Moneytalk

The wait that will prove to be worthed the wait

2011-06-10T23:59:00.006+08:00

The last time I actually wrote something on this site was a couple of months ago. The reason why I have stopped writing for such a long time is that there is really nothing interesting out there in the market for me to write about as there is nothing which I can capitalize on.

Bonds in particular, the Singapore Government Bonds and Treasury Bills are still near their historical yield level which makes any purchase unattractive.

Stocks are neither here or there. It is at a price level which is not undervalued enough (at least for me) to purchase them. But it is also not ridiculously overpriced such that some upside is still possible. I'm an risk averse investor so I only seek to buy at a price significantly below their worth.

Properties should be pretty obvious to everyone. It has been in the headlines for a long time with mostly bullish news. Price are still bursting through the peak. Flip through the newspapers and properties advertisement and sale launches are still everywhere. Similar to stocks, I reckon it is not a good idea to buy near the peak.

I am actually bidding my time to capitalize on events which I think it may happen in the near future.

The stock market has been trending sideways for the past year or so. There are a few issues which may have a potential for stocks to be on the downside. These issues now are the Greek debt crisis and the sluggishness of the US economy being weighed down by huge amount of the debt. I would say that the latter is contributing more to the sideway trending that we are seeing now. Despite of this, I do not think that the market is going to fall heavily. I am waiting for the opportunity to snap up quality stocks but meanwhile, it will be waiting and waiting for the market to fall and monitoring the companies on my watchlist.

The property market locally is a bubble waiting to be burst. For me, it is not a matter of if but when. There has been a few articles out there warning about this. The main factors are as the following.

Tightening of foreign labour policies
Oversupply of land and properties
Rise in interest rates

The tightening of foreign labour policies will see a drop in demand and the oversupply of land coupled with properties with developments coming in the pipeline in the next few years will be a double whammy. Besides, interest rates will not remain low forever and when it rise, it will affect the mortgage payments of properties owners and the serviceability of their loans. Still remember the property crash back in 1998 ? When this happens, it will be easy to snap up properties counters at firesale prices.

Home prices slip but the 'centre' still holds

2011-03-29T21:34:00.002+08:00

Home prices slip but the 'centre' still holds
Central region resists overall dip for now, but luxury market also expected to stay flat

By KALPANA RASHIWALA from the Business Times, 29th March 2011

Prices of completed private apartments and condos have slipped slightly, overall, as the government's cooling measures made themselves felt. But those in the most posh part of town are still holding their own.

Latest flash estimates for February from the National University of Singapore show a weaker month-on-month performance in price indices compared to January.

'The Jan 13 cooling measures are certainly working,' said Knight Frank chairman Tan Tiong Cheng. 'The lower loan-to- value limit has affected investors with outstanding housing loans even if they have some financial capacity to purchase another residential property.'

NUS's overall Singapore Residential Price Index (SRPI) dipped 0.4 per cent month on month in February, a reversal of a gain of 2.9 per cent posted in January.

The sub-index for the Central region - home to Singapore's choicest residential districts (1-4 and 9-11) - rose one per cent month on month in February, a slower rise than the 3.1 per cent gain recorded in January.

The sub-index for the Non-Central region (where suburban mass-market condos are located) declined 1.5 per cent in February over the preceding month, in contrast with a 2.8 per cent appreciation in January.

Mr Tan predicts that private home prices in Singapore are likely to drift at current levels - 'unless the government opens the immigration tap again and removes some of these very severe cooling measures such as the seller's stamp duty rates and 60 per cent LTV for those with existing housing loans'.

Meanwhile, prices in the Central region have risen at a faster clip in the first two months of this year since end-2010 than in the Non-Central region. This marks a reversal of last year's pattern.

As a result, the SRPI for the Central region has finally surpassed its pre-global financial crisis peak of November 2007, albeit by just 0.1 per cent.

NUS's indices are produced by the university's Institute of Real Estate Studies and cover only completed non-landed private homes. The February 2011 flash estimate for the Central region index is up 4.1 per cent from the end of last year. This is a bigger gain than the 1.3 per cent year-to-date appreciation in the index for the Non-Central region.

The February Non-Central region index is up 18.8 per cent from its pre-crisis peak in January 2008.

The overall SRPI has appreciated 2.5 per cent year to date and is 11.5 per cent higher than its November 2007 peak.

February flash estimates reflect year-on-year increases of 10.3 per cent for the Central region, 13.1 per cent for the Non-Central region and 11.9 per cent for the overall index.

International Property Advisor (IPA) chief executive Ku Swee Yong said that prices of projects such as St Thomas Suites and Trillium in the prime districts, which were completed towards the end of last year, have posted price gains as buyers viewing the finished projects have found their quality better than expected.

'Clients whom we have brought for viewing for other projects like 8 Napier and Parkview Eclat have also been impressed by the quality of finishings,' he added.

Despite the NUS SRPI for the Central region outperforming that for the Non-Central region in February, Mr Ku is doubtful that this trend will prevail for the whole of this year.

'Unfortunately, wealth does not trickle from the bottom to the top,' he said. He does not expect the luxury condo market to outshine the suburban market in 2011 unless 'we see an influx of more high net worth individuals into Singapore both as tenants and buyers, and bankers receive their one and two-year bonuses again', he added.

The luxury market is likely to remain flat this year in terms of both prices and transactions, Mr Ku predicts.

Last year, out of the 16,292 private homes developers sold, only about 100 were above $3,000 per square foot.

'Foreigners are still scouting for buys but are not coming back to the high-end market the way they were in 2007,' he added.

Agreeing, Knight Frank's Mr Tan said: 'The foreign contingent is not back in full force. And there's still a good selection of units in prime district projects available from developers, which will put pressure on prices. For these reasons, I don't see a need for further cooling measures.

S&P 500 Historical P/E Ratio

2011-02-01T22:40:00.010+08:00

I was trying to search for the historical price to earnings ratio or in short, the P/E ratio for the S&P 500, a major US index. My search was not exactly that fruitless and I managed to get a Excel spreadsheet of the data from the official website of Standard and Poors here although the data is only up to 2008. However, the data goes back to a long time starting from 1936. Using the data, I managed to plot the P/E ratio against time and the chart is shown below.

From the chart, the P/E ratio has not drop below 10 since 1984. Following which, the P/E ratio has consistently remained above 10. This chart is a good gauge of when it is a good time to accumulate the S&P 500 given that one can buy an ETF that tracks the S&P 500 on the SGX. This ETF is the iShares S&P 500 trading under the symbol IS S&P500 10US$.

Increasing housing loans held by banks

2011-01-05T22:47:00.008+08:00

Amidst all the frenzy and noise with regards to the bullish and feverish economic and property news, the following are two articles which in my opinion, are rather interesting as it offers something that is of the contrary. Capital inflows into Singapore and a low interest rate are inflating assets and such circumstances will come to a stop soon, especially the latter. And when that happens, it is not hard to think of what will the outcome be.

Personal debt bomb
THE real star behind the recent Monetary Authority of Singapore statistics is consumer loans and not business loans ('Business loans surge in sign of upswing'; last Thursday)
Jan 5, 2011. Taken from the Straits Times.

Business loans actually contracted from July 2009 until March last year, and showed anaemic growth until the second half of last year.

By contrast, total consumer loans have never declined and have grown steadily with usually double-digit growth year on year. Even in the depths of the financial crisis, total consumer loans were growing at a high single-digit pace from October 2008 to September 2009, before spurting into double-digit territory a year ago.

The growth of total consumer loans has quickened from 10 per cent a year ago to more than 18 per cent for the past three months to reach $150 billion. Business loans managed only a double-digit growth from October to November last year.

The performance of business loans therefore pales in comparison with the growth of consumer loans.

The fast growth can be explained by housing loans. January 2008 housing loan figures were already 16 per cent higher than the corresponding figure in 2007. This double-digit performance lasted until October 2008, when growth figures slipped into the high single-digit figures before going back into double-digit growth in July 2009. Total housing loans are now $111 billion.

