Friday, March 04, 2016

Lessen the psychological impact of a home mortgage though asset/liability matching.

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.



  1. Hi Chris,

    Interesting take.

    The mortgage is indeed quite huge but I thought with $100k sitting in the OA account, it should provide you with some peace of mind?

    With regards to biz/stocks that increase profits when interest rates increase, I can't think of anything else except banks that can earn more with higher spreads. When rates increase, all biz will find it more expensive to get funding.

    Perhaps companies that sit on alot of cash will do better since the cash (earning higher rates) will be less of a drag to the performance. Maybe that's why Sheng Siong? To be honest, I am quite puzzled why their profits increase when rates increase.

  2. Yeah man. I really wish I could share that brokerage report but I can't remember which broking house sent it out. I remember it was quite precise, revenue going up 3% for each 1% increase in interest rates.

    $100,000 will only last me four years from now, after which I would have to start paying off the mortgage from my dividend income. My monthly mortgage payment climbed from about $1300 to $2200 since I started paying for it. When I left the workforce, I promised myself never to eat into share capital.

    This promise may be broken in the future which explains the psychological strain I am facing.

  3. Hi Chris,

    I don't know what is in your REIT portfolio but I don't see S'pore listed REITs cutting their distribution in 2015 in a big way when interest rate is going up. In fact, most of them had reported DPU increase which make sense as they had locked in fixed interest rate via swaps for their loans for at least the next 2 or 3 years. Your decreasing income might come from your high yielding portfolio which I suspect that business trusts contributed some of it as most of them are underperforming in terms of dividend payout. Some of the business trusts have unsustainable payout because of high debt and also increasing capex.

    As for a high yielding portfolio, it really depends on what are the stocks in the portfolio. Most of the blue chip stocks had either cut or maintained their dividend payout this time round but there are some small caps which are still paying a decent yield despite challenging outlook. It really depends on how you construct your portfolio.

    The satellite portfolio idea that you cited will have problem again if stocks in your portfolio starts to cut dividend if interest rate doesn't go up as you have anticipated. In fact, the concern now about banks like UOB is not about interest rate, but rather non-performing loans.

    So what you are going to do if your satellite portfolio starts to cut dividends? Are you going to farm in more money from your REIT portfolio?

    Instead of using $150,000 to reduce your home mortgage from $530,000 to $380,000, why don't you use that $150,000 to invest into your current REIT and high-yielding portfolio to increase the income from your current portfolio?

    The thing about asset/liability matching is that it is not fool-proof. What you have cited is actually cash flow matching from your current mortgage floating rate loan and your dividend income. To do a complete asset/liability matching, you would have to match your mortgage loan of $380,000 with a $380,000 satellite portfolio. That would have given you a greater peace of mind.

  4. For me , if i am going into semi-retirement mode i would ensure that all my loans are cleared first for a peace of mind . Yes we can depend on REITS and other investment vehicles but nothing means having a loan free lifestyle so that we dont have to worry too much .

  5. ghchua and starmaster,

    The $150,000 is CPF-OA money and I have already maxed out my CPF-IS portfolio which is largely high-yielding.

    I can easily pay-off my mortgage loan right now but I am hesitant because a mortgage loan is possibly the cheapest form of financing a person can possibly get in their lives. I am getting a 2.2% loan and investing it at a yield of over 7%.

    A satellite portfolio, if built, can be a good halfway house between paying off a cheap loan and living dangerously risking a squeeze on yields.

    The ultimate peace of mind is to sell the condo and move back with my parents.


  6. Do U or in the past contribute or top up your Sa or oa?
    I'm thinking whether I should do that
    If U move back to parent house by selling condominium U will incur frictional costs.

  7. I maxxed out my CPFSA when i was single. Perhaps I would start topping up my OA with my dividends if I run of CPFOA funds in the future.

  8. First time i read this blog today.

    My humble opinion would be investing into companies which deals with commodities to hedge against interest rate rise.

  9. Actually I am still looking for evidence of rising interest rates and its correlation to commodity prices.

    Maybe someone can provide some perspective on this.

  10. Hi Christopher,

    For whatever you decide to do in the mist of trying to achieve more, it is important to do scenario analysis. If the decision can withstand the worst scenario, then you consider the risk reward if is worth it or not.

    By the way, moving back to parent house is not a choice in my view, unless there is other reason for example you have to take care of your aged parents, or your parents requested you to move to them as they miss you and etc.

  11. To be honest, I do not think that I can overpower the mortgage and it stops me psychologically. But in any case, I dream of having a personal home and am already preparing for this. I recently visited the official website of sss id and applied. This will give me the opportunity to get some privileges from the state if I take out a mortgage.