Money Cents: Best Investment Guide

"I tell people that investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." -- Paul Samuelson, Nobel Prize winning economist

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Thursday, June 08, 2006

Best Home Loans: Refinancing

Home Loans: Refinancing

Average interest rates for years 1 + 2 + conversion fee

Rank Bank HDB(%) Private(%)
1,1 DBS 3.57 3.57
1,1 OCBC 3.57 3.57
1,1 UOB 3.57 3.57
1,1 Hong Leong 3.55 3.70
-2 NTUC Income N/A 3.70
2,2 MayBank 3.88 3.88
2,2 CitiBank 3.95 3.82
2,2 HSBC 3.95 3.95
2,2 St. Chartered 3.95 3.95
3,3 ABN-Amro 4.57 4.57
For comparision HDB Loan 2.60 N/A

Best refinancing strategy

(i) Most banks charge an early repayment penalty of 1.5 per cent for repayment of the loan within the penalty period, which is 2 years for variable-rate loans and 3 years for fixed-rate loans. There is also a 0.4 per cent legal subsidy clawback for loan repayment within the first 3 years.

(ii) Two refinancing strategies work well. The first is to wait until the end of year 2 then switch to another bank. That way, you will avoid the 1.5 per cent penalty. You must, however, pay the 0.4 per cent legal subsidy clawback. The ave. rates shown in the table are calculated as follows: ((Interest rates in years 1 + 2 + the legal subsidy clawback)/2).

(iii) The second strategy which works even better is to refinance at the same bank. It is often called "converting" your home loan instead of "refinancing" it. At the end of year 2, your rates are set to rise again in year 3. Then, it is best to go to your bank and say, "I do not wish to pay your year 3 interest rates. I prefer to go back to paying year 1 rates so I would like to refinance my home loan." Surprisingly, the bank will not oppose this. They know if they do not agree, you will take your business to another bank.

(iv) The cost of refinancing at the same bank is usually $500 but a few banks charge $800. It is called "a conversion" or "re-pricing" fee. It is "negotiable" which means with a little effort, you may be able to get your bank to waive it. Also, you should not pay the legal subsidy clawback of 0.4 per cent. Since you are staying with the same bank, there is no justification for the bank to charge it. (If you move to another bank, however, you will probably be required to pay a new set of legal fees.)

(v) For a $200,000 loan, an $800 conversion fee is exactly 0.4 per cent. For larger loans, the $800 is slightly less than 0.4 per cent. For smaller loans, it is slightly more.

(vi) The table above shows the average interest rate for 2 years plus 0.4 per cent -- (which is the legal subsidy clawback or the conversion fee, both which come to about 0.4 per cent).

The formula is (the interest rates for year 1 + year 2 + 0.4) / 2. Using Standard Chartered HDB loan as an example, the numbers are (2.75 + 3.25 + 0.4)/2 = 3.2 per cent.

Refinancing does not result in huge savings but it is worth it since the refinancing rates are lower than the alternative of paying the year 3 interest rates. On average, the savings is about 0.3 per cent. It means the savings is $750 per year for each $250K borrowed. For a $500K loan, the savings would be $1,500 per year.

HDB's rates are cheapest

HDB's 2.6 per cent concessionary rate loans are cheaper than any bank rates. They also have these 4 advantages:

a. HDB is considered to be more helpful should you hit on hard times and default on your home loan.

b. HDB adjusts interest rates slowly. This is helpful when rates are rising, as they are now.

c. HDB loans give flexibility. It is easy to take an HDB loan then switch to a bank loan. But you cannot take a bank loan and later refinance it with an HDB concessionary rate loan.

d. CPF rules require that bank borrowers pay 5 per cent of an HDB flat's purchase price in cash (from Jan 1, 2006). HDB loans do not have this cash requirement.



Related Articles:
Best Home Loans: Private
Best Home Loans: HDB

Wednesday, June 07, 2006

Best Home Loans: HDB

Home Loans: HDB

(variable rates)

Rank
Bank Loans
(80% & 90%)
Yr 1
Yr 2
Yr3
Costs: Yrs 1+2+3
1Hong Leong 80%
Finance (90%)
3.20
(3.95)
3.50
(4.25)
3.75
(4.75)
10.45
(12.95)
1DBS 80%
(90%)
3.25
(4.00)
3.50
(4.25)
3.75
(4.75)
10.5
(13.0)
1OCBC 80%
(90%)
3.25
(4.00)
3.50
(4.25)
3.75
(4.75)
10.5
(13.0)
1NTUC 80%
Income (90%)
3.25
(4.00)
3.50
(4.25)
3.75
(4.75)
10.5
(13.0)
2Maybank 80%
(90%)
3.68
(4.18)
3.68
(4.18)
3.98
(4.48)
11.34
(12.84)
2Standard 80%
Chartered (90%)
3.5
none
4.0
none
4.25
none
11.75
none
3CitiBank 80%
(90%)
3.5
(4.25)
4.0
(4.75)
4.5
(5.25)
12.0
(12.0)
3HSBC 80%
(90%)
3.5
(4.5)
4.0
(5.0)
4.5
(5.5)
12.0
(15.0)
4ABN Amro 80%
(90%)
4.25
(4.25)
4.5
(4.5)
4.5
(4.5)
13.25
(13.25)

For comparison

HDB Loan 90%

2.6
2.6
2.6
7.8

Notes: (i) The approximate fixed-rate equivalents can be calculated by adding 0.5 to the variable rates shown here.

