Many blogs and websites have wrote about their views about why you should not pay off your home mortgage early. They advocate that you should keep your low interest home mortgage for as long as possible while investing the rest of your money in investment instruments that offer a much higher potential return.
In this article, I would like to share a contrarian view of why it may be a better idea to pay off your home mortgage instead.
Avoid any risk of losing your home
The idea of a home mortgage relies on the fact that you have job security. Unless you have a cushy job in the public sector, there’s always a chance of losing your job when your firm goes through a rough patch in the economy.
If you lose your job and are unable to service your mortgage, the bank would not hesitate to foreclose your home.
The mortgage loan interest rate is real
You put your money into your investments with the mindset that the returns will be higher than the interest that you are incurring on your mortgage. But always remember that while your paper gains are not realised, the mortgage interest has already been realised and charged to your account.
Not everyone with a mortgage loan is a good investor
When many bloggers and professionals advocate that you should not pay off your mortgage early, they assume that you are a good investor with the capability to generate returns through investments. But the problem here is that not everyone with a mortgage loan is a good investor.
Can you confidently say that you are a good investor? Are you able to keep your cool and not sell all your shares when the market is down? Do you know when you should take profit when your investments are performing?
Being debt-free reduces your monthly expenses
If you are planning for an early retirement or a possible sabbatical, being debt-free will reduce your monthly expenses significantly. With a lower monthly expense needed for your retirement, it makes your retirement planning much easier to achieve.
Even if you are not planning to retire, having additional cash in your bank due to your debt-free status means that you can put more money into your investments and grow your portfolio.
Don’t mess with your CPF accounts for retirement
The Central Provident Fund (CPF) started as a comprehensive social security system that enables working Singaporeans to set aside funds for retirement. Subsequently, the system also started to address healthcare, home ownership, family protection and asset enhancement.
The problem with Singaporeans these days is that the modus operandi of purchasing a property in Singapore is to tap on almost all the money in their CPF Ordinary Account and subsequently service their mortgage with their monthly CPF contribution as well. This is the same for me as well.
With lesser money in their CPF account, it would be harder to make use of the power of compounding interest to build their retirement nest.
Would you prefer to service your mortgage as long as possible or would you rather pay it off as soon as possible? I’d love to hear your take on this. Please share your thoughts in the comments below.
The Monetary Authority of Singapore (MAS) has just released a press release with more details about the Singapore Savings Bonds (SSB) programme that I blogged about earlier.
Low barrier to invest and 6-month interest payout (Yay!)
The barrier to invest in SSB is a low sum of $500 which I would like to think that most middle-income Singaporeans should be able afford. This is half of what you would need to have in order to invest in a SGS bond or Treasury Bill. I also like that the payout of interest is set to every 6 months instead of once a year.
Ability to sell SSB and withdraw the money at any time without penalty (Yay!)
As an investor, the liquidity of bonds is always an issue because premature sale of bonds may result a loss in principal or interest. Giving bond-holders the flexibility of selling SSB without incurring any penalty is great because they can sell their SSB to capitalise on any investment opportunity that they come across.
Interest rate tied to Singapore Government Securities (SGS) rates (Meh!)
As SSB interest rates will be tied to SGS bond yields and increased over time, let’s look at how our SGS treasury bills and bonds are faring today (30 March 2015).
If you invest $1,000 in SSB today, you will receive 1% interest ($10) in a year. If you put the same amount of money in a fixed deposit, the highest interest rate in the market today is at 0.63% ($6.30) offered by RHB Singapore. Sounds like SSB is good right?
Let’s say you put in another $1,000 in the second year because you like what SSB is offering. The average interest rate you will receive for the $2,000 worth of bonds is now 1.16% ($23.20), an average of 1-year and 2-year bond yields. The highest 2-year fixed deposit interest rate available today is 1.13% ($22.60) offered by RHB Singapore. In both cases, SSB offers a slightly higher interest rate.
A fluctuating interest rate (Yay and Meh!)
If you look at the SGS website, you would see that bond yields fluctuate every day. As SSB interest rates are tied to SGS bond yields, you would expect them to fluctuate on a daily basis as well.
