What are your reasons for F-I-R-E?

[minamikaze]

You're working, so you're getting fresh OA funds every month, presumably. That's part of your savings flow, and that part is earning 2.5%.

Yes, but neither my company nor I am contributing to CPF. I'm getting the CPF as cash from my company, as part of the agreement. So zero CPF contribution at the moment.

You can directly deposit funds into your OA: up to the $78K you've used so far, plus accrued interest. Use CPF Form HSD/VR if you'd like to make that deposit. If you have cash lying about earning less than 2.5% that you'd like to earmark for "mortgage defense," that'll work just fine, even better than fine.

The weird thing about this is that I think you can repeat this maneuver as many times as you want. (Somebody please check me on that.) That is, you can repay OA using Form HSD/VR with a check, eventually use those OA funds to pay down your mortgage faster (only when that makes financial sense), then use Form HSD/VR again to deposit funds (until the other mortgage interest rate rises), loop repeat. (Anybody see any problem with that?) The only "gotcha" I can think of is that this interest is earned only on whole calendar months. So you need some decent run at keeping OA funds in OA if you want to avoid too significant interest loss. This also means that deposits should be toward the end of the month (but not at the last moment since you want the deposit to be credited within the calendar month), and withdrawals should be at the beginning of the calendar month.

Now this is interesting. It may make sense for me to contribute that $78K to my CPF OA, then - and once the 1st home loan rate increases to more than 2.5%, then I can repay my mortgage from the CPF.

Yes.

Where's the insurance? And is the maintenance enough reserve toward periodic renovation?

You should also factor in some periodic vacancy loss since tenants come and go, and there isn't a 5 minute gap between them.

Hm, I believe home insurance is covered as part of the home loan package (don't recall being asked to pay it, ever). Anyway, I do not believe it is significant even if its separate - maybe a few hundred per year, tops.
But fair enough, sometimes there may be a gap between tenants, although we've been fortunate enough so far. Maybe we're looking at a conservative estimate of $4k net then...? We haven't owned the homes long enough to encounter any big ticket costs, so far.

Nope. SSBs are month to month. SSBs are subject to possible oversubscription, so it may take more than a month if you want to place substantial funds. And the current holding limit is $100K per person ($200K for you as a couple), although that's soon to double. But that's a very attainable and highly liquid rate, and it's a freakin' government bond -- ultra safe.

Ah, I see. So if I purchase $100K of SSBs, I will get 1.98% ($1980/12 = $165) from the very first month. Correct?

Bond funds don't. Although there is a bit of capital risk (since fund share prices will vary based on market interest rates), MBH should yield around 3%.

Not sure if it's worth 0.7% gain (vs 2.3% mortgage interest) for that "bit" of capital risk...?

Back to ultra conservative approaches for a moment, a fixed deposit ladder can work quite well, with maturities staggered at 2 month or quarterly intervals, for example. SBI is currently offering 1.95% on 12 month fixed deposits, and that handily beats your 1.8% mortgage rate at the moment. Singapore government t-bills are running at roughly 2% right now, and they're auctioned quarterly so also easy to ladder. There's a t-bill auction this month, as a matter of fact.

There are some attractive "rewards" accounts from BOC, OCBC, DBS, and UOB (as examples) where if you do X, Y, and Z then you get higher bonus interest on the first $X. It's rather easy to get 2.08% on the first $50,000 in a DBS Multiplier Account, for example.

If you park $70,000 (or up to $150,000) in a Citibank MaxiGain Savings Account, then you'll start out at about 1.23% interest right now but within one year end up at about 2.43%. (The rate is partially one month SIBOR pegged, so it bounces around a little bit. But so does your mortgage, so this fits.) You're allowed to withdraw the interest every month, but if you withdraw the principal then the step-up interest is knocked down. Still, on balance, this should beat your 1.8% interest rate mortgage rather well.

Yeah, I've already maxed out the counters and limit on both mine and my wife's Maxigain accounts. It's hard for me to enjoy the other bank "rewards" accounts as I do not have salary crediting.