Since May last year, housing loans have been growing at more than 20 per cent year on year, a growth rate that must be the highest ever seen in Singapore.

Two other milestones which merit mention are that the total number of main credit cards crossed six million in October last year; and second - which is of greater concern - that rollover balances breached the $4 billion mark in November. This is the amount that is not paid by cardholders and on which interest is charged at usually 24 per cent per annum. Rollover balances have been growing at an average annual rate of 11.5 per cent for the past two years.

Personal indebtedness in Singapore is, therefore, growing unabated and the pace has quickened this year. The recent big surge in housing loans and the growth of rollover balances raise the question of whether Singaporeans, already facing one of the highest debt-to-income ratios in the world, have placed themselves in a very precarious situation.

If the economy stumbles and real estate prices decline, many individuals will be unable to pay off their debts.

Kuo How Nam
President
Credit Counselling Singapore

ADB: 51% S'pore banking loans to property is 'Worrying'
Dec 08, 2010

SINGAPORE - The Asian Development Bank (ADB) said yesterday that Singapore's fast-rising home prices are "worrying", as real-estate lending accounts for more than half of total loans in the banking system.

According to the latest issue of the ADB's Asia Economic Monitor, the share of property-related loans in total loans is as low as 9 per cent in South Korea, 15 per cent or less in Indonesia and the Philippines, and below 20 per cent in Hong Kong, Thailand and China.

At 51 per cent of advances, Singapore's banking sector's exposure to property is the highest among the nine major economies of East Asia, followed by 42 per cent in Taiwan and 38 per cent in Malaysia, ADB data showed.

The ADB report comes less than two weeks after the Monetary Authority of Singapore said in its annual Financial Stability Review that household debt has been growing at a faster rate in recent quarters - driven largely by housing loans which account for the bulk of household borrowing.

The study pointed out that Singapore had already taken steps to cool the property market, in line with measures adopted by other economies in the region.

As a result, the increase in home prices had started slowing in the third quarter in eight out of the nine East Asian economies, with Thailand as the only exception.

The ADB also called for greater cooperation among East Asian authorities on exchange rates, so as to reduce the volatility of currency fluctuations within the region and benefit the production network that spans East Asia. For Asean nations and China, Japan and South Korea, cooperation on exchange rates could also help "manage surging capital inflows to the region and better rebalance the sources of growth", the study said.

A single currency is not on the menu because "the recent debt crisis in the euro zone shows that stronger institutions than previously thought are required for monetary unions to function properly", the ADB said. Nor does it recommend that regional countries peg their currencies to one another's or benchmark their exchange rates to the "Asian Monetary Unit", the artificial basket of regional currencies first mooted by Japanese scholars.

East Asian countries could instead pick a reference currency from outside the region - either the US dollar, or a combination of the dollar and the euro - and then seek to maintain stability of their home currency's exchange rate against the reference unit.

Increasing housing loans held by banks

2011-01-05T22:47:00.007+08:00

Personal debt bomb
THE real star behind the recent Monetary Authority of Singapore statistics is consumer loans and not business loans ('Business loans surge in sign of upswing'; last Thursday)
Jan 5, 2011. Taken from the Straits Times.

Business loans actually contracted from July 2009 until March last year, and showed anaemic growth until the second half of last year.

By contrast, total consumer loans have never declined and have grown steadily with usually double-digit growth year on year. Even in the depths of the financial crisis, total consumer loans were growing at a high single-digit pace from October 2008 to September 2009, before spurting into double-digit territory a year ago.

The growth of total consumer loans has quickened from 10 per cent a year ago to more than 18 per cent for the past three months to reach $150 billion. Business loans managed only a double-digit growth from October to November last year.

The performance of business loans therefore pales in comparison with the growth of consumer loans.

The fast growth can be explained by housing loans. January 2008 housing loan figures were already 16 per cent higher than the corresponding figure in 2007. This double-digit performance lasted until October 2008, when growth figures slipped into the high single-digit figures before going back into double-digit growth in July 2009. Total housing loans are now $111 billion.

Since May last year, housing loans have been growing at more than 20 per cent year on year, a growth rate that must be the highest ever seen in Singapore.

Two other milestones which merit mention are that the total number of main credit cards crossed six million in October last year; and second - which is of greater concern - that rollover balances breached the $4 billion mark in November. This is the amount that is not paid by cardholders and on which interest is charged at usually 24 per cent per annum. Rollover balances have been growing at an average annual rate of 11.5 per cent for the past two years.

Personal indebtedness in Singapore is, therefore, growing unabated and the pace has quickened this year. The recent big surge in housing loans and the growth of rollover balances raise the question of whether Singaporeans, already facing one of the highest debt-to-income ratios in the world, have placed themselves in a very precarious situation.

If the economy stumbles and real estate prices decline, many individuals will be unable to pay off their debts.

Kuo How Nam
President
Credit Counselling Singapore

ADB: 51% S'pore banking loans to property is 'Worrying'
Dec 08, 2010

SINGAPORE - The Asian Development Bank (ADB) said yesterday that Singapore's fast-rising home prices are "worrying", as real-estate lending accounts for more than half of total loans in the banking system.

According to the latest issue of the ADB's Asia Economic Monitor, the share of property-related loans in total loans is as low as 9 per cent in South Korea, 15 per cent or less in Indonesia and the Philippines, and below 20 per cent in Hong Kong, Thailand and China.

At 51 per cent of advances, Singapore's banking sector's exposure to property is the highest among the nine major economies of East Asia, followed by 42 per cent in Taiwan and 38 per cent in Malaysia, ADB data showed.

The ADB report comes less than two weeks after the Monetary Authority of Singapore said in its annual Financial Stability Review that household debt has been growing at a faster rate in recent quarters - driven largely by housing loans which account for the bulk of household borrowing.

The study pointed out that Singapore had already taken steps to cool the property market, in line with measures adopted by other economies in the region.

As a result, the increase in home prices had started slowing in the third quarter in eight out of the nine East Asian economies, with Thailand as the only exception.

The ADB also called for greater cooperation among East Asian authorities on exchange rates, so as to reduce the volatility of currency fluctuations within the region and benefit the production network that spans East Asia. For Asean nations and China, Japan and South Korea, cooperation on exchange rates could also help "manage surging capital inflows to the region and better rebalance the sources of growth", the study said.

A single currency is not on the menu because "the recent debt crisis in the euro zone shows that stronger institutions than previously thought are required for monetary unions to function properly", the ADB said. Nor does it recommend that regional countries peg their currencies to one another's or benchmark their exchange rates to the "Asian Monetary Unit", the artificial basket of regional currencies first mooted by Japanese scholars.

East Asian countries could instead pick a reference currency from outside the region - either the US dollar, or a combination of the dollar and the euro - and then seek to maintain stability of their home currency's exchange rate against the reference unit.

DBS preference shares

2010-11-14T17:34:00.012+08:00

DBS is offering $500 million of preference shares to retail investors. The details are as follow.

Dividend rate : 4.7 % per annum

Dividend payable rate : 22 May and 22 November of every year

Redemption date: May be redeemed by DBS 10 years after the issue

Type: Non-cumulative, non-convertible and non-voting

You may want to take a look at a previous post that I written on preference shares here.

The timeline of events for this tranche of preference shares are as follow.

Lodgment of Offer Information Statement : November 10, 2010

Opening date and time for the Offer : November 10, 2010 at 2.00 p.m.

Opening date and time for the Public Offer : November 11, 2010 at 9.00 a.m.

Last date and time for applications for the Preference Shares under the Public Offer : November 18, 2010 at 12.00 noon

Closing date and time for the Offer : November 18, 2010 at 12.00 noon

Balloting of applications under the Public Offer, if necessary. Commence returning or refunding of application moneys to unsuccessful or partially successful applicants under the Public Offer: November 19, 2010

Issue Date of the Preference Shares : November 22, 2010

Date of commencement of trading of the Preference Shares on the Main Board of the SGX-ST: November 23, 2010

You can apply for the preference shares thorough the ATMs of the 3 local banks or by using the internet banking facility of DBS. The Offer Information Statement is available here.