The fluctuation could go both ways for investors. Over the past week, we see 1-year SGS bond yields gradually inching up bit by bit to 1% as of 30th March. That is a good thing, but there are also cases where SGS bond yields decrease due to various factors. Fortunately SSB bond-holders will be able to sell at any point in time without incurring any penalty. That means if SGS bond yields are too low, one could always switch to fixed deposits or other forms of fixed income investments.
Will I invest in SSB if it was available today?
As of today, the interest rates offered by SSB is definitely better than the current fixed deposits offered in the market. However, I don’t have any fixed deposits under my name anyway. Instead, my money is all kept in my OCBC 360 account which generates 2.05% interest per year. That is definitely higher than what SSB is offering so I’m unlikely to make the switch.
I would adopt a wait-and-see approach and find out how the market reacts when SSB becomes a reality. Banks would definitely have to increase their fixed deposit interest rates to retain their customers. I’m also hearing rumours that the OCBC 360 account may have some adjustments made to their current interest rates so it may be a reason for me to switch to SSB too.
Here’s an infographic about the Singapore Savings Bond that was created by Business Time.
The Government and Monetary Authority of Singapore (MAS) are planning to introduce Singapore Savings Bonds (SSB), a new type of bonds to help individual investors get a better return on their savings.
“In short, the Singapore Savings Bonds will offer the higher returns of a long-term bond and give what investors call a term premium, while retaining the flexibility of a shorter-term deposit, and the safety of an instrument guaranteed by the Government,” – Senior Minister of State for Finance Josephine Teo
While details about SSB are still being finalised, here’s what we know about this product:
Given that my current portfolio is 100% equities instead of an 80-20 split between equities and bonds, I certainly look forward to rebalancing my portfolio after SSB becomes available.
In my opinion, SSB has a steep hill to climb in order to be well-received by retail investors.
Offer higher interest rates than the regular bank deposits
I don’t think this will be difficult seeing how the average interest rates that banks are offering for deposits are very low. The highest bank deposit interest rate offered in the market right now is the OCBC 360 deposit account where account holders can earn up to 3.05% per year in interest by performing these tasks every month:
If SSB could offer an interest rate of approx. 2.5-3.5% per year, I’m pretty confident that investors would move their deposits from OCBC to SSB because it is much more simple. I for one would love to not have to spend at least $400 on my OCBC credit card if I don’t have a need to.
Be more attractive than Singapore Government Securities (SGS) bonds
Singapore Government Securities (SGS) are marketable debt instruments of the Government of Singapore. These debt instruments take the form of either Treasury bills (T-bills) or bonds and are backed by the full faith and credit of the Singapore Government.
They are offered in the following options:
The SGS bonds and Treasury bills are not widely marketed and I’m quite sure that the average investor would not have the knowledge on how to go about applying for one. I personally have participated in a 1-year Treasury Bill auction many years ago when the interest rates offered back then were quite attractive. In recent years, the interest rates offered for SGS bonds and Treasury Bills have been rather unattractive for me to make the effort to add them into my portfolio.
Our senior minister has mentioned that SSB offer interest rates close to long-term SGS bonds and would not have any lock-in periods tagged to them. Awesome! The next hurdle to cross would be to make SSB easy to buy (and sell). The best way to do this would be to allow investors to purchase SSB through internet banking platform of local banks and making payments with their deposit accounts.
Remain simple to understand and sustainable in the long run
With lofty ideas such as to offer interest rates close to long-term SGS bonds and allowing investors to get their money back any time without penalties, this product will need to be well-planned and given a thorough scrutiny to ensure that it is self-sustainable and not become a ponzi scheme.
As an investor, I would want to know how the money in the bond is being invested in order to generate the returns promised. As they say, if it sounds too good to be true, it probably is.
If done correctly, the SSB could become a disruptive innovation that forces the fixed-income market to improve on its offerings in order to retain its investors. Banks may be pressured to increase their interest rates for deposit accounts to keep account holders from withdrawing their money to buy SSB. Bond issuers will have to think out of the box in order to entice investors in parking their money in their bonds.