At this point, perhaps let me give a complete picture/summary to see if it helps anyone's assessment:

Home loan 1 outstanding: $530K, able to pay off half right now, without penalty. Lock-in ends Oct 2019. 2.3% interest.
Home loan 2 outstanding: $460K, lock-in ends Jan 2021. 1.8% interest.

Liquid cash available: US$210K, S$200K (in Maxigain accounts), 1Y FD (matures in about 7 months)
CPF OA: $50K roughly
Been contributing $7K per year to SA.
Yearly gross income - $320K (+/- $20K)
No CPF contribution from my side (but wife contributes CPF)
We are good savers, saving easily 65% of our gross income (expenses include daily expenses, mortgage payments, parent allowance, travel expenses, "fun" expenses etc), but yet leading what we feel is a very comfortable lifestyle.

My current mindset: Want to pay off home loans fast for "peace of mind", then we can afford to get more aggressive after that - may not retire yet as we love our jobs, but we can take more overseas trips per year.
Of course, if there is a way for us to *not* worry about that home loan hanging over our heads (in spite of rising interest rates), and yet accelerate our wealth building, that would be ideal.
Given the volatile world economic situation I'm being a little more prudent than usual (I've liquidated my stocks for now to take a breather and think - took minor losses recently but nothing too damaging). Thinking about how close we are to paying off the home loan if we were to focus our efforts there, I just wonder why not get it over with in a span of 1-2 years, then think about investing more aggressively after that.

 

[BBCWatcher]

Yes, but neither my company nor I am contributing to CPF. I'm getting the CPF as cash from my company, as part of the agreement. So zero CPF contribution at the moment.

Is that legal?

Ah, I see. So if I purchase $100K of SSBs, I will get 1.98% ($1980/12 = $165) from the very first month. Correct?

Less the $2 purchase fee, correct.

Not sure if it's worth 0.7% gain (vs 2.3% mortgage interest) for that "bit" of capital risk...?

Bear in mind that if there's some other calamity in the household, you're probably not going to be pleased with yourself that you've only got lots of hard-to-tap capital.

Honestly, 2.3% is still cheap money.

Of course, if there is a way for us to *not* worry about that home loan hanging over our heads (in spite of rising interest rates), and yet accelerate our wealth building, that would be ideal.

It hasn't risen yet! Let's just pick the cheapest mortgage for a moment. It's 1.8% locked until 2021. Good grief, that's cheap! You can easily run ahead of 1.8%, guaranteed.

The government will pay you ~2% or even 2.5%, but you want to pay off 1.8% debt now? Seriously? This doesn't make any financial sense whatsoever. You lock up money that then becomes hard to tap (in a family emergency for example), and you lose the interest spread. Huh?

Given the volatile world economic situation I'm being a little more prudent than usual (I've liquidated my stocks for now to take a breather and think - took minor losses recently but nothing too damaging).

There's nothing at all that's "volatile" about a AAA rated government that's guaranteeing 2% to 2.5% on your savings while your mortgages are running at 1.8% to 2.3%. That's a free money party!

WHEN that free money party ends -- not a moment before, but WHEN -- THEN you might accelerate repayment.

 

[Dividends Warrior]

Why pursue FIRE? Isn't the reason similar for everyone?
To do the things I love without worrying about money.

 

[starlight318]

Why pursue FIRE? Isn't the reason similar for everyone?
To do the things I love without worrying about money.

I guess maybe the question should be: if you could retire early, would you? What would you do with all the free time if you no longer need to work?

Everyone would want to pursue FI (financial independence) but not everyone would want RE ( retire early).

 

[havetheveryfun]

I guess maybe the question should be: if you could retire early, would you? What would you do with all the free time if you no longer need to work?

Everyone would want to pursue FI (financial independence) but not everyone would want RE ( retire early).

dont know why people keep using the argument of free time

it is more of the option to be able to choose to work when you want to, and not work because you have to

 

[minamikaze]

Is that legal?

