Tuesday, April 25, 2006

Invest more in your home

NINETY-THREE per cent of us own our homes while the rest rent.
 
It gives us the highest home ownership rates in the world. This is lucky for us because owning is better.
 
You pay a mortgage for 30 years and at the end you have something to show for it - a house.
 
Better yet, your home is free, in a way, since if you didn't buy it, you would have paid just as much in rent but with nothing to show for it at the end.
This 'free home' concept works well for HDB flats and low-priced homes.
It doesn't work for expensive homes since their mortgage payments usually exceed the rents.
 
It is another instance of HDB flats being the best deal around.
Another advantage of home ownership is you can borrow cheaply.
 
Personal loans, car loans and credit card debt all cost more than a home loan.
More importantly, you can raise a family and fix up your home with enthusiasm. It's your castle.
 
In comparison, stocks, bonds and unit trusts have little emotional appeal.
 
ASSET-RICH, CASH-POOR
 
Recently, much attention has focused on a big drawback of home ownership: Over-investing, or putting more into a home than you can afford.
 
The risk is you will sink all your money into a house then end up retiring asset-rich but cash-poor.
 
Does it mean you should invest less in a home? I don't think so.
Here is why.
 
1. There is no good alternative to buying a home. If you rent for 40 years, you will retire asset-poor and cash-poor.
 
2. Suppose you throw caution to the wind and buy a big home.
Most likely, you will grow into it. As your career progresses, your income will increase.
Your savings will too.
A house that looks expensive now will seem quite affordable in 10 years.
In 20 years, you will probably think that you had under-invested.
 
3. If you retire and find that you have a big house but no cash, it is an easy problem to fix.
Simply sell your house.
This instantly transforms you from being asset-rich and cash-poor to the opposite.
You become asset poor but cash rich.
 
4. Another solution is to keep your home and use it as collateral to borrow money.
You can do it through a reverse mortgage.
 
5. Avoid becoming cash-poor by keeping your home but cutting back on other investments that squeeze your cash.
Recent CPF changes make this a necessity for home owners.
That's because new rules to take effect from 2003 to 2013 mean that much less will go into CPF ordinary accounts, which are the primary source for home-loan payments.
It is a big problem and the easiest solution is to cut back on other investments that tie up your money.
Whole life, education and endowment insurance policies, for example, require that you keep paying for up to 20 years before you can break even.
 
6. Final advice: Don't worry too much.
Bank and HDB rules make it very difficult to over-invest.
They limit your loan size so that monthly mortgage payments do not exceed 40 per cent of your income.
You couldn't over-invest even if you wanted to.
 
A way to 'pawn' your home
 
IF you are super sentimental and cannot bear to sell your home, here is a solution: Borrow money using your home as collateral.
 
It is called a reverse mortgage. It works like a pawnshop loan but instead of using gold jewellery as collateral, you use your home.
 
For HDB flats, it is available to people over 70 years of age who have already paid off 90 per cent of their mortgage. They can borrow up to 70 per cent of the value of the home over a period of 20 years.
 
After 20 years - at age 90 - they must pay back the loan. To do this, most people sell their homes.
 
In fact, you can think of a reverse mortgage as selling your home gradually. If you change your mind, you can always pay off the loan and keep your home.
 
It works like this: If you have a $400,000 HDB flat, you can borrow $280,000 over 20 years. It means you will receive monthly payments of $655.
 
I think a reverse mortgage is useful. For senior citizens, it may be their only source of cash other than selling their home.
 
Most banks won't refinance a home loan unless the mortgage is paid off prior to the borrower's 65th birthday.
 
It means you must be under 45 years of age to qualify for a 20-year home loan.
An HDB flat's reverse mortgage costs 5 per cent interest, which is about
1 per cent more than a fixed-rate home loan.
 
It is cheaper than all other sources of borrowing. The only company offering reverse mortgages is NTUC Income. It just started offering them for HDB flats and has issued four so far.
 
For private property, it has issued 300 since 1997. The small numbers may indicate that being asset-rich and cash-poor is not such a big problem for retirees after all.

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// posted by Shajahan @ 10:18 AM


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