SGX ADRs

2010-11-05T17:28:00.014+08:00

SGX has opened up the opportunity to invest in companies in China such as internet giant Baidu and oil and gas enterprise such as China PetroChem through ADRs. ADRs, which stands for American Depository Deposits is a way of investing in selected companies which are not listed on SGX. But what are ADRs exactly and how does it work ?

ADRs has been around since 1927 and it was introduced to the US markets at that time. It was created as a investment vehicle to make it easier for investor to buy shares of a foreign listed company. The conventional way of buying shares of a foreign listed company is that the investor will have to open an brokerage account that has access to the stock exchange which the company is listed on and buy the shares of the company through it. However, there are many problems associated with this way of buying shares and such as the difference in the currencies between the investor's own currency and the currency in which the company is listed in, high expenses associated such as brokerage and handling fees along with custodian fees and financial regulations associated with foreign ownership of shares of the listed company in that country. As such, ADRs can overcome the problems as mentioned above.

The process of creating ADRs can be roughly explained as follows. Banks will buy a bulk purchase of the shares of the foreign listed companies through their counterparts in the country which the country is listed in. Subsequently, this bulk purchase of shares will be divided into smaller bundles and this will be released for sale on the US stock exchanges to investors. Thus the purchase of ADRs represents a claim on the associated portion of the bulk purchase of the shares of the foreign listed companies by the bank.

There are three types of ADRs and as taken from investopedia.com, the three type of ADRs are as follows.

Level 1 - This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-counter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 1 ADRs also have the loosest requirements from the Securities and Exchange Commission (SEC).

Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs have slightly more requirements from the SEC, but they also get higher visibility trading volume.

Level 3 - The most prestigious of the three, this is when an issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets.

The ADRs listed on SGX belongs to either level 2 or level 3.

The ADRs are also divided into two categories and they are single-listed ADRs and dual listed ADRs. Single-listed ADRs are listed only have ADRs listed in the US and the companies of these ADRs do not have any shares listed on any stock exchanges. In comparison, the companies of these dual-listed ADRs have shares listed on a stock exchange and also have ADRs listed in the US. As such, the risk implications for these ADRs can be different and it is further explained in this post.

So what are the risks of investing in these ADRs ? Besides the usual risk of fluctuating prices and currency difference which are also common if you invest in equities listed overseas, the following are risk factors which are unique to ADRs.

Termination of ADRs

As stated on the SGX website, for single-listed ADRs, the ADRs holders will get back the equivalent of the shares as proportional to the amount of ADRs that they owned. However, the shares of the company for the single-listed ADRs are not publicly traded on any stock exchange, it will be difficult to sell these shares for cash although CDP will try to sell them. For dual-listed ADRs, this is less of a problem since the shares of the company are publicly traded on an overseas stock exchange so it will still be relatively easier to sell it.

Counterparty risks

ADRs holders do not actually hold the shares of the underlying company and these shares are held with a custodian or with the depository bank. In the event that that the custodian or the depository bank goes into financial difficulties, there is a risk that ADRs holders may not be able to retrieve back the shares though these shares are not supposed to be part of the assets of the custodian or the depository bank.

Trading Halt

In the event where trading is halted either in the US or locally on SGX, ADR investors may suffer losses due to the inability to trade or due to changes in the market from time delay.

There are also other things that you should take note. Firstly, ADRs holders have no voting rights since essentially they are holding ADRs and not the shares of the underlying company. Secondly, ADRs holders will not be able to receive any non-cash entitlement such as rights issue or bonus shares although CDP or the depository banks will try to sell these non-cash entitlement and distribute the cash proceeds to the ADR holders. Thirdly, transaction charges and tax if any, will be deducted from the dividends before it is distributed to the ADRs holders.

CPF to extend 4% interest in SMRA accounts

2010-09-21T21:23:00.001+08:00

CPF to extend 4% interest in SMRA accounts until 31 Dec 2011
Taken from Channelnewsasia on the 20th September 2010

SINGAPORE : The government has decided to further extend the 4 per cent floor or minimum rate for interest on CPF savings for the Special, Medisave and Retirement Accounts (SMRA) for another year until 31 December 2011 .

This is the second time that it has been extended.

Explaining the move in a statement, Manpower Minister Gan Kim Yong, said that despite Singapore's strong economic recovery, interest rates have remained low this year.

He added that the sharp drop in interest rates at the expiry of the 4 per cent floor rate may impact CPF members who may not have benefited fully from the economic recovery yet.

Since January 2008, SMRA savings have been invested in 10-year Government Securities plus 1%.

This is a market-based rate for instruments of comparable risk and duration, and will ensure that members receive fair and reasonable interest rates.

However, to help members cope with the transition, the government had committed to providing a 4 per cent floor rate for SMRA interest for two years up to December 2009.

This was extended to December 2010, in light of the global economic conditions and exceptionally low interest rate environment a year ago.

Beginning 2012, the interest rates will be subject to a minimum rate of 2.5 per cent per annum. - CNA /

Sibor drops to record 0.51%

2010-09-17T21:57:00.004+08:00

Sibor drops to record 0.51%
By Gabriel Chen
Taken from The Straits Times, 16 Sep, 2010

A key Singapore interest rate that determines some mortgage rates has sunk to a new record low, offering the prospect of even cheaper home loans.

The rate at which banks here lend to one another – the three-month Singapore Interbank Offered Rate, or Sibor – is now 0.51 per cent.

It has been hovering around the mid-0.5 per cent levels for the past few months.

In September 2008, it spiked to 2.22 per cent, as banks were afraid to lend to one another for fear of not getting repaid during the global credit crunch.

Sibor, which also affects rates for consumer loans and deposit rates, has been sliding of late.

This has been in line with the trend of interest rates set by the United States Federal Reserve, which are at historic lows. The Fed is continuing its strategy of trying to kick-start the anaemic US economy with cheap credit.

The record Sibor low also comes as the Singapore dollar has been allowed to strengthen since April.

Asia, including Singapore, is seeing major capital inflows, and this puts more liquidity into the system than would otherwise have been the case. The flushed liquidity conditions then puts downward pressure on rates.

A number of banks here offer mortgages with interest rates that are pegged to the Sibor, so there are cheaper home loans in store for homebuyers.

Still, some banks have widened the spreads that they charge above the Sibor.

This reduces the impact that the falling Sibor will have on Sibor-linked packages.

‘Still, by and large, people will be paying less for Sibor-pegged loans,’ noted Mr Nicholas Tan, OCBC Bank’s head of global wealth management.

In the low interest rate environment, some banks have introduced new housing loan products that are undercutting the rates offered by their competitors.

Maybank Singapore, for example, last month launched a new range of home loan products with interest rates that start at below 1 per cent, which is one of the lowest in town.

This intensifying fight for market share based on pricing is causing some bankers here to be concerned.

‘We are afraid of another price war breaking out,’ said a senior banker.

‘With Singapore cooling its real estate market and banks fighting for fewer real estate deals, we are looking at competition being more price intensive.’

But Ms Vibha Coburn, Citibank Singapore’s business director for secured finance, said that even if a price war breaks out, banks are not obliged to take part.

‘I don’t see the necessity of being in a price war,’ she said.

Ms Coburn said banks will have promotions from time to time, but when rates are so low, homebuyers will consider other factors, such as the turnaround time for a loan application.

‘Assuming all the customer’s documents are in place, we can give him the letter of offer in an hour,’ she said.

The low interest rates will not be a ‘pivotal factor’ to attract homebuyers back to the market, said Mr Nicholas Mak, executive director of research and consultancy at SLP International.

He said current home prices and the expected future pricing of properties are more important factors.

Some buyers are expecting prices to drop further and are holding off on making purchases, after the Government recently implemented further measures to cool speculation.

But while consumers benefit from the lower Sibor, it will mean continued lean times for those with bank deposits.