Yes, verified B&W with authorities (won't go into details here).

Bear in mind that if there's some other calamity in the household, you're probably not going to be pleased with yourself that you've only got lots of hard-to-tap capital.

Honestly, 2.3% is still cheap money.


It hasn't risen yet! Let's just pick the cheapest mortgage for a moment. It's 1.8% locked until 2021. Good grief, that's cheap! You can easily run ahead of 1.8%, guaranteed.

The government will pay you ~2% or even 2.5%, but you want to pay off 1.8% debt now? Seriously? This doesn't make any financial sense whatsoever. You lock up money that then becomes hard to tap (in a family emergency for example), and you lose the interest spread. Huh?

I think you've misunderstood, it's locked-in, as in, I cannot prepay any of it, nor reprice/refinance this 2nd loan package, until Jan 2021. In the meantime, the bank is free to raise its interest rate (as it did, from 1.28% to 1.48% and then to 1.88%, in the quick span of a few months), to whatever rate it deems necessary.
So, I can't pay before Jan 2021, even if I want to (not to mention that right now I don't have money to pay the 2nd loan as well - it's just that my saved income by then would allow me to pay off that loan completely on Jan 2021).

There's nothing at all that's "volatile" about a AAA rated government that's guaranteeing 2% to 2.5% on your savings while your mortgages are running at 1.8% to 2.3%. That's a free money party!

WHEN that free money party ends -- not a moment before, but WHEN -- THEN you might accelerate repayment.

Agreed. So my options (given that I've already maxed out Maxigain and can't take advantage of "reward" bank accounts since I have no salary crediting, are (if I want to be conservative and be able to pay off my home loan, should interest rates rise to 3% or more):
- Top up 78K into my CPF, which is what I had already used for my home so far (that's 2.5% returns), use it to pay off my home loan if it exceeds 2.5%
- Buy SSBs at 1.98% returns (although, my 1st home loan is already at 2.3%... not sure if SSBs make sense for me)
- Buy bond funds at ~3% returns
- Anything else?

 

[BBCWatcher]

Yes, verified B&W with authorities (won't go into details here).

Are you then self-employed, so you’re eligible then for full tax relief on an “all three” voluntary contribution (this month would be nice) for the $37,740 CPF Annual Limit? If so, it’ll depend on your MA and SA levels, but somewhere between a lot and most of that “all three” top up will land in your OA. So that’d be another way to inject some dollars mostly into OA (and with tax relief to boot).

I think you've misunderstood, it's locked-in, as in, I cannot prepay any of it, nor reprice/refinance this 2nd loan package, until Jan 2021. In the meantime, the bank is free to raise its interest rate (as it did, from 1.28% to 1.48% and then to 1.88%, in the quick span of a few months), to whatever rate it deems necessary.

Ah! OK, that’s “fun.”

Well, SSBs and OA are still running ahead of that mortgage. Even fixed deposits are (SBI at 1.95%). So it’s not expensive yet. It only might be. Water under the bridge on signing up for this turd, so yes, just keep some reserve on hand along the lines we’ve been talking about. Everybody in Singapore with a mortgage beyond 3 years faces some mortgage interest rate risk, but your only difference is that you have to ride it until early 2021 unless you want to incur a prepaypment penalty.

Is there any sort of caveat on that prepayment penalty, e.g. “If we raise to 3% or higher, you have 30 days to prepay with a penalty of $100?”

This loan might be riskier than your 2.3% loan, oddly enough. So this is another reason why you probably don’t want to dive into prepaying still cheap 2.3% money, because you could end up in January, 2021, with a (principal reduced) 2.3% loan and a 2.6% loan (the former 1.88% loan). And then, if you’re going to repay anything earlier (still an interesting question for 2.X% money), you’ll be regretting accelerating repayment on the cheaper loan. I’m assuming here that these two mortgages are not both 1 month SIBOR+0.3% (exactly the same interest rate rule), that they have different adjustment rules and that the rate relationship between them could invert.

