purchase price is $1,500,435 after all the discounts,30 years repayment, 80% loan with progressive payment till TOP. During the first few years before TOP, the buyer is charged at a 3-month Sibor (about 0.4319%).
During these first few years before TOP, the buyers have to pay as low as $444 monthly, increasing steadily every 4 months to $1816 monthly till TOP. After TOP, it immediately jumps to $3029.WOW!!. This will be a rude shock and bear in mind all these numbers are based on only 3 month Sibor,without addition of a board rate. It is not 1+3month sibor. The calculation is just based on 3 month sibor which is given to uncompleted properties.

From TOP+1 year to TOP+2 year, the interest rate is 1.75%.(Will it be so low!!This is after 2015!)The monthly repayment is $4430!Its slowly ballooning this cash drain!.

From TOP+2 year t TOP+3 year, the interest rate is 2%.The monthly repayment is now $4565.

From TOP+3 year to TOP+4 year, the interest is 2.5%, The monthly repayment is now $4831

From TOP+3 year to TOP+5 , the interest is 3%.(This is long term average rate i feel but it has spiked up to 6% before.) The monthly repayment is now $5097

From TOP+5 year onward, the interest rate is 3.5%. The monthly repayment is now $5244.

It will be interesting to see how things will unfold when the large supply of new properties start to TOP and there lies the huge jump in monthly repayment which will surely affect the psychology of the sellers. From $444 to $5244. In addition, if you are thinking of renting, think again.

Do not forget to add in the maintenance fees which averages about $250 - $400 per month for newer private apartments after they TOP, before sinking fund fees are even added subsequently.

Everyone knows that property has been propped up by low interest rates and excess cash liquidity in the world. If you haven't noticed yet, the finance sector in Singapore has been silently retrenching people since last November.These banks are mainly those europe ones due to the euro-zone crisis. I am not too sure if these banks are as flush with liquidity given the bad loans that need to be forgiven, Greece for now. maybe Spain next?( 500 singtel employees retrenched and given a new role in Huawei..hmm for how long?Nice spin.SIA offers pilots unpaid leave for up to 2 years...Whats happening?Good deal for SIA)

Some people may say, the Central banks can just pump somemore money into the system to shore up the liquidity of these banks. True....but with oil prices slowly creeping up and inflation becoming more pervasive and with the Iran tensions ongoing...are they able to keep on pumping money into the system? Oil prices determines how much room there is for liquidity which in turn determines how much support there is for property. No data, just reasoning. Too high oil prices can lead to social unrest i feel.

Having said that, my emotional decision for staying in the market with 50% invested has been rewarding with lending fees and dividends dripping in, in addition to some additional capital appreciation.

I am also pleasantly surprised that the district which i am eyeing for my property purchase has shown a massive amount of new listings BUT with ridiculous asking prices which will make Warren Buffet get a heart attack. I am comfortable with my house now...nay maybe i should just stay put for another 10 more years and utilize my cash somewhere else.

Cheers to the stock market. Tata

If you are looking to leverage on an illiquid asset to acquire some good debt to grow your wealth....Read on.

The following article is reprinted with permission from singaporehomeloans. All information or queries are to be directed to loans@propertybuyer.com.sg directly or mobile (sms) : +65 9782 8606.
(There is no affiliation between this website (sgdividends) and singaporehomeloans website and the owners are different)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Most banks in Singapore lend based on criteria such as debt to servicing ratio. The usual debt servicing ratio is capped at 50% to 60%.(Note: This is different from the financial planning guideline of setting the debt at 35% of monthly income.) Singapore banks who lend money based on asset based lending will assess your property valuation and lend you money based on your assets.However many banks do not engage in asset based lending as they deemed it risky. For those few banks that do asset based lending, they want to make sure that you can service the loan by asking for proof of cash or assets under management of 24 months.

Traditional Asset Based LendingSomeone with a fully paid up property valued at $3.2m. He goes to the bank to borrow 50% of $3.2m. He gets $1.6m in cash for an equity term loan (Cash out). The bank will usually want to see proof of liquid assets of 24 months of the installment amount.

Illustration:
Age of owner = 50 years old
Property valuation = $3,200,000
Loan to value = 50%
Loan tenor = 20 years
Interest rate = 1.5%

Loan amount = $1,600,000
Monthly Installment = $7,720
In this scenario, the owner would most likely be asked to show proof of 24 months of monthly repayment in liquid assets of $185,280.

Alternative Traditional Asset Based LendingAnother form of asset based lending lends out to 70% to 75% of the property asset valuation.
This is applicable for refinancing or new purchase of completed properties. This loan is also very effective for Singaporeans buying a second property.

Scenario: Rich foreigner 50 years old who has a paid up properties and no outstanding loan. The rich foreigner earns an income of only $25,000 a month in his home country.
Property valuation = $6,000,000
Status = Fully Paid up
Loan to value = Can to up to 70% (up to 75% subject to approval)
Loan tenor = up to 25 years
Loan amount = $4,200,000
He will be eligible to borrow up to $4,216,000 based on his asset and some proof of income instead of $2,529,000.
Under normal lending criteria, this Rich Foreigner will only be able to refinance with cash out (Term loan) of only $2,529,000 and NOT $4,216,000. In this way, cash is freed up for other needs.

Eligibility of Asset based lending: -Age = up to 75 years old
Tenor = up to 40 years
Min Income = $8,000 per month
Documents required for Asset based lending
NRIC = front and back copy. (For foreigners who are NON-PR, copy of passport)
Income = Proof of income via Company letter only
(NO need to go to Notary public in their respective country)
OR
3 Months salary slip
OR
2 years of Notice of Assessment (NOA) – from IRAS.
Outstanding home loan
= 6 months to 12 months bank statement showing outstanding loan amount. (if fully paid, copy of title deed)
Option to purchase = Required for a purchase of a completed property. (Not needed if
refinancing)

Contact :
loans@propertybuyer.com.sg
Mobile (sms) : +65 9782 8606
Get Asset Based Lending housing loan
Get Asset Based Lending Refinance Home Loan
If you are a Mortgage Broker, do contact us, we will avail this to you and your clients. (Only for Mortgage Broker and Consultants)

at 2:58 PM