Need advice - Home equity loan

[saikangwarrior]

I’m currently 39yo and have recently quit my job (no income) in Jan with a fully paid up 1 room condo.

Would like to seek everyone’s advice on the prudence of taking a home equity loan (~100k-150k), and paying down with my CPF OA, which has around 80-100k.

The purpose is to free up the locked up OA, and buy bond instruments rather than it being stuck in OA. Are there anything I may have missed out or need to keep a on before I look for a banker to discuss the feasibility?

Thanks in advance!

 

[reddevil0728]

I’m currently 39yo and have recently quit my job (no income) in Jan with a fully paid up 1 room condo.

Would like to seek everyone’s advice on the prudence of taking a home equity loan (~100k-150k), and paying down with my CPF OA, which has around 80-100k.

The purpose is to free up the locked up OA, and buy bond instruments rather than it being stuck in OA. Are there anything I may have missed out or need to keep a on before I look for a banker to discuss the feasibility?

Thanks in advance!

Can pay off home equity loan with OA?

 

[DevilPlate]

Im more curious to know the rates for equity loan.
Perhaps only riskier HY bond etf can cover to make a yield spread?

 

[reddevil0728]

Im more curious to know the rates for equity loan.
Perhaps only riskier HY bond etf can cover to make a yield spread?

maybe is pay for short term, expecting interest rate cut then bond price will go up?

 

[havetheveryfun]

Im more curious to know the rates for equity loan.
Perhaps only riskier HY bond etf can cover to make a yield spread?

think he want to borrow HDB loan at 2.6% then slowly pay off while using the OA balance to buy SSB/T-bills etc at 3-4%.. still earning the spread.. not sure if now he can still take HDB loan

cos if not HDB loan sure not worth it.. all more than 4% now

 

[reddevil0728]

think he want to borrow HDB loan at 2.6% then slowly pay off while using the OA balance to buy SSB/T-bills etc at 3-4%.. still earning the spread.. not sure if now he can still take HDB loan

cos if not HDB loan sure not worth it.. all more than 4% now

can buy HDB when own Condo???

 

[BBCWatcher]

I’m currently 39yo and have recently quit my job (no income) in Jan with a fully paid up 1 room condo.

Would like to seek everyone’s advice on the prudence of taking a home equity loan (~100k-150k), and paying down with my CPF OA, which has around 80-100k.

The purpose is to free up the locked up OA, and buy bond instruments rather than it being stuck in OA. Are there anything I may have missed out or need to keep a on before I look for a banker to discuss the feasibility?

It's quite odd that you're 39 years old and have a fully paid up condo given that we're just coming off ultra low mortgage interest rates that many people locked in for 5 years. But OK, that's water under the bridge I guess. Not a criticism, just an observation.

[Pay attention everyone! Take low fixed interest rate mortgages when they're offered, take them for the maximum term, don't pay them off unless and until it makes financial sense to do so — which hasn't been the case for 15+ years at least — and save/prudently invest dollars that you'd otherwise use to accelerate payment on such a mortgage.]

I suppose one big question is whether there's any lender that'd take their side of the deal when you're not employed. Is there?

If your CPF OA has $90K (let's suppose) you already have a couple choices available, directly, that don't involve any costs or risks associated with "cash out" financing (home equity loans):

1. If your CPF Special Account is below the Full Retirement Sum you can transfer OA dollars to your SA. SA pays at least 4.0% interest. (There's a decent chance it'll pay above 4.0% in 3Q2023, but we'll see.) All $90K is potentially available for this purpose. Since you have zero income from work then presumably you won't owe income tax in Singapore next year, so tax relief associated with SA top ups is off the table, for now anyway. That means a transfer makes even more sense. However, this is a one-way trip, and you have about 15 1/2 years to go before you can tap CPF SA to any degree (absent a particularly dire emergency and exception).

2. If you have a qualified family member (such as a spouse) under age 55 with a CPF Special Account below the Full Retirement Sum, or a qualified family member age 55+ with a CPF Retirement Account with room to spare below the Enhanced Retirement Sum, then you may be able to transfer your OA dollars to their SA/RA. All $90K is potentially available for this purpose. If the transferee happens to name you as their CPF nominee then that money comes back to you, in cash, when the transferee dies. This last bit is the "typical," arguably cynical way younger CPF members liberate OA dollars. Find a sick and sympathetic grandparent, basically.🫤 (Yes, people really do this. It's fine; nothing to apologize for.)