Anyway, no need to panic — you’re a long way away from that. Yes, OK, you signed something of a turd of a mortgage (variable rate with a prepayment penalty), but that’s water under the bridge, its current rate is ridiculously cheap, and it probably will stay at least relatively cheap until at least January, 2021.

 

[minamikaze]

Are you then self-employed, so you’re eligible then for full tax relief on an “all three” voluntary contribution (this month would be nice) for the $37,740 CPF Annual Limit? If so, it’ll depend on your MA and SA levels, but somewhere between a lot and most of that “all three” top up will land in your OA. So that’d be another way to inject some dollars mostly into OA (and with tax relief to boot).

I don't pay tax either - it's a special situation (actually, not too special really in this digital age). Again, not skirting any laws as I've corresponded with the authorities (many times, just to make sure), provided the necessary documentation and obtained confirmation in B&W. So no, won't be (or need) tax relief.

Ah! OK, that’s “fun.”

Well, SSBs and OA are still running ahead of that mortgage. Even fixed deposits are (SBI at 1.95%). So it’s not expensive yet. It only might be. Water under the bridge on signing up for this turd, so yes, just keep some reserve on hand along the lines we’ve been talking about. Everybody in Singapore with a mortgage beyond 3 years faces some mortgage interest rate risk, but your only difference is that you have to ride it until early 2021 unless you want to incur a prepaypment penalty.

Is there any sort of caveat on that prepayment penalty, e.g. “If we raise to 3% or higher, you have 30 days to prepay with a penalty of $100?”

This loan might be riskier than your 2.3% loan, oddly enough. So this is another reason why you probably don’t want to dive into prepaying still cheap 2.3% money, because you could end up in January, 2021, with a (principal reduced) 2.3% loan and a 2.6% loan (the former 1.88% loan). And then, if you’re going to repay anything earlier (still an interesting question for 2.X% money), you’ll be regretting accelerating repayment on the cheaper loan. I’m assuming here that these two mortgages are not both 1 month SIBOR+0.3% (exactly the same interest rate rule), that they have different adjustment rules and that the rate relationship between them could invert.

Anyway, no need to panic — you’re a long way away from that. Yes, OK, you signed something of a turd of a mortgage (variable rate with a prepayment penalty), but that’s water under the bridge, its current rate is ridiculously cheap, and it probably will stay at least relatively cheap until at least January, 2021.

Yeah it looked like a good deal initially but turned out to be crap, but we had other reasons for signing up this package, not just the initial low interest rate which they screwed us over - they were willing to extend us a larger loan than other banks (yeah, no free lunch, I know). In case anyone wants to know, it's Maybank's FDMR package. After the lock-in we're definitely getting the hell out of there. My 1st loan package is also FDMR but the lock-in is 1 year less, and we can prepay it.

And you're right, this 2nd loan at 1.8% might be riskier. My current planning is that (and you may also see that from my current cash reserves):
- Currently, I have enough to prepay the entire 1st loan balance of 530K, but I am only allowed to prepay half of it now with no penalty.
- Come Oct 2019, lock-in for 1st loan ends, so I can prepay everything with no penalty (or refinance it)
- Come Jan 2021, lock-in for 2nd loan ends, and if nothing goes wrong, I should have enough to pay off that one entirely as well.

This looks like the plan that I can follow for now:
Prepay $200K to the 1st loan (at 2.3%) now, which still leaves me with ~$200K+ which is sitting in Maxigain making 2.2-2.3%. This reduces my monthly mortgage payments significantly. Originally I intended to prepay about $250K, which means with this plan (to prepay just $200K) I now have ~$50K (more by end of month due to income), which I can use to top up my CPF OA's $78K (which was used for mortgage payments). This lets me earn 2.5% on that $78K. Although, not sure if it's worth the trouble just for 0.2% and few months (will think about it).
And, for my monthly income, I can use it to buy a mix of:
- short-term bond ETFs which is fairly liquid.
- SSBs, safe and liquid
- small % for equities

When Oct 2019 comes around, I make a decision there and then based on the interest rate.
- If interest rate > Maxigain interest rate, pay off the 1st loan with the money in Maxigain.
- If interest rate < Maxigain interest rate, keep the money in Maxigain, look for a better home loan package to refinance to (likely there are none, since the rates are more or less the same across banks)
And I would still have ~100K sitting around from my monthly income, which is in bond fund ETFs/SSBs and some in equities.