The soft Sibor is also restricting how much Singapore banks, which are net lenders on the interbank market, can charge on new loans.

This hurts their net interest margins, which measure how profitable their lending activities are.

Standard Chartered economist Alvin Liew has been revising his three-month Sibor forecast downwards, projecting rates to be at 0.5 per cent by the end of next year, from 1.5 per cent in his previous forecast.

‘The risk is that there might be more downside revision,’ he said.

Looking deeper into the benefit illustration

2010-09-16T18:23:00.009+08:00

(Taken from moneysense.gov.sg)

Moneysense has a excellent explanation of the benefit illustration but I thought it would be good to explain on how are the numbers are derived.

This benefit illustration is an example of a 15 years regular premium participating endowment policy. As you may know, the premiums after accounting for the expenses will go into a participating fund or in short, a par fund in which the insurer will manage this fund to in order to grow it. This participating fund is also used for payouts to those who make claims on their policies.

For this benefit illustration, the investment return is assumed to be at 5.25%. The surrender value is the amount which you will get back if you terminate the policy. And this surrender value is made up of 2 components, the guaranteed and the non-guaranteed portion. Once again, the non-guaranteed portion is subjected to the investment performance of the fund and this is not guaranteed while the guaranteed portion is the portion which the insurer is obligated to give you back.

End of 1st year

If the entire premium paid is invested,

$3814 * 105.25% = $4014

Since the surrender value for the end of 1st year is zero, you will lose $4014 if you surrender the policy. This figure corresponds with the figure given under the effect of deductions.

End of 2nd year

Premium paid for 1st year is invested for another year,

$4014 * 105.25% = $4225

Premium paid for 2nd year is invested.

$3814 * 105.25% = $4014

Total return for 2nd year,

$4225 + $4014 = $8239

Since the surrender value for the end of 2nd year is zero, you will lose $8239 if you surrender the policy. This figure corresponds with the figure given under the effect of deductions.

End of 3rd year

Premium paid for 1st year is invested for another year,

$4225 * 105.25% = $4447

Premium paid for 2nd year is invested for another year,

$4014 * 105.25% = $4225

Premium paid for 3rd year is invested,

$3814 * 105.25% = $4014

Total return for 3rd year,

$4447 + $4225 + $4014 = $12686

Since the surrender value for the end of 3rd year is $6766, you will lose $12686 - $6766 = $5920 if you surrender the policy. This figure corresponds with the figure given under the effect of deductions. Notice that the surrender value of $6766 consists of the guaranteed portion of $6494 and the non-guaranteed portion of $272.

For the remaining years, one can use a spreadsheet to work out the numbers since it is quite repetitive.

There are a couple of things you should take note when it comes to the benefit illustration. The first thing is that you should always take the projected investment return with a pinch of salt. Insurers may have a tendency to use a higher projected investment return to make the numbers look nicer. As such, it is always prudent to ask yourself if the projected investment return is realistic. That is because, such a plan represents a long term financial commitment and it may be detrimental to your financial plans if the insurer fails to meet the projected returns down the road. Perhaps, the easiest way is to look at the guaranteed amount of the surrender value since this is the amount that the insurer must give it to you if you terminate your policy. In this case, the guaranteed portion of the surrender value is always less than the total premiums paid. Neglecting the time value of money, you may have to think for yourself whether this policy is a good one.

Another thing is that the death benefit in endowment plans is likely to be not enough to cover your insurance needs. If you have a few dependents who depends on your income to survive, a death benefit of a few grands will probably be enough to last them a few years only. As such, you cannot use such plans to cover the needs of your dependents in the event that you pass away.

New restrictions on property market by Government

2010-08-31T21:50:00.007+08:00

Below is a summary of the regulations introduced by the Government over the National Day Rally and the increase of supply of flats by HDB.

For the purchase of a second property while still one is still servicing an existing mortgage, an upfront payment of 30% of the valuation must be placed - at least 10% in cash, the rest from CPF. Previously, it was 20% of the valuation with at least 5% in cash.
A minimum occupation period (MOP) for your HDB flat must passed before you can invest in private property. Previously, it was 3 years.
Private property owner who buys a HDB resale flat must sell the private property within six months of the purchase of the HDB resale flat.
Those who sell any private property within 3 years of buying it must pay a stamp duty of up to 3% of the sale price. Previously, the seller's stamp duty applied only for resale within one year of purchase.
HDB will offer 38,000 new flats in the next 2 years which includes BTO, DBSS and EC and the waiting time for BTO flats will be reduced by 6 months from 3 years to 2.5 years.

I do think that the restrictions are quite substantial. In my opinion, we are having a housing bubble now and bubbles can be irrational and unpredictable as it depends on how the market perceives and reacts to the news. Supply and demand has some influence over the price too but the price may take some time to adjust and correct. In the short term, the price may still hover near the high region. But as I have been blogging about how the Government is increasing the supply and lowering the demand for the past articles, the price is likely to fall over a longer period of time such as in a few years time.

Deposit products to interest the savers

2010-08-25T20:07:00.002+08:00

Deposit products to interest the savers
By Francis Chan, Companies Correspondent
The Straits Times, 25 Aug, 2010, Wednesday

BANK depositors are being warned that measly interest rates on savings are not likely to rise this year.

But they can take some comfort from innovative new deposit products at some banks that offer higher rates as a way to lure savers.

Besides offering promotional rates from time to time, more banks are rolling out special savings programmes with slightly higher returns to cater to different customer needs and demographics.

For instance, to celebrate its 75th anniversary, United Overseas Bank is offering to pay interest of 0.75 per cent a year for fresh deposits starting from $10,000.

That may still sound like a fairly modest return, but it compares favourably with basic savings accounts that typically pay as low as 0.1 per cent a year in interest.

Some of these new deposit products return as much as 1.3 per cent a year for two-year fixed deposits, while others come with a monthly savings plan or even free insurance coverage.

Interest rates for garden variety savings accounts have not risen above 1 per cent a year since August 2001, when banks were paying, on average, 1.28 per cent.

Monthly average savings rates have also been on a downward trend since 2006, falling from 0.26 per cent.

Based on latest figures compiled by the Monetary Authority of Singapore from 10 financial institutions, savings accounts earned an average of 0.16 per cent a year in January, before slipping to a dismal 0.14 per cent from February to last month.

Savers hoping for a higher yield from their hard-earned cash will have to look elsewhere as interest rates for run-of-the-mill savings accounts are unlikely to rise at least within the year, say industry experts and observers.

‘Banks here – especially the local institutions – are very well-capitalised, so they have little incentive to offer high returns when taking deposits from savers,’ said a former independent financial adviser-turned-private banker.

He added: ‘This is unless they have a sudden need to raise capital for a particularly large financing deal they are hoping to close.’

Despite the meagre interest rates from savings accounts, experts like Mr Brian Goh of iPac Financial Planning still see them as an important tool for any investor or saver, especially when coping with rising inflation.

‘When you take it out of the bank, it will be eaten up by inflation, which is going to rise by between 3 and 5 per cent,’ said Mr Goh, a senior vice-president at iPac.

‘We need to remember that capital preservation and the ability to handle loss of capital, especially if it is a permanent loss, is just as important as growing your wealth.’

A survey by The Straits Times has found that Malaysian lender CIMB Bank has one of the highest interest rates on offer in Singapore.

According to the bank’s website, its latest promotion offers a rate of 1.3 per cent a year for a 24-month fixed deposit, but customers will need to put in a minimum of $10,000 and maintain that amount over the next two years.

At Maybank, customers can enjoy a rate of 0.75 per cent if they deposit a minimum of $10,000 for one year.

And to cater to customers above 50 years of age, Maybank’s Privilege Plus Savings Account offers a rate between 0.4375 per cent and 0.5 per cent a year, with a bonus of free personal accident insurance coverage for eligible customers.

Local lender OCBC Bank pays 0.688 per cent for a nine-month time deposit or 0.788 per cent for a 14-month term.