3. You can invest $70K of the $90K via the CPF Investment Scheme (OA). The CPF Investment Scheme (OA) offers a fairly wide variety of investment options.

 

[BBCWatcher]

think he want to borrow HDB loan at 2.6% then slowly pay off while using the OA balance to buy SSB/T-bills etc at 3-4%.. still earning the spread.. not sure if now he can still take HDB loan

cos if not HDB loan sure not worth it.. all more than 4% now

can buy HDB when own Condo???

Cannot. HDB concessionary loans are solely for HDB properties. They're not available for condos. You have to pay market interest rates for private condo loans.

Yes, home equity loans have a moderately high interest rate right now. So that's a bit of a puzzle. Also, the loan origination costs (fees and whatnot) will probably be a big fraction of the loan quantum, and that won't be fun. The only bonds that might beat these costs would be junk bonds (via fund form in this amount), but those are risky. However, if you're "property rich, cash poor" (for example) maybe you explore this idea. You put the $120K (let's suppose) of equity in Singapore Savings Bonds (for example) and use the SSBs to keep afloat between jobs. The interest rate spread and costs won't be in your favor, but you'll have cashflow available from OA and SSBs.

But I'm perhaps assuming facts not in evidence, and I shouldn't do that. And I certainly don't judge. Let's try to solve the problem(s) on the table and offer good advice.

 

[wira]

As per BBC if purpose is just to "free up the locked up OA, and buy bond instruments rather than it being stuck in OA", you may as well just invest the CPF OA directly via the CPF investment Scheme ?

 

[dork32]

maybe you people were never young before.

you are young, you bochap your cpf. cpf money is like monopoly money. got not use.

by taking a loan 100k loan, you have 100k real money, and you get to pay your loan with play play money. who cares if the interest is very high. the most is that i lose my play play money.

of course if you are older you will not think that way. actually 39 not very young already and still think like 21 years old

and oa can be used to pay home loan, cannot pay equity loan. equity loan interest = home loan interest.

 

[dork32]

As per BBC if purpose is just to "free up the locked up OA, and buy bond instruments rather than it being stuck in OA", you may as well just invest the CPF OA directly via the CPF investment Scheme ?

buy bond is only to show that the guy is very prudent. the money can also be used to do thousands of things that oa cannot, eg buy sports car to kao the chio chio sia gal

 

[sglandscape]

maybe you people were never young before.

you are young, you bochap your cpf. cpf money is like monopoly money. got not use.

by taking a loan 100k loan, you have 100k real money, and you get to pay your loan with play play money. who cares if the interest is very high. the most is that i lose my play play money.

of course if you are older you will not think that way. actually 39 not very young already and still think like 21 years old

and oa can be used to pay home loan, cannot pay equity loan. equity loan interest = home loan interest.

Money is fungible, so optimise all especially when rates are so high now.

 

[sglandscape]

on the OP question, why not buy bonds directly with CPFIA or you're planning to take even more risk?

 

[Nofear40]

maybe you people were never young before.

you are young, you bochap your cpf. cpf money is like monopoly money. got not use.

by taking a loan 100k loan, you have 100k real money, and you get to pay your loan with play play money. who cares if the interest is very high. the most is that i lose my play play money.

of course if you are older you will not think that way. actually 39 not very young already and still think like 21 years old

and oa can be used to pay home loan, cannot pay equity loan. equity loan interest = home loan interest.

So basically TS’s proposal to use OA to pay equity loan to get cash does not work

 

[sglandscape]

So basically TS’s proposal to use OA to pay equity loan to get cash does not work

nope next best alternative is to invest in tbills using cpfoa via cpfia

 

[BBCWatcher]

So basically TS’s proposal to use OA to pay equity loan to get cash does not work

The home equity loan definitely hands you cash. But you have to pay it back over time, and in the current interest rate environment (and with loan costs factored in) it’s a somewhat expensive way to raise cash. More attractive than credit card debt, and that’s a popular swap (taking a home equity loan to pay off credit card debt).

The only bonds I can think of that could beat the full cost of a home equity loan are high yield (a.k.a. junk) bonds. But I don’t know how you buy those individually in small increments, so it’d have to be in fund form. Which could work if market interest rates fall (bond prices go up) as long as there aren’t too many/too big bond defaults within the fund. I guess if you feel really strongly about the direction of interest rates that you could make that bet in this odd way, but why not just make the bet via the CPF Investment Scheme?