From Oct 2019 to Jan 2021, continue to put money into bond ETFs, SSBs and a small % into equities. If my Maxigain was depleted to pay off the 1st home loan (because the rate went up to > 2.5%), then I will also put some money into Maxigain to enjoy the ~1.8% returns (counter drops when you withdraw).

When Jan 2021 comes around, I make a decision there and then based on the interest rate.
- If interest rate went down (unlikely), I will refinance the loan package and not pay it off. Continue with above plan of putting money into bond ETFs and SSBs until mortgage rate increases again.
- If interest rate went up further (likely more than 2.5%?), I will liquidate my portfolio and pay off as much as I can.

After Jan 2021, hopefully I would have paid off my home loans, and have more freedom to pursue what I want to do at that point.


Another option is, don't prepay anything at all - since 2.3% is still considered cheap...?
- Pay 78K into CPF (which was used to pay the mortgage) to enjoy 2.5%
- Invest in bond funds (how liquid are they?) to enjoy ~3% net yield, but there is some capital risk
- Maxigain is full, can't put anymore in there
- SSBs give 1.98%, that's less than my 1st home loan interest rate. Can't see any reason to go for it

No matter how I look at it, the 1st option/plan seems to make more sense... thoughts?

 

[BBCWatcher]

Another option is, don't prepay anything at all - since 2.3% is still considered cheap...?

I think it's still very cheap, yes. But I'm implicitly assuming a normal range of age appropriate prudence and risk tolerance with long-term investing goals, and....well, that's not you.

- Pay 78K into CPF (which was used to pay the mortgage) to enjoy 2.5%

You certainly should do that (CPF OA) first. 2.5% beats 2.3%. Just look at the numbers. Enjoy the 20 basis point spread for as long as you can. That's free money, risk free.

- Invest in bond funds (how liquid are they?) to enjoy ~3% net yield, but there is some capital risk

MBH is very liquid, traded on the SGX. It's a suggestion, but I don't think it's ideal for these circumstances for every dollar. The reason is that a rising market interest rate environment should result in a gently falling share price in MBH, i.e. some capital loss. So it's not a good hedge against the particular risk you're so concerned about. On the other hand, if the 2.3% falls to 2.1% (in line with general market forces), then your MBH share price should increase.

No matter how I look at it, the 1st option/plan seems to make more sense... thoughts?

Not for at least $78K (plus accrued interest).

 

[minamikaze]

So, what would you do, if you were in my shoes?
I understand it's going to be a little more complicated because there might be other considerations on my side that I didn't share, but it would be interesting and potentially enlightening to study what you might do, if you were in my situation and given the information that I had shared so far


And yes, I think I'll put the $78K back into the CPF OA, at least.

 

[BBCWatcher]

So, what would you do, if you were in my shoes?

Well, what most people do is they have some non-zero part of their savings (and new savings flow) riding along in long-term, retirement-oriented vehicles that should enjoy much higher long-term total net returns than the 2.X% sort of figures you’re worried about presently. They buffer the short-term volatility in those assets with some defense against mortgage interest rate risk (and other emergency reserve against calamities — and a 3% mortgage interest rate is not the worst imaginable calamity by any means).

This approach is analogous to what banks do. Banks don’t accept your deposits and then stick the notes in a cash drawer, dollar for dollar. They do hold reserves, in tiered fashion (various types of reserves), and in sufficient quantities to absorb all sorts of bad events. But you don’t need 1:1 reserve ratios to have a super strong bank that can weather even the worst financial crises.

And yes, I think I'll put the $78K back into the CPF OA, at least.

That one seems like a no brainer for what you’re trying to accomplish.