Another offering from the bank is OCBC MSA 123, a monthly savings account that comes with terms of 13 months, 24 months or 36 months.

They offer rates of between 0.6 per cent and 1 per cent a year. Customers start earning interest by making monthly contributions of $50 to $5,000.

Head of deposit at OCBC Bank, Ms Chng Bee Leng, said such promotions can still help customers maximise their returns while staying liquid in a low interest rate environment.

For the latest auction result, the average yield of the SGS 3 months and 1 year Treasury Bill were at 0.24% and 0.42%. As such, the rates of the fixed deposits offered by the banks above are quite attractive.

Why rising property prices are not healthy for the majority

2010-08-16T19:33:00.003+08:00

HDB's Historical Resale Price Index (RPI) Chart

At the end of the previous month, HDB just released the latest update of the Resale Price Index (RPI) and this latest update shows that the RPI has increased by another 4.1% in the Q2 of 2010. The chart above shows the historical RPI and as you can see, the RPI is some way above the previous peak already.

I noticed that many have the misconception that rising flat prices are beneficial since it makes them richer, or at least on paper. After all, the current flat prices are way higher than the original buying price. But that is only true if you own more than one property.

Let's say you own a 5 room HDB flat and that HDB flat is the only piece of property you own and you are currently staying in it. The market price is much higher than the original price which you have bought it. Thus you can sell it and profit from the difference between the market price and the original price which you have bought it. But after selling your HDB flat, where are you going to stay in ? Assuming all things equal, it is not possible that you can get another 5 room HDB flat at a lower price. Well, you can buy another 5 room HDB flat at a cheaper location at a lower price and profit from the difference but the similarity ends here. The profit that is gained does not come from the rising market prices but from the disparity between the locations.

Well, it is possible that you can buy a 4 room HDB flat and since a 4 room HDB flat is cheaper than a 5 room HDB flat, you can profit from the difference. But it is the same as the previous example since the profit that is gained comes from the disparity between the size of the flats and not from the rising market prices.

As such, only those who own more than one property has the potential to benefit from rising market prices. This group of people are not bounded by where they are staying in. As such, they can stay in one property and use the other properties they own to sell at a higher price and not be forced to buy another one at a high price so that they can have a place to stay. Thus, they can capitalize on the market by selling their other properties at a higher price and wait for the market to fall so they can buy properties at a lower price. Unfortunately, the majority of the public do not belong to this group.

BP: Short-sightedness of the stock market

2010-06-30T21:52:00.008+08:00

I'm sure that everyone is familiar with the oil company, BP even before the recent oil spill disaster in the Gulf of Mexico, which has been making the headlines beside the World Cup. The oil spill disaster has and will cause BP to pay billions in damages. With such a consequence, it is not surprising that the share price has taken a huge tumble from its recent peak of around $60 to its current price of around $28.

From a general point of view, without doing an in-depth analysis of the financials and business model of BP, I would say that the market is short-sighted with regards to the share price of this company. Why ? The main question for me will be, is the long term profitability of this BP being threatened ?

We don't have to look far back to see examples that are analogous to this. The SARS period that occurred in 2003 caused a decline in the stock market. This was because SARS represented a health threat worldwide. Companies that were affected by this includes those in hotels, tourism and aviation industries since people were very reluctant to travel and venture out due to the fear of catching SARS. On the other hand, there were companies who benefited from SARS and these companies are mainly in the healthcare and services segment. On hindsight, the market is rather short-sighted. This is because, all crises will eventually end although the time taken for the crises to end may be rather long. And if the crises only affects the companies temporarily but the long term profitability of these companies are not affected, the depressed stock prices of these companies may prove to be a bargain. As the SARS crisis ended, the stock market began to bounce back. Thus, those who managed to pick up bargains, benefited from the short-sightedness of the stock market.

Now given this example of the SARS period, do you think that the stock market is being too short-sighted on the long term profitability of BP ?

(The opinion expressed by the writer does not constitute an endorsement of the purchase or sale of the stock mentioned in the article. One should do a thorough research and analysis before deciding on any investment decisions)

Credit Card Debts

2010-06-07T20:45:00.002+08:00

I read with interest on the article titled "Younger Singaporeans biggest debt defaulters" posted on Channel NewsAsia. This article talks about percentage of default for the age group ranging from 21-29 years old has the highest rate of defaults among the other age groups.

This is the age group where most of them have just graduated and are heading to the working force. It is at this stage they suddenly have much more disposable income to spend on as compared to before thus they may not have experience in dealing with credit cards and doing budgeting. Besides, they may not be well informed in the area of personal finance and it is not a wonder that this group may be the most susceptible to the ills of credit cards usage. Here are some opinions of mine regarding the usage of credit cards.

1. Spend only what you have

As the title suggest, it means that one should not even own a credit card. Otherwise, one can stick to using a debit card instead, which means that one only spend within their means. Well, it may not be reasonably practical to refrain from using a credit card since nowadays, credit cards come with a lot of privileges and perks which may save you money such as discounts at restaurants and shops, reward points and other promotions. In that case, that will bring me to my next point.

2. Pay off all outstanding balance in full
The killer here is the exorbitant interest rates which cause many to default on their debts once they are unable to keep up with the interest payments. Generally, the interest rate is around 2% monthly or 24% yearly on the outstanding balance and that is very hefty. As such, make it a point to always pay off the outstanding balance and do not let the banks earn any interest at all.

In the event that you are not able to keep up your credit card debts and the outstanding balance is beginning to snowball, do not use another credit card to pay off the debts of another credit card. Try to seek help immediately from your loved ones or friends since frankly speaking, loans from them usually carry no interest. In this sense, you are changing your debtors from the banks to that of your loved ones, who are more likely to help you out.

Otherwise, you can give the Credit Counseling Singapore here. I believe they can work out a practical debt payment plan with the banks and can also try to negotiate for a lower interest rate, which will be helpful in solving your credit card debts.

Leaving without a will

2010-05-22T22:21:00.007+08:00

I was looking at the implications of not doing a will and what will happen to the assets of the deceased if a will was not done when the deceased was still alive. A search on the internet threw up a legal act which I thought it will be pretty useful to put it up on this post and this legal act is known at the Intestate Succession Act.

Intestacy, as taken off Wikipedia here is the condition of the estate of a person who dies owning property greater than the sum of his enforceable debts and funeral expenses without having made a valid will or other binding declaration. In short, if the deceased still has assets left after and he did not make a will, he is known as dying intestate.

As for the act, I took it off the Attorney General's Chambers here, and the act is posted as follows. Do take note that this act is not applicable to the estate of any Muslim as seen below.

Short title.
1. This Act may be cited as the Intestate Succession Act.

Application.
2. Nothing in this Act shall apply to the estate of any Muslim or shall affect any rules of the Muslim law in respect of the distribution of the estate of any such person.

Interpretation.
3. In this Act —

"child" means a legitimate child and includes any child adopted by virtue of an order of court under any written law for the time being in force in Singapore, Malaysia or Brunei Darussalam;

"intestate" includes any person who leaves a will but dies intestate as to some beneficial interest in his property;

"issue" includes children and the descendants of deceased children.

Law regulating distribution.
4. —(1) The distribution of the movable property of a person deceased shall be regulated by the law of the country in which he was domiciled at the time of his death.

(2) The distribution of the immovable property of a person deceased shall be regulated by this Act wherever he may have been domiciled at the time of his death.

Property of an intestate to be distributed.
5. If a person dies intestate after the commencement of this Act, he being at the time of his death —

(a) domiciled in Singapore and possessed beneficially of property, whether movable or immovable, or both, situated in Singapore, or

(b) domiciled outside Singapore and possessed beneficially of immovable property situated in Singapore,

that property or the proceeds thereof, after payment thereout of the expenses of due administration as prescribed by the Probate and Administration Act shall be distributed among the persons entitled to succeed beneficially thereto.
Cap. 251.

