Should I pay off loan amount with USD funds now or wait?

[boroangel]

Hi all,

seeking some advice here please.
I have a $200 K housing loan remaining with DBS where I am paying 2.155% interest now. There is about 10 years left in the loan.

I don't carry SGD but have equivalent of $200K in USD (about 147K USD), which I can pay off. However, considering cash flow and potentially use of the money in other areas in future, I am undecided if I should make partial repayment to reduce the loan amount, say $50K , $100K.

With the USDSGD exchange rate at about 1.35 a few weeks ago, I reckon if the USDSGD do raise up to 1.38 within the next year, it would have made up the 2.155% mortgage rate, not considering any USD fixed deposit additions. Currently, I can get 1.45% USD fixed deposit with Maybank.

Appreciate your feedback and advice.

 

[Trazora]

Don't think anyone has crystal ball to help see the future. Think it pretty much depends whether you need the funds for other purpose in the future.

 

[Mecisteus]

You are facing 2 kind of risks here.

SGD interest rate risk and USD FCY risk assuming you have no immediate and large USD expenses to incur.

If I were you, I would convert the USD to SGD to eliminate 1 of the risks.

 

[BBCWatcher]

Are there any prepayment fees?

For reference, you can currently get these pre-tax interest rates on ordinary U.S. federally insured bank and credit union deposits without looking too hard, assuming US$100K:

On demand savings account: 1.5% (not a guaranteed rate)
12 Month Certificate of Deposit: 1.75%
24 Month Certificate of Deposit: 2.0%

So that's the least you can accomplish with your U.S. dollars, assuming you're eligible to open an account at a U.S. bank or credit union.

 

[boroangel]

Are there any prepayment fees?

For reference, you can currently get these pre-tax interest rates on ordinary U.S. federally insured bank and credit union deposits without looking too hard, assuming US$100K:

On demand savings account: 1.5% (not a guaranteed rate)
12 Month Certificate of Deposit: 1.75%
24 Month Certificate of Deposit: 2.0%

So that's the least you can accomplish with your U.S. dollars, assuming you're eligible to open an account at a U.S. bank or credit union.

DBS confirmed no partial repayment fees. I can't open an account in the US unfortunately.

 

[BBCWatcher]

If I were you, I would convert the USD to SGD to eliminate 1 of the risks.

I probably wouldn't. Currency conversion is never free, and U.S. dollars are useful. If nothing else they can be spent at Amazon.com, for example.

Really you just decide whether and how to put those U.S. dollars to work versus paying down what seems to be rather low cost debt. And it's not even clear paying off that loan is the highest priority use of the next Singapore dollars. For example, I'd probably make some CPF Medisave and/or Special Account top-ups (with tax relief) before paying off that loan.

 

[BBCWatcher]

I can't open an account in the US unfortunately.

Where are those U.S. dollars currently sitting?

 

[boroangel]

Where are those U.S. dollars currently sitting?

They are sitting in a USD account in a singapore bank actually.

 

[Mecisteus]

I probably wouldn't. Currency conversion is never free, and U.S. dollars are useful. If nothing else they can be spent at Amazon.com, for example.

Really you just decide whether and how to put those U.S. dollars to work versus paying down what seems to be rather low cost debt. And it's not even clear paying off that loan is the highest priority use of the next Singapore dollars. For example, I'd probably make some CPF Medisave and/or Special Account top-ups (with tax relief) before paying off that loan.

What kind of stuff do you want to spend on Amazon with 200k USD?

Transaction fees is like 1 or 2%. What if USD falls 10% and interest rate shoots up in the next 12 months? This is a possibility and it is risk.

 

[boroangel]

I probably wouldn't. Currency conversion is never free, and U.S. dollars are useful. If nothing else they can be spent at Amazon.com, for example.

Really you just decide whether and how to put those U.S. dollars to work versus paying down what seems to be rather low cost debt. And it's not even clear paying off that loan is the highest priority use of the next Singapore dollars. For example, I'd probably make some CPF Medisave and/or Special Account top-ups (with tax relief) before paying off that loan.

Yea really the challenge is finding what to do with those USD. I mean I can put them in some FD now with like 1.45% to 1.6% in Singapore banks.

I am not buying stocks with them as I have a separate portfolio. My gut feel is USD might go up against SGD in the next 12 months, and I might miss out on other opportunities in the coming years if the money is tied down to the property.

 

[boroangel]

Yea really the challenge is finding what to do with those USD. I mean I can put them in some FD now with like 1.45% to 1.6% in Singapore banks.

Is 2.155% current mortgage considered as low cost debt just wondering?

I am not buying stocks with them as I have a separate portfolio. My gut feel is USD might go up against SGD in the next 12 months, and I might miss out on other opportunities in the coming years if the money is tied down to the property.

 

[BBCWatcher]

They are sitting in a USD account in a singapore bank actually.

Ah, OK. Those are quite idle then.

For reference, CIMB Singapore is running a U.S. dollar fixed deposit promotion right now with a tax free 1.86% interest rate, 12 month term, minimum US$20,000. I think that's the highest U.S. dollar fixed deposit rate in Singapore right now. It's better than the ~1.75% taxable CD rate available in the U.S., but there's a reason for that: U.S. federal government deposit insurance. (Foreign currency deposits in banks in Singapore get no deposit insurance coverage whatsoever.)