 

[saikangwarrior]

Thanks everyone for the advice. I’m generally risk adversed and have chosen to fully pay up my loan even amidst a low interest rate environment (which I hope everyone learnt not to do).

The purpose of considering this option of home equity loan in the first place was to bolster my emergency funds now that I’m unemployed, and household expenses (2-3k/month) need paying for, and so was considering if there is any means of arbitrage now that interest rates for risk free investments (T-bills) are high and cash is king. Of course, hopefully, this is a temporary state of being unemployed

Anyhow I’ve checked with my banking associate and understand now that CPF can’t be used for home equity financing, so that’s off the table. But thanks again for all the help.

 

[BBCWatcher]

Here’s another idea that might apply in narrow circumstances. Let’s suppose you have an working spouse who’s currently paying his/her own mortgage and has a CPF Special Account below the Full Retirement Sum. (You individually bought homes to avoid ABSD, in particular.) You could transfer your OA dollars to your spouse’s SA. The reason you’d do that (beyond higher interest) is that when MA is at the Basic Retirement Sum and SA is at or above the Full Retirement Sum then the portion of CPF contributions allocated to MA (could be self-employment contributions) spills over into OA. That gives your spouse more OA dollars to service that mortgage, improving the overall household cashflow situation.

Like I said it’s a pretty rare situation, but if that situation applies it can work. It would also help if you assume all MediSave payable expenses for the household to keep his/her MediSave pegged at the BHS as much as possible. You’d make tax relief (via Voluntary Contributions to MA) harder to win since zero income already means zero income tax, at least eventually. But that’s probably a very acceptable trade because your household is trying to conserve cash and wouldn’t make VCs to MA in these circumstances.

I suppose it’s also possible a parent could be paying a mortgage and be in similar circumstances as the spouse in the example above, so you could hypothetically strike a deal to transfer OA dollars to your parent who then hands you some cash (and pays his/her mortgage with the OA dollars you "effectively" transferred, via the MA-to-OA spillovers). Or you might be supporting a grandparent with a monthly stipend, and instead of doing that you transfer OA dollars to his/her RA to jack up his/her retirement payouts — and reduce your cash support to conserve household cash.

If a lender will allow a home equity loan then you can do that even without the ability to repay using OA, but that just buys you time at a cost. If the income cessation is truly temporary then OK, maybe that’s a reasonable thing to do. If not then it’s just delaying the inevitable (selling the home) and increasing the cost of the inevitable.

Some life insurance products with surrender values — the ones I don’t think you should buy! — let you surrender them (of course) either to the insurer or (for a higher surrender value) a private party. That can make a great deal of sense in the circumstances. You’re not generating an income to protect, and if you were to die tomorrow your dependent(s) would inherit the condo you’re trying to save, keeping them whole. If you’re still insurable you could replace this policy with lower cost term life insurance, mainly for TPD and a CI accelerator since the death benefit is less exciting. Some policies also let you borrow against their value, although there a cost to that too.

 

[ExEngineer]

I managed to achieve a similar thing as OP had in mind, just perhaps with more fortunate timing. When refinancing my home loan a couple of years ago I cashed up, taking advantage of the property’s updated valuation which had significant increased since Covid started - so now I’m paying 1.5ish % on the loan at least over the 3yr lock in (hindsight - wish I’d gone for DBS 5yr when it was available!), and putting most of the money into FDs that are paying 4% (I also fully paid off my car loan which was costing an EIR of 5%).
Of course when the home loan rate resets, the spread may disappear, at which point it might make sense to pay down some of the loan (also depending what refinancing offers there are).

Another aha from the OP’s post and subsequent replies is that you should really make the most of financial options (in particular access to credit), when you still have a job and income to show. I’m fortunate to have a very stable and reasonably well paid job; as a result, banks here will loan me quite ridiculous amounts of money sine may paperwork (pay checks, tax returns, credit history), probably tell them I’m very low credit risk. That easy access to credit would evaporate almost instantly if I were to quit my job for whatever reason. So if I could predict the scenario of losing the income (or even changing jobs to a lower paying one), one thing I’d do for sure before quitting would be to explore whether to tap into various credit facilities which might not be available afterwards.