Home Loan - Does inflation help you reduce the amount of interest you pay?

[Jared Seah]

Flinger,

We win some here but lose big time elsewhere

If inflation is 5% and your mortgage loan is 2.6%, you win.

But not so fast!


Is our pay raise higher than the 5% inflation?

Our ability to service the loan may be compromised if our living expenses go up faster than our income.


Total income must beat inflation before we really win by taking advantage of "inflate our debt away" tactic.


We smart; others not stupid.


Would banks and HDB allow us to "win" indefinitely? Even if their management fall asleep on the wheel, I am sure some vested shareholders and citizens will be very vocal on their entitlement on creating shareholders' value


But we still have 1 trick that's in our favour - refinancing!

For that, you may want to compare the pros and cons between a HDB loan and a commercial bank loan

[godjira1]

I would take a 25 year fixed 2.5 over an ARM with a 1.05 teaser rate at this point. Sure if you can refinance u are fine but a combination of falling prop price and rising ir can be devastating.

The beauty of a fixed rate loan against a non marked to mkt asset is that leverage you use here is a lot less vulnerable.

If we dont back ourselves to return better than 2.5 pct per year on average we have no business being investors....

That said, looks like its not a 25 year fixed rate loan afterall.

[flinger]

Hi Hyom,

Thank you for enlightening me that it is actually not a fixed loan but based on interest rate of the CPF account. I totally forgot about that linkage.

Appreciate your reply.

Regards,

Flinger

Hi flinger,

I think your strategy will work fine in a high-inflation-over-many-years environment. However, Cory's assumption that the interest rate remains fixed throughout 25-year period is a critical one in Singapore's context. The last time I asked almost 4 years ago, there are no such thing as a 25-year fixed interest rate bank loan in Singapore. The interest rate will reset every 3 years. Because of this constraint, your strategy will not work in Singapore but will work in US where 30-year fixed interest rate loan is available.

HDB interest rates are not fixed at 2.5%. They fluctuate with the interest rate in our CPF ordinary account.

If someone knows of mortgage loans which fixes interest rates for longer than 10 years, please do let us know. Thank you.

---

Hi Jared,

That's true refinancing is a great tool if you are using ARM. Sometimes however, it comes with penalties etc...but if you are careful in your package it can be good to refinance.

However, I think from a risk management perspective for me, I think the HDB loan is a better loan for me.

Thank you for your reply. Much appreciated.

Regards,

Flinger

Flinger,

We win some here but lose big time elsewhere

If inflation is 5% and your mortgage loan is 2.6%, you win.

But not so fast!


Is our pay raise higher than the 5% inflation?

Our ability to service the loan may be compromised if our living expenses go up faster than our income.


Total income must beat inflation before we really win by taking advantage of "inflate our debt away" tactic.


We smart; others not stupid.


Would banks and HDB allow us to "win" indefinitely? Even if their management fall asleep on the wheel, I am sure some vested shareholders and citizens will be very vocal on their entitlement on creating shareholders' value


But we still have 1 trick that's in our favour - refinancing!

For that, you may want to compare the pros and cons between a HDB loan and a commercial bank loan

[kookie]

Was just wondering if the interest on for instance posb mortgage loans are adjusted for inflation? I know it's not for a locked in rate..but for floating? Or is it set according to demand and supply?

[CityFarmer]

Was just wondering if the interest on for instance posb mortgage loans are adjusted for inflation? I know it's not for a locked in rate..but for floating? Or is it set according to demand and supply?

The mortgage loan specified is pegged to CPF rate (according to the link), so the floating follows CPF rate

The next question is CPF adjusted for inflation? Here is info from CPF website

"The computed CPF interest rate, derived from the major local banks’ interest rates for the three-month period ... the legislated minimum of 2.50% per annum, the OA interest rate ..."

[snowcap]

Speaking of inflation, I think the official published CPI or inflation figure is useless to the man on the street. This is because the inflation is measured using a weighted basket of goods and services. Who consumes exactly the same goods and services in the basket in the exact same proportions at that particular moment in time? So rubbish.