If you were to deploy those U.S. dollars in the alternative (not to accelerate payments on your 2.155% mortgage), how would you deploy them? What's your "usual" investment/savings program?

 

[BBCWatcher]

What kind of stuff do you want to spend on Amazon with 200k USD?

It's US$147K, actually. Boroangel already spent US$53K at Amazon, and it didn't take much imagination.

Seriously, it's not hard to spend U.S. dollars. It is the world's largest economy, after all, and plenty of goods and services are priced in the stuff. ICBC and DBS both offer debit cards that let you spend the stuff without markups. They're not useless, even if you're a full-time resident of Singapore.

Transaction fees is like 1 or 2%.

Yes, and even using the low figure that's US$1,470. It's a cost, and it's guaranteed. And, if you wipe out all/most of those U.S. dollars, then you've got to incur the cost again when (not if) you want to spend U.S. dollars you don't have.

I'm not a big fan of incurring costs without a "damn good reason." Is accelerating repayment of a 2.155% variable interest (it is variable, right?) Singapore dollar loan the best use for these U.S. dollars -- or all/most of them, anyway? I'm not so sure yet.

What if USD falls 10% and interest rate shoots up in the next 12 months?
This is a possibility and it is risk.

Well, let's consider putting some of those U.S. dollars to work, probably using something denominated in U.S. dollars already in order to avoid Singapore dollar to U.S. dollar currency conversion costs to accomplish the same investment/savings objective. Boroangel already mentioned that he's/she's buying stocks, and some of those could be denominated in U.S. dollars. So this seems like an interesting opportunity to avoid a currency conversion cost for something Boroangel is already doing, right? Note carefully then when you buy something using U.S. dollars, you're no longer holding U.S. dollars. You're holding whatever you bought. If it's a journey to the same (or substantially similar) destination but with a lower cost to get there, that's good!

I also wonder if Boroangel has an available source of 2.5% Singapore dollars if rising SGD interest rates ever become an issue: a CPF Ordinary Account.

 

[boroangel]

Hi BBCWatcher,

What is your take on US REITS at the moment despite the 30% withholding tax on dividends?

I won't have forex risk as I am already holding US dollars, and am looking at a 5 to 10 year horizon.

 

[revhappy]

I think the fact that your money is in US dollars is clouding your judgement. Take a step back and imagine your money was in SGD, what would you do? currency conversion fee is a small factor, but you shouldnt miss the forest for the trees.

If I were you I would look at my total portfolio/networth and then look at how much is property:fixed income: equity ratio and then decide according whether to reduce your balance sheet or keep it as it is.

 

[Yachtmaster]

I have 2 simple solutions for u

1) Reprice your dbs loan to get 1.xx%
2) Long FB with your usd

Hi all,

seeking some advice here please.
I have a $200 K housing loan remaining with DBS where I am paying 2.155% interest now. There is about 10 years left in the loan.

I don't carry SGD but have equivalent of $200K in USD (about 147K USD), which I can pay off. However, considering cash flow and potentially use of the money in other areas in future, I am undecided if I should make partial repayment to reduce the loan amount, say $50K , $100K.

With the USDSGD exchange rate at about 1.35 a few weeks ago, I reckon if the USDSGD do raise up to 1.38 within the next year, it would have made up the 2.155% mortgage rate, not considering any USD fixed deposit additions. Currently, I can get 1.45% USD fixed deposit with Maybank.

Appreciate your feedback and advice.

 

[Mecisteus]

Buying USD stocks do not equate to reduction of FCY risk with USD. But you save on the transaction costs.

Putting in FD gives you low single digit returns per annum.

Buying stocks give you potentially higher gains (losses).

Make your choice based on your holding period and risk appetite.

 

[watsum]

On demand savings account: 1.5% (not a guaranteed rate)
12 Month Certificate of Deposit: 1.75%
24 Month Certificate of Deposit: 2.0%

Hi BBCWatcher

Thanks for the info. Do you know why Bank Of America CD interests are so low (0.05% 1 year) compared to what you have shared?

I have some funds from rentals in BOA and would like to see how to optimise it.

 

[BBCWatcher]

What is your take on US REITS at the moment despite the 30% withholding tax on dividends?

U.S. real estate valuations appear to have risen above what turned out to be the Global Financial Crisis's bubble peak. Also, the U.S. Congress (with the President's support) is seriously considering reducing the federal tax advantages that U.S. real estate currently enjoys. I certainly would not overweight that sector at this time. What percentage of your total portfolio is in real estate already?

You might be able to get a lower income tax rate (and legally avoid U.S. estate tax liabilities) using an Irish domiciled fund, assuming you are a non-U.S. person. Yes, U.S. REITs are available in that form, for example symbol IUSP on the London Stock Exchange.

Do you know why Bank Of America CD interests are so low (0.05% 1 year) compared to what you have shared?

Because Bank of America doesn't have to offer competitive CD rates. It's basically the same reason DBS generally offers terrible fixed deposit rates compared to their competition.