Persons held to be similarly related to deceased.
6. For the purpose of distribution —

(a) there shall be no distinction between those who are related to a person deceased through his father and those who are related to him through his mother nor between those who were actually born in his lifetime and those who at the date of his death were only conceived in the womb but who have subsequently been born alive; and

(b) those related to a person deceased by the half blood shall rank immediately after those of the whole blood related to him in the same degree.

Rules for distribution.
7. In effecting such distribution the following rules shall be observed:

Rule 1
If an intestate dies leaving a surviving spouse, no issue and no parent, the spouse shall be entitled to the whole of the estate.

Rule 2
If an intestate dies leaving a surviving spouse and issue, the spouse shall be entitled to one-half of the estate.

Rule 3
Subject to the rights of the surviving spouse, if any, the estate (both as to the undistributed portion and the reversionary interest) of an intestate who leaves issue shall be distributed by equal portions per stirpes to and amongst the children of the person dying intestate and such persons as legally represent those children, in case any of those children be then dead.

Proviso No. (1) — The persons who legally represent the children of an intestate are their descendants and not their next-of-kin.

Proviso No. (2) — Descendants of the intestate to the remotest degree stand in the place of their parent or other ancestor, and take according to their stocks the share which he or she would have taken.

Rule 4
If an intestate dies leaving a surviving spouse and no issue but a parent or parents, the spouse shall be entitled to one-half of the estate and the parent or parents to the other half of the estate.

Rule 5
If there are no descendants the parent or parents of the intestate shall take the estate, in equal portions if there be two parents, subject to the rights of the surviving spouse (if any) as provided in rule 4.

Rule 6
If there are no surviving spouse, descendants or parents, the brothers and sisters and children of deceased brothers or sisters of the intestate shall share the estate in equal portions between the brothers and sisters and the children of any deceased brother or sister shall take according to their stocks the share which he or she would have taken.

Rule 7
If there are no surviving spouse, descendants, parents, brothers and sisters or children of such brothers and sisters but grandparents of the intestate the grandparents shall take the whole of the estate in equal portions.

Rule 8
If there are no surviving spouse, descendants, parents, brothers and sisters or their children or grandparents but uncles and aunts of the intestate the uncles and aunts shall take the whole of the estate in equal portions.

Rule 9
In default of distribution under the foregoing rules the Government shall be entitled to the whole of the estate.

Special provision if the intestate leaves lawful widows.
8. If any person so dying intestate leaves surviving him more wives than one, such wives shall share among them equally the share that the wife of the intestate would have been entitled to, had the intestate left one wife only surviving him.

Children’s advancement not to be taken into account.
9. Where a distributive share of the property of a person dying intestate is claimed by a child or any descendant of a child of that person no money or other property which the intestate may during his life have given, paid or settled to or for the advancement of the child by whom or by whose descendant the claim is made shall be taken into account in estimating such distributive share.

Application to cases of partial intestacy.
10. Where any person dies leaving a will beneficially disposing of part of his property, the provisions of this Act shall have effect as respects the part of his property not so disposed of, subject to the provisions contained in the will:

Provided that the personal representative shall, subject to his rights and powers for the purposes of administration, be a trustee for the persons entitled under this Act in respect of the part of the estate not expressly disposed of unless it appears by the will that the personal representative is entitled to take that part beneficially.

If the above proves to be too dry for you to read, I found an easier summary on financialadvice.com.sg here.

Do take a closer look at the distribution path of the deceased dying intestate. In the very unfortunate event that you were to pass away and you did not do a will, is this the way which you want your estate to be distributed ? For example, if you have parents who are financially dependent on you and you have a spouse and children, your estate will only be distributed to your spouse and children but not your parents. In this case, I do not think many will be comfortable with that. As such, do think about this. In any case, it is easy and not expensive to get a will done so as to ensure that your estate are distributed in accordance with your will in the event that you passed away.

Property crash of 1996

2010-05-16T00:10:00.000+08:00

I'm not sure if anyone still remembers the previous property crash of 1996 where prices of properties tumbled over 40% from the 2nd quarter of 1996 to the 4th quarter of 1998. Going by the euphoria sweeping the market and the tendency for people to forget, the bad memories of this crash are probably distant by now.

I found an excellent chart on the private residential property price index on Singapore Real Estate Info here that gives a graphical representation and the significant news and measures taken by the government from 1960 until 2010.

(Taken from singaporerealestate.info)

Back then at the peak of the market, the property news that made it to the papers were of the following;

Enbloc sales being carried out or being proposed at private estates
Record sale prices by developers
Buyers queuing overnight with long queue lines at launches
Influx of foreigners buying properties
Flipping of properties to get rich

The government tried to stem this bubble by introducing more land sales to increase the supply and to show that there is adequate land to meet the demand. When that fails, more drastic measures were introduced such as;

Housing loans limited to 80% for property purchase
Tax on gains from the sale of properties bought within 3 years
Additional stamp duty within 3 years of purchase of properties for sellers
Stamp duty for buyers of sales and sub-sales of uncompleted properties
Foreigners not allowed to take housing loans
Permanent residents limited to one housing loan

The property market started to head south and with the impact of the Asian Financial Crisis acting as the catalyst, the housing bubble burst and the property market crashed.

Fast forward 14 years later to the current state, the property news that are making to the papers now are generally the same as in the past though the property market now is not as hot as it was back then. Similarly, it is also seen that the government has introduced an increase in land sales to meet the demand and HDB will also be ramping up its flat supply. Measures to counter speculation have also been introduced though they are not as draconian as in the past. To me, it seems like history is going one full circle in a milder manner though. So the question is where will the market head to from now ? That is something for you to think about.

Dream Home Loans

2010-05-04T20:49:00.003+08:00

Dream Home Loans

By Gabriel Chan and Harsha Jethnani

Taken from the Sunday Times on 2th of May 2010

If you thought low mortgage rates would stay unchanged this year, think again.

Over the last month or so, some banks have upped the spreads they charge above Sibor - the rate at which banks lend to one another - making Sibor-pegged home loans more expensive.

The three-month Singapore Interbank Offered Rate, or Sibor, was at 0.54 per cent last week, below the previous all-time low of 0.56 per cent in June 2003.

At DBS Bank, a home-buyer taking a loan of 80 per cent of his property's value around March would have paid a rate of Sibor plus 0.5 percentage point for the first year and Sibor plus 0.75 percentage point for the second.

A buyer opting for this Sibor- linked DBS package now will have to pay Sibor plus 1 percentage point for the first two years.

Some fixed-rate packages have also shot up recently.

Standard Chartered Bank's one-year fixed package stood at 1.25 per cent in March, but has risen to 1.95 per cent.

Sibor, which is already low as it tracks prevailing United States rates which are at rock bottom, fell further following gains in the Singapore dollar last month.

In line with the improving global economic outlook, interest rates in some countries have moved higher - with more rate hikes expected globally in the second half of the year.

Some experts tip Sibor to rise later this year and to go even higher from next year.

Standard Chartered economist Alvin Liew predicts the three-month Sibor rate will likely rise to 3 per cent in 2012.

'Mortgage rates are hitting one of the lowest levels in recent years,' says Providend's head of financial planning, Mr Eddy Cheong. 'I think, going forward, there is a high chance that rates will move up if the economy continues to improve.'

When interest rates rise, monthly instalments on home loans that are not fixed will be driven up.

This could have severe implications for buyers who have over- extended themselves with big mortgages, believing interest rates will always stay low.

'Do your numbers properly. Buying a home should be a blessing, not burden,' says Mr Apelles Poh, a financial planner with Professional Investment Advisory Services.

While some home loan rates are now higher, there are still bargains and benefits out there for the cost-conscious home-buyer.

The Sunday Times shopped around to find out what some banks have to offer:

Fixed-rate loans

If you want loans with fixed rates locked in for a term of three or five years, try DBS Bank.

Last week, the bank introduced its five-year fixed package, an unusual tenor in the market.