(ii) Most fixed-rate loans are fixed for the first two years only. DBS bank has the longest fixed-rate home loan. It is for 10 years and charges 5.25 per cent per year.

(iii) Most banks require a lock-in. Full repayment before end of the lock-in usually incurs of penalty of 1.5 per cent plus a 0.4 per cent legal subsidy clawback. The typical lock-in is 2 years for variable and 3 years for fixed-rate home loans. HSBC and Maybank have no lock-in period. HSBC charges lower rates for home loans over $300,000.

(iv) An indirect additional cost of 90 per cent loans is borrowers will hit the CPF withdrawal limits sooner than with 80 per cent loans. (When these limits are hit, loan repayments must be made with cash and not CPF money.)

HDB's rates are cheapest

HDB's 2.6 per cent concessionary rate loans are cheaper than any bank rates. They also have these 4 advantages:

a. HDB is considered to be more helpful should you hit on hard times and default on your home loan.

a. HDB is considered to be more helpful should you hit on hard times and default on your home loan.

b. HDB adjusts interest rates slowly. This is helpful when rates are rising, as they are now.

c. HDB loans give flexibility. It is easy to take an HDB loan then switch to a bank loan. But you cannot take a bank loan and later refinance it with an HDB concessionary rate loan.

d. CPF rules require that bank borrowers pay 5 per cent of an HDB flat's purchase price in cash (from Jan 1, 2006). HDB loans do not have this cash requirement.



Related Articles:
Best Home Loans: Refinancing
Best Home Loans: Private

Tuesday, June 06, 2006

Best Home Loans: Private

Home Loans: Private Property

(variable rates)

Rank
Bank Loans
(80% & 90%)
Yr 1
Yr 2
Yr3
Costs: Yrs 1+2+3
1 DBS 80%
(90%)
3.25
(4.00)
3.50
(4.25)
3.75
(4.75)
10.5
(13.0)
1 OCBC 80%
(90%)
3.25
(4.00)
3.50
(4.25)
3.75
(4.75)
10.5
(13.0)
1 UOB 80%
(90%)
3.25
(4.00)
3.50
(4.25)
3.75
(4.75)
10.5
(13.0)
1 NTUC 80%
Income (90%)
3.25
(4.00)
3.50
(4.25)
3.75
(4.75)
10.5
(13.0)
2 Hong Leong 80%
Finance (90%)
3.30
(4.05)
3.75
(4.50)
4.0
(5.0)
11.05
(13.55)
2 MayBank 80%
(90%)
3.68
(4.18)
3.68
(4.18)
3.98
(4.48)
11.34
(12.84)
3 Standard 80%
Chartered(90%)
3.5
(4.25)
4.0
(4.75)
4.25
(5.25)
11.75
(14.25)
3 HSBC 80%
(90%)
3.5
(4.5)
4.0
(5.0)
4.5
(5.5)
12.0
(15.0)
4 ABN Amro 80%
(90%)
4.25
(4.25)
4.5
(4.5)
4.5
(4.5)
13.25
(13.25)

Notes: (i) Fixed-rate equivalents (approximate) can be calculated by adding 0.5 to the variable rates shown here. Fixed-rate loans are typically fixed for the first two years only.

DBS bank has the longest fixed-rate home loan. It is for 10 years and charges 5.25 per cent per year.

(ii) Most banks require a lock-in. Full repayment before end of the lock-in usually incurs of penalty of 1.5 per cent plus a 0.4 per cent legal subsidy clawback. The typical lock-in is 2 years for variable and 3 years for fixed-rate home loans. HSBC and Maybank have no lock-in period. HSBC charges lower rates for home loans over $300,000.

(iii) An indirect additional cost of 90 per cent loans is borrowers will hit the CPF withdrawal limits sooner than with 80 per cent loans. (When these limits are hit, loan repayments must be made with cash and not CPF money.)



Related articles
Best Home Loans: Refinancing
Best Home Loans: HDB

Monday, June 05, 2006

Best of the Best Summary Investments Rankings

Best of the Best Summary Rankings: Investments
Best Buy GoldSilverBronze

Best Bank Deposit Rates (high returns, low balance)

Citibank

FundSupermart

OCBC

Best Unit trusts and ILPs (low costs)

STI-ETF

CPF Special Account

CPF Ordinary Account

Best ILPs – Single Premium (low costs)

NTUC Income

GE Life

Prudential
Best Takaful and Halal Funds (low costs)

NTUC Income

HSBC

DBS

Important Information

1) For the category "Best unit trusts and ILPs", STI-ETF ranked first followed by the CPF special and CPF ordinary accounts.

