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Monday, 15 August 2011

Housing mortgage loan as an inflation hedge?

The US Fed has gamely revealed their poker hands for the next 2 years – rates will remain low. No surprise this decision is not unanimous! 3 out of 10 committee members dissented – the biggest split in 20 years. Talk about living in unusual times!

What is your housing mortgage loan rate? What’s the inflation rate in Singapore now?

I will soon have some spare cash by December of this year due to a recent “enbloc” of one shares counter in my portfolio. It’s more than enough to cover my remaining SGD 70,000 HDB loan. Would I pay up my HDB loan in advance and save on the 3.75% loan interests annually?

No way!

At least for the next 2 years anyway… Singapore’s bank rates are influenced by US rates. So savings and loan rates will remain depressed. Add to money printing in US, I don’t think inflation will go down anytime soon. More on the upside unless MAS allows our Sing dollars to strengthen to offset imported inflation; but that is mitigated by the need to maintain our export competitiveness – hence the Sing dollar “weakness” during 2008/09. Your guess is as good as mine (OK, yours is better!)

Was your pay increment more than 4.5% last year? If not, you are being “scrxxed” (pardon my French) – just like the bank savings account interests we are getting.

This unusual situation today regarding the housing loan interests offered by banks and the inflation rate is one rare chance where I can “stick it to the man”. Pay the bank back in money that’s worth less and less. Once in a while, the “smol” (the unintended acronym of my nick fits me well) man wins!

I am doing what the US government is doing – inflate your way out of the debt. So having a housing loan is an inflation hedge? No? Yes? Two can play the game what!?

In this “correction” or “bear” market (you take your pick of semantics!) scenario today, close one eye can easily find blue-chip counters that yield more than 4.5% annually. If I take more iron tablets to fortify my stomach, I can even swallow REITs and small caps that yield more than 9% annually.

Of course this game can only be played until the music stops – when housing loan interests is above inflation rate (and/or I can’t find other profitable investments that yield more than the housing loan or inflation interest rate – whichever comes first).


I have full respect for those who can’t sleep with a loan weighing on their mind; and would advocate paying off their loans as soon as possible. A good night’s sleep is worth its weight in gold! This I concur. I wish you sweet dreams!

Hey! Different strokes for different folks!


New readers may one to read an earlier post for "context":

Have my cake and eat it

9 comments:

  1. well done, thats a good way of analysing. do whats comfortable and right for you.

    i love sweet dreams so i don't "otang" any body.

    ReplyDelete
  2. I have enough money in my cpf to pay up my mortgage loan but I left it status quo. Too lazy to go around doing all the paper work. ANyway, CPF pays at least 2.5 % INTEREST while my mortgage loan over next 3 years fixed at 1.68%, 1.88 and 1.98%.
    See what happens after 2013 I guess. Maybe can standby CPF money to buy another property when property prices crash in 2013.

    ReplyDelete
  3. 1) Coconut,

    Thanks! Ah, you no debts so guys like you that are asset ++; you are so very the "attractive" at OG Chinatown to the "northern birds" there. Hang on to your wallet! LOL!


    2) Financialray,

    I happy for you! You've locked in very low housing rates for the next 3 years! Way to go!

    I love to have the flexibility to consider different options - that is my definition of financial freedom! The ability to choose :)

    ReplyDelete
  4. haha, not that i'm showing off my wallet. but the nature of my job - speculation is the most dangerous financially.

    having debts is just adding risk onto an already risky business.

    i always prepare the unexpected and unthinkable.

    ReplyDelete
  5. by the way, our real danger is deflation and not inflation. and thats the only reason why fed keep its interest at near zero.

    thats also why i dump all my shares. hedge against deflation, just in case.

    ReplyDelete
  6. Stop Coconut!

    Now you are giving me nightmares...

    LOL!

    I have 5 more months of salary coming in as dry powder; so I can still nibble here and there defensive and dividend counters - it's to position myself to receive cash flows while not working.

    But my finger is on the sell button to make sure I don't turn a in-the-money portfolio to a negative one! Yield or no yield!

    ReplyDelete
  7. haha, what if i tell you i found a stock to short this afternoon? which i did. i'm also looking to short the three local banks if things got worst.

    don't worry haha, i might be wrong and got to buy them back at much higher price (don't forget i'm a trader).

    anyway it will not be as bad as 08/09. for investor i say stay put or buy on the way down if any.

    ReplyDelete
  8. so we are in the same boat, whether market up or down i eventually will have to buy back my stocks. its a matter of timing which i have no idea yet.

    ReplyDelete
  9. Now I sleep sound sound.

    Short-sellers like you will have to cover your shorts and provide a bottom to the market. You are friends to long term bulls like me :)

    The European govts are crazy. You don't change the rule mid-stream by banning short-selling for a few days.

    Short sellers are not to blame - what happen to price discovery and market liquidity?

    Short sellers should in fact be "recognised" for doing the job of the regulators by "punishing" companies or governments that did not get their house in order!

    Now that the most intellectually stimulating conversation I had all week!

    Thanks Coconut!

    ReplyDelete

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