Rates: Three-year package: The bank's current promotion requires a customer to also sign up for its mortgage insurance plan. Rates are fixed at 1.99 per cent for three years, and Sibor plus 1.25 per cent thereafter.
Standard rates are otherwise 2.2 per cent for three years, and Sibor plus 1.5 per cent thereafter.

Five-year package: For those taking up mortgage protection as well, rates are 2.25 per cent for five years and then Sibor plus 1.25 per cent.

Standard rates are 2.5 per cent for five years, and Sibor plus 1.5 per cent thereafter.

The managing director and head of DBS' consumer banking group, Mr Jeremy Soo, says: 'Our three-year fixed rate remains highly popular with home owners desiring more certainty in their repayment, especially with our three- and five- year fixed rates at a historical low'.

He says the current promotion includes mortgage protection, which is a 'key consideration for many home owners since mortgage is a long-term and significant commitment'.

Sibor-linked loans

If you are exploring Sibor-linked loans, HSBC will be the bank of choice. Its 'no lock-in' Sibor-pegged loyalty home loan is the only package that offers decreasing spreads over the tenor.

Rates: You pay the three-month Sibor plus an additional 0.9 per cent for the first year, three-month Sibor plus 0.8 per cent for the second year and then the three-month Sibor plus 0.7 per cent thereafter.
'The interest spread reduction feature serves to benefit customers regardless of how Sibor rates move,' says Mr Sebastian Arcuri, head of personal financial services at HSBC Singapore.

This bucks the conventional home loan package, which typically sees interest rate spreads rise over the loan tenor, he adds.

Sibor-linked loans with flexibility

Citibank provides the best solutions if you are looking for flexibility through the widest variety of Sibor- linked loans.

Unlike other banks, Citi offers loans pegged to the one-month Sibor. Other loans are pegged to the three-, six- and 12-month Sibor. Lock-in period varies from zero to two years, and spreads are determined based on the size of the loan and customer relationship.

Citi offers the lowest rate on one-year fixed packages at 1.5 per cent. For its two-year fixed package, it charges 1.88 per cent for the first two years.

Rates: For the first year, rates are Sibor plus 0.7 per cent to 1 per cent. For year two, rates are Sibor plus 0.9 per cent to 1 per cent, and thereafter Sibor plus 1 per cent to 1.25 per cent.
'Customers have the flexibility to switch from one tenor to another upon tenor maturity date,' says the business director for secured finance at Citibank Singapore, Ms Vibha Coburn.

As an example, clients can make use of the low one-month Sibor and subsequently, when the month is over, perhaps pick a 12-month Sibor if they feel that interest rates are likely to rise.

SOR-linked loans

For loans tied to the Swap Offer Rate, or SOR, OCBC and United Overseas Bank (UOB) are good picks.

UOB offers a package tied to the one-month SOR, now at 0.35 per cent, that allows customers to pay a fixed monthly instalment for a one-year period.

Rates: For the first three years, rates are one-month SOR plus 1.25 per cent, and thereafter the one- month SOR plus 1.5 per cent.
In the first year, if interest rates increase, 'customers can be assured that their monthly cash flow will not be disrupted. Conversely, if the rates decline, customers can pay off more of the principal amount', says a UOB spokesman.

The one-year constant monthly instalment feature can be re-continued for subsequent years as the fixed monthly instalments will be re-computed based on the remaining tenor and interest.

SOR-linked with lowest rates

OCBC offers the lowest rates on loans pegged to the three-month SOR, which is hovering at around 0.39 per cent, with a two-year lock-in.

Rates: SOR plus 0.75 per cent for the first year, SOR plus 1 per cent for the second year, SOR plus 1.25 per cent for the third year and SOR plus 1.5 per cent thereafter.
Ms Phang Lah Hwa, OCBC's head of consumer secured lending, advises buyers to guard against being swayed by just their sentiments.

Properly assessing your financial ability before making a commitment is important, she says.

'Consider longer-term issues, like affordability in the event that interest rates rise or instalment amounts increase,' adds Ms Phang.

Loans with variable rates

As for loans with variable rates, Maybank emerges the top of the lot, with the most affordable rates, with a two-year lock-in.

Rates: The loans are tied to the bank's board rate, currently at 3.75 per cent.
Rates on the loans are discounted from this 3.75 per cent, starting at 1.18 per cent for the first year. Customers will pay 1.68 per cent in the second year, and then 2.28 per cent in the third year, and 3.25 per cent thereafter.

To mark its 50th anniversary, Maybank is offering a cash gift of $5,000 to customers who pick up the variable-rate loan, says consumer banking head Helen Neo.

Rates for loans inclusive of the gift are slightly different, at 1.68 per cent for the first year, 1.88 per cent for the second year, 2.38 per cent for the third, and 3.25 per cent thereafter.

The two packages offer 'customers discounts off the bank's board rate throughout the period of their loan tenor', Ms Neo adds.

gabrielc@sph.com.sg

harshamj@sph.com.sg

Be prepared for higher mortgage interest rates

2010-05-01T00:40:00.001+08:00

The graph belows shows the historical 3 months SIBOR chart starting from Jan 1988 to the SIBOR now. The data that were used from to obtain this chart was taken from MAS's website here.

The current SIBOR, at the time of publishing of this post, stands at 0.646% and this is one of the lowest SIBOR which we have seen so far. In fact, the SIBOR has been hovering at a very low rate at around 0.69% as compared to the previous two decades, which can be seen from the chart.

Typically, interest rates will begin to rise when the economy is recovering as this is the case we we should be seeing now. Admittedly, low interest rates for the past year or so has enticed buyers to make purchases of properties since mortgage payments will be very affordable given the low interest rates. As such, buyers can be lulled into the belief or assume that mortgage payments will continue to remain affordable for a long time and this can be a rather expensive assumption.

As an example, we can consider a loan quantum of $500,000 with a loan period of 30 years. With an interest rate of 3%, the monthly mortgage payment will be $2,168. If the interest rate is increased by 2.5% to 5.5%, the mortgage payment will increase to $2,839 and that will be an increase of $671. So the question is that will you have any difficulty in servicing the monthly mortgage payment if the interest rate increases ? Otherwise, it will be prudent not to over leverage and set aside an amount of funds to cover implications that may arise from an increased interest rate.

Factors crucial to financial freedom

2010-04-25T19:50:00.001+08:00

There are three factors which I consider as crucial to get started on the journey towards financial freedom. To get started, I would define financial freedom to be the ability to sustain your desired lifestyle with little or no further work. That means that without having to work, there will still be income being generated from other avenues that can meet or exceed your expenses.

What are these factors which I consider as crucial ? These three factors are Earnings, Savings and Investment. These three factors are closely linked to each other and the combined strength of these factors is greater than the individual sum of these factors alone. If you are able to do well in just two of these factors, you should be rather financially stable after all. But if you can do well in these three factors, you should be able to achieve financial freedom after a period of time. The three factors are being elaborated below.

Earnings

The ability to generate earnings can give rise to a higher proportion of savings which can give one much more capital to channeled it into investment, which can then give rise to a higher absolute return. Consider the case of two persons who are earning $1,000 and $5,000 monthly. Let's say that both are able to save 20% of their salaries. At the end of each year, both of them will be able to accumulate $2,400 and $12,000 respectively. If both of them are able to generate the same investment return on their savings, who will take a shorter time to hit $100,000 ? This answer is pretty obvious for the one who earns less must either take a longer time or generate a higher investment return to hit his investment target.

Savings

The ability to save is equally important too though this factor is usually not deemed to be as important as earnings generally. Irregardless of your earnings, if you are not able save much, there will not be much capital left for investment. Without capital, it will be difficult to acquire assets which can generate streams of income. As such, both earnings and savings are equally important to me.

Investment

If the above two factors are satisfied, you should have a substantial amount of capital for investment. But the foremost rule of investment is to preserve your capital. As such, one should always be wary and prudent of any investment opportunities for it takes time to build up a substantial amount of capital. The capital should be deployed to investments which can offer capital gains and a steady stream of cash flows over a period of time. Some examples could be in the form of purchasing equities or properties which can give capital gains during a price appreciation of these assets. Dividends and rental income from these assets will also give a steady stream of cash flows. Such gains and cash flows can also be reinvested to acquire more of such assets which can give rise to a higher capital gains and cash flows.