2) It is b ecause of their low expenses (zero) and low risk (also zero), that CPF account returns exceeded that of funds on a risk- adjusted basis -- (i.e. when taking into consideration the higher risks of funds.)

Sunday, June 04, 2006

Best Low-Cost Funds

Risk/Return Name of Fund Annual Expenses Initial Commission Projected long-run returns
Low

COM: Singapore Bond

0.50% 3.0% 2.0%
Low

HSBC: Singapore Bond

0.99% 1.0% 2.0%
Low

NTUC Income: Sng Bond

0.52% 3.5% 2.0%
Low

UOB: GrowthPath 2020

1.04% 2.5% 2.0%

Medium to High

NTUC Income Flexi-Link: 3 Combined Funds (C, B, G)

1.05% 3.5% 5 to 8%
High

DBS: Horizon Sng Equity

1.48% 3.5% 8%
High

OCBC: 3 Infinity Funds

1 - 1.2%

2.0% 8%
High

UOB: Unifund

1.41%

2.0%

8%
High

UOB: 2 United Funds

1.18%

2.0%

8%

STI ETF

0.3% 0.4% 11%
For Comparison:

Zero

CPF Ordinary Account

0.0% 0.0% 2.5%

Zero

CPF Ordinary Account

0.0% 0.0% 4.0%

Important Information

1) Studies have found fund performance is not consistent from year to year. It means that past performance is not a good indicator of a fund's future performance. This leaves "costs" as a primary criteria for fund selection .

2) The two major fund costs are annual expense and initial commission. Annual expense is the more important since investors must pay it yearly. Initial commission is a one-time cost.

3) Most funds show historical returns on a bid-bid basis. This implicitly assumes initial commissions are zero, which is not correct since all funds in Singapore charge an initial commission or "load". In marketing brochures, funds usually show bid-offer returns, which shows the effects of initial commissions on returns. Brochures will often show the higher bid-bid returns along with the bid-offer returns.

4) On-line vendors like Finatiq.com, FundSupermart.com and DollarDex.com offer initial commissions of 1 to 3 per cent for certain unit trusts. (Initial commissions of 2 per cent shown for the UOB funds are for on-line purchases only.)

5) The column "expected long-run returns" are average after-cost returns for various asset classes. (It does not consider possible market-timing or stock-selection skills of individual fund managers.)

6) The STI ETF is the "Straits Times Index Exchange-Traded Fund". It is the only equity ETF approved for CPF investments. It trades like a stock (symbol: STTF). Its "initial commission" of 0.4 per cent is the brokerage cost to buy and sell on-line. Expected returns for the ETF are higher than other funds (11% vs. 8%) because of its lower costs in 3 categories: (i) initial commission, (ii) expense ratio and (iii) hidden expenses.

7) Sources: Fund fact sheets, annual reports and prospectuses.

Saturday, June 03, 2006

Best Takaful and Halal Funds

Best Takaful and Halal Funds

DistributorName of Fund Initial Commission Management Fee (Yearly)Min. Initial Investment Min. Top Up
NTUC IncomeAmanah Fund 3.5%1.00%$5,000$1,000
NTUC IncomeTakaful Fund3.5%1.05%$5,000$500
HSBC Bank Takaful Sinaran 5.0%1.05%$4,000$500
HSBC BankTakaful Global 5.0%1.05%$4,000$500
HSBC BankTakaful Asia Pacific 5.0%1.05%$4,000$500
DBS Bank Mendaki Fund 3.0%4.83%$1,000$100

Friday, June 02, 2006

Best Single Premium Investment-Linked Products (ILPs)

Single Premium Investment-Linked Products (ILPs)

Average expense ratio for each insurer

(ILPs are like unit trusts and are sold mostly by insurance companies.)


Rank

Insurance Company

Average Expense Ratio

1

NTUC Income

1.0 %

2

GreatEastern Life

1.4 %

2

Prudential

1.5 %

3

UOB Life

1.7 %

3

HSBC

1.8 %

3

ManuLife

1.8 %

3

AIA

1.9 %

3

AXA

1.9 %

3

OAC

2.1 %

3

Aviva

2.2 %

3

Asia Life

2.2 %

For Comparison

Average Expense Ratio

Unit Trusts

2.1 %

Exchange-Traded Fund

0.3 %

CPF Ordinary and Special Accounts

0.0 %

Shares

0.0 %

Important Information

1) Each of the 11 insurers offers as few as 4 or as many as 22 funds. The "average expense ratio" shown above is the average of expense ratios for all the stock funds offered by that insurer.

2) To standardize risk, the expense ratios are for equity (stock) funds only. Bond funds are excluded.

3) The column "Average Expense Ratio" actually shows the median (and not the average) value of expenses divided by market value for all stock funds sold by each insurer. It uses median instead of mean returns to give less weight to very high or low expense ratios ? (but the median vs. mean difference is not more than 0.1 per cent for any insurer).

4) In the "for comparison" section, the Exchange Traded Fund with the expense ratio of 0.3 % is the STI ETF. At present, it is the only ETF approved for CPF investments.