By Leong Sze Hian
What if someone suggest to you that you can borrow against the equity of your residential property(ies), shares, investment funds, bank deposits and other assets, at an interest rate of about one per cent? And then ask you to invest the loan that you have taken?
Normally, the maximum loan tenure is until age 75 and subject to the 60% Total Debt Servicing Ratio (TDSR). However, up to 30% of certain approved assets (divided by 48 months to add to one’s earned income) may be applied to increase one’s income.
What are the things that you should consider? Well, in my opinion – your primary consideration should be “what are the risks?”
Can you repay the loan if the loan interest rate rise to such a level that the probability of the investment returns may likely be below the loan interest? Are there any penalties for early redemption of your loan?
To avoid currency risk, should your investments ideally be in Singapore dollar assets? (Please note that just because an investment fund is denominated as S$ in Singapore does not necessarily mean that there is no currency risk.) Are the underlying assets subject to currency risk?
If you invest in a bond, the issuer can always default. So, the least risky bonds, are Singapore Government bonds, which also have no currency risk. In fact, the yield on the long-term government bond is defines as the risk-free rate, and is the benchmark for measuring the risk premium against all investments.
The “Risk Premium” is the return in excess of the risk-free rate of return that an investment is expected to yield. An asset’s risk premium is a form of compensation for investors who tolerate the extra risk – compared to that of a risk-free asset – in a given investment. (Source: Investopedia)
The entire global or local stock market may crash. A listed company may go bust. Even government bonds are subject to market risk, such as when interest rates rise a lot very quickly. However, looking at the history of interest rates, inflation policy, government securities’ price history, etc, this risk is, in my view, relatively low in Singapore, compared to government securities in other countries.
So, if you borrow at say 1.5%, and invest in long-term Singapore government bonds (the percentage yield on the 30-year Singapore government bond, 20, 15 and 10-year Singapore government bond was 3.04 , 2.92, 2.85 and 2.27, respectively) – there is almost no risk?
Uniquely Singapore, right?