However, it is not easy to satisfy all these criteria. The reality is that all of us are in different circumstances and these circumstances may not allow us to meet the criteria easily. Some of us may be stuck in industries or companies that do not pay as well or do not possess enough qualifications to command higher earnings. Others may find it hard to save due to inevitable expenses such as payment of loans or parental support or even the need to sustain one's lifestyle. To add on, investment is an another totally different game which the majority of us may not do extremely well for it takes knowledge and experience on top of the ability to rein in your emotions to be able to achieve a higher return. Doing well for any of these two factors should ensure that you should be financially stable but doing well for these three factors will get you started on the road to being financially free.

The more things change, the more things stay the same

2010-04-19T21:55:00.005+08:00

Has the sudden change of market taken anyone by surprise. Last Wednesday, the STI broke the elusive 3000 level by closing at a level of 3019.74, fueled by the news of an excellent quarterly GDP growth by Singapore. When I logged into Facebook on the following day, I saw a few comments that goes like this.

"NOL huat arh !"

"XX% profit on Cosco, more to come !"

"Time to do analysis on Genting !"

A rising market that makes the most noise draws in speculators easily. Fast forward to the present, STI closed badly at a level of 2960.93. Now I wonder if those speculators and punters are sitting uncomfortably on a loss now. This episode is a stark reminder that the stock market is not an ATM machine. But as human nature goes by, greed is inherent in us and many will still continue to speculate and punt.

Starting salaries for graduates in 2009

2010-04-10T18:45:00.006+08:00

The graduate employment survey for 2009, which is conducted by the Ministry of Education has been released and the official link is here. The course which has the highest starting salary in this survey is the Information Systems Management offered by SMU with a mean and median starting salary of $3,754 and $4,000 for those graduating cum laude and above. Otherwise, there are no surprises with courses from the Arts & Social Sciences garnering the lowest salaries generally followed by Science, IT & Engineering Courses with Business courses taking the upper tier though there are some exceptions depending on the university offering the courses.

There are some interesting findings too. Not all business courses are created equally. Starting salaries for NTU business course graduates seems to lagged behind the other business courses offered by other universities generally although it is a 3 years direct honours course. On the other hand, since it is a 3 years courses, graduates can gain a year of experience and earn a year of salary compared to business graduates from other universities who are taking the 4 year route. Another thing is that graduating with honours or Cum Laude and above give rise to a rather significant increase in the starting salaries.

The starting salaries for SMU graduates is also rather interesting. SMU graduates seems to be commanding a premium for their salaries as compared to graduates for other universities for equivalent courses generally. Their mean salaries are also significant higher than their median salaries which suggest that there are a few graduates at the upper tier who are really getting much higher starting salaries than the rest of their peers in the same courses. It seems like SMU is a good choice for those who are considering on which universities they should join.

The fallacy of long term investing

2010-03-26T22:30:00.001+08:00

It is often advocated that investing in the long term for equities is the way to go. That is because equities are volatile so in the short term, one may suffer a temporary drop in the price of their holdings. But it has been seen historically that equities has a strong tendency to trend up over the long term thus that is why it is important to invest for the long term to ride out the volatility. However, it does not mean that one should buy at anytime and hold it for a long period of time as this period of time that is required to ride out the volatility can be really long. So how long is really long ? Let me illustrate with one situation below.

Let's assume that you bought at near the beginning of the purple line as listed on the chart below. The beginning of the purple line coincides with 6th of February 1996 and at that point of time, the STI was at a level of around 2493. Unfortunately, as you can see from the chart, STI went on a decline. It will take you another 1416 days or close to 4 years before you will break even on your investment on the 2nd of January as seen by the end of the purple line.

What if you decide to hold your investment since it is suggested that you should hold your investment for a long period of time ? Another breakeven point will occur on the 2nd of October 2006 at the end of the blue line which will take 3881 days or around 10 years and 7 months. If you still decide to hold your investment, you will suffer a paper loss on your investment as signified by the green circle once again although you will enjoy some minor gains currently as the STI approaches the level of 3000. And that is after holding your investment for around 14 years.

As you can see from the scenario I painted above, a long period of time can really be long. I'm not suggesting that investing for the long term is a wrong concept. To me, it is a sound concept but that comes attached with conditions. So what are the conditions that you should take note of ?

Point of entry is of utmost importance. As illustrated above, buying near the peak will result in poor returns on your investments. Even if you did not manage to sell out near the peak but if you had bought near the bottom, you will still be sitting on a respectable amount of return after a long holding period.

Choice of investment is of utmost importance similarly. Buying a stock of a fundmentally lousy company and holding it over the long term will not yield you any decent return. The choice of investment should be an investment that has a strong tendency to rise in the long run such as index funds, ETFs that tracks major indices or a diversifed portfolio consisting of stocks of fundamentally strong companies.

Raising the Threshold for CPFIS-SA Investment

2010-03-16T21:28:00.004+08:00

Raising the Threshold for CPF Investment Scheme-Special Account Investment

From 1 July 2010, the first $40,000 of members’ Special Account balances will no longer be allowed to be used for investments. Given the higher risk-free interest rate on the Special Account, it is better to be more conservative than to subject these savings to the uncertainty of CPFIS returns.

There is no change to the requirement for members to set aside $20,000 in the Ordinary Account before they can invest their Ordinary Account monies.

(Taken from the CPF Board's official website)

That is bad news for investors who can potentially generate a higher return on their funds sitting in their CPF SA. However, that group of investors belongs to the minority. For the majority, the interest for the CPF SA is already very decent if you take into account that the return is risk free.

Definition of Critical Illness

2010-03-14T15:37:00.000+08:00

Critical illness plans are insurance policies which will pay out a sum of money if the policyholder is diagnosed as having a critical illness. However, if you are having such a plan, have you ever seen the definition of the critical illnesses which must be met first before the full sum of money will be given out to you ? I managed to find the definition of the critical illnesses on the website of the Life Insurance Association of Singapore here and we can take a look at some of the definitions.

1 Major Cancers
A malignant tumour characterised by the uncontrolled growth and spread of malignant cells with invasion and destruction of normal tissue. This diagnosis must be supported by histological evidence of malignancy and confirmed by an oncologist or pathologist.

The following are excluded:
• Tumours showing the malignant changes of carcinoma-in-situ and tumours which are histologically described as pre-malignant or non-invasive, including, but not limited to: Carcinoma-in-Situ of the Breasts, Cervical Dysplasia CIN-1, CIN-2 and CIN-3;
• Hyperkeratoses, basal cell and squamous skin cancers, and melanomas of less than 1.5mm Breslow thickness, or less than Clark Level 3, unless there is evidence of metastases;
• Prostate cancers histologically described as TNM Classification T1a or T1b or Prostate cancers of another equivalent or lesser classification, T1N0M0 Papillary micro-carcinoma of the Thyroid less than 1 cm in diameter, Papillary micro-carcinoma of the Bladder, and Chronic Lymphocytic Leukaemia less than RAI Stage 3; and
• All tumours in the presence of HIV infection.

I am not legally or medically trained so my apologies if I have failed to misunderstand any of the terms clearly. It is stated above that Carcinoma in situ is excluded from the definition of the critical illness. A search on Google for this term reveals that it is cancer that involves only the place in which it began and that has not spread. Thus, if you have cancer which have not spread, do not be surprised if you cannot receive any payout from your critical illness plans.

14 Major Burns
Third degree (full thickness of the skin) burns covering at least 20% of the surface of the Life Assured’s body.

Here is another definition from the definitions of critical illnesses. Notice that the definition of major burns is defined very clearly and concisely. Thus, any major burns that does not meet the above definition may result in non-payment of the policy.

As such, you may wish to take a closer look at the critical illness riders or plan if you are buying one and ask your financial adviser for a more detailed explanation.