I just ended hell week. Two paper submissions this week and a team presentation has made me lose sleep over the last few days. My body still aches after having a nap and I wonder if I am actually falling sick.
Today I will talk about home mortgages and psychological strain I have been receiving from my home loan for the past two years. The current state is that I pay my home mortgage with my CPF-OA and I have enough to do this for another 4 years at the current SIBOR rate. But this is psychologically straining because I worry that at the end of the year, I am unable to save enough of my dividends to offset the drop in my CPF-OA (given that its been a year of medical emergencies for my family). The other problem is that having a REIT and high-yielding portfolio, I also experienced the double whammy of increasing mortgage rates and a decreasing income in a bad year like 2015.
( Banks probably won't let me refinance as I have no income right now. )
This could mean that my retirement is not as sustainable as I thought it would be. And my loan has over 30 years more to go !
So I thought I'd return to the roots of this blog by toying around with the idea of matching an investment asset like a different kind of equity portfolio with a liability like a home mortgage that goes beyond simply farming dividends back to pay off a mortgage loan like I am doing now. The idea of asset/liability matching is to set aside or create a satellite portfolio which can offset the psychological impact of my home mortgage.
In effect, you are buying a peace of mind when you create this portfolio.
Currently, my home mortgage is about $530,000. After paying off my mortgage regularly without earning an income for the past 2 years, I barely have about $105,000 in my CPF-OA. Most of my money is locked down in my SA account anyway but I suppose between myself and my wife, we can pony up $150,000 to immediately reduce the loan to $380,000 if I do not touch my other assets.
One answer would be to simply buy $380,000 of Singapore Savings Bonds because it currently yields a rate which is higher than my floating rate loan. But that would be problematic because floating rates can increase faster than SSB yields and I would prefer to set aside a sum which is significantly less than $380,000.
So what I have to do is to hunt for investment assets with two attributes :
a) Investment must generally increase in value when interest rates rise.
The biggest problem with Singapore is the lack of floating rate bonds. But reading a brokerage report a while ago, I know that Sheng Siong's net profit increases when interest rates increase. The other obvious choice are local banks like UOB which profit from mortgage loans.
b) Dividend yields must be higher than my floating rate.
Both Sheng Siong and UOB yield more than my current floating rate loan which is around 2.2%, so this allows me that peace of mind without needing to accumulate $380,000 with my new rookie income.
So suppose I blend a simple portfolio which yields 4.5% using UOB and Sheng Siong, I would only need a portfolio size of only to $186,000 to match dividends with interest rate payments of my mortgage.
This satellite portfolio will need to be rebalanced annually to maintain my psychological well-being.
Suppose, I start with a mortgage loan of $380,000 at 2.2% and a satellite portfolio of $186,000. After a year of work, I reduce the loan to $360,000 at a rate of , say, 2.4% and the satellite portfolio increases in value to to $190,000 and yields 4.8%. The satellite portfolio required to yield the same interest as the mortgage loan is now $180,000. I can release $10,000 back into my REITs portfolio for more income while maintaining a greater piece of mind.
For now, I can only start this project when I return to the workforce but my biggest issue is to find stocks which do increase in value when interest rates go up. Articles are very vague when they describe stocks which have this property. The ideal scenario is to find 6-8 stocks with this property.
If you are a reader and can offer some suggestions, do comment on this blog.
This may be potentially a better idea than simply paying-off a SIBOR floating rate home loan prematurely which did cross my mind last year.