A person who goes drinking every other night, when alcohol prices goes up, he is hit, but those non-drinkers are not affected. Someone who works from home, doesn't care (much) if bus fare or petrol prices go up. If I don't drink coffee, I am not affected if Starbucks or Coffee Bean raise their prices by 10%. And so on. To me, what I would do is to measure my own inflation index. What are the things I spend on every month (this is already done as I track my budget), what are the price increases? Then I know what is my personal inflation.

The second thing I can do is spend wisely. Buy things on sale. Choose cheaper alternatives - instead of Kleenex tissue, I buy house brand. If COEs go up to $100,000, I can choose a Toyota rather than a Merc. I can buy a second hand car.

The third point is that we don't always buy things every year. If the price of washing machines goes up, I buy it once in 5-8 years, so it doesn't affect me this year.

So a suggestion would be to calculate separate inflation indices based on "basic needs" like rice, cooking oil, hawker food, versus a "middle income" basket like iPads, overseas holidays, car ownership, etc. And use a "moving average" inflation for durable goods.

I am not an economist, pardon me if the suggestions are not good.

[kazukirai]

So a suggestion would be to calculate separate inflation indices based on "basic needs" like rice, cooking oil, hawker food, versus a "middle income" basket like iPads, overseas holidays, car ownership, etc. And use a "moving average" inflation for durable goods.

Actually, Singstats does produce CPIs for the different income groups.
http://www.singstat.gov.sg/news/news/cpi...un2012.pdf

[sgd]

Speaking of inflation, I think the official published CPI or inflation figure is useless to the man on the street. This is because the inflation is measured using a weighted basket of goods and services. Who consumes exactly the same goods and services in the basket in the exact same proportions at that particular moment in time? So rubbish.

A person who goes drinking every other night, when alcohol prices goes up, he is hit, but those non-drinkers are not affected. Someone who works from home, doesn't care (much) if bus fare or petrol prices go up. If I don't drink coffee, I am not affected if Starbucks or Coffee Bean raise their prices by 10%. And so on. To me, what I would do is to measure my own inflation index. What are the things I spend on every month (this is already done as I track my budget), what are the price increases? Then I know what is my personal inflation.

The second thing I can do is spend wisely. Buy things on sale. Choose cheaper alternatives - instead of Kleenex tissue, I buy house brand. If COEs go up to $100,000, I can choose a Toyota rather than a Merc. I can buy a second hand car.

The third point is that we don't always buy things every year. If the price of washing machines goes up, I buy it once in 5-8 years, so it doesn't affect me this year.

So a suggestion would be to calculate separate inflation indices based on "basic needs" like rice, cooking oil, hawker food, versus a "middle income" basket like iPads, overseas holidays, car ownership, etc. And use a "moving average" inflation for durable goods.

I am not an economist, pardon me if the suggestions are not good.

I have the same view actually, most of your points similar to mine.

[CityFarmer]

Speaking of inflation, I think the official published CPI or inflation figure is useless to the man on the street. This is because the inflation is measured using a weighted basket of goods and services. Who consumes exactly the same goods and services in the basket in the exact same proportions at that particular moment in time? So rubbish.

...

The consumer price index (CPI) is a macro economic measure, to use as reference for individual.

The CPI published normally contains detail figures by product groups, instead of just a collective CPI figure. The grouping e.g. Food excl prepared meal, Clothing & Footwear, Medical treatment, insurance etc.

MAS also published the Core Inflation Measure which exclude accommodation and Private Road Transport which normally not consumed by general majority.

In short, the CPI is useful even for general user to gauge his/her inflation rate, if he/she wants to

[snowcap]

So a suggestion would be to calculate separate inflation indices based on "basic needs" like rice, cooking oil, hawker food, versus a "middle income" basket like iPads, overseas holidays, car ownership, etc. And use a "moving average" inflation for durable goods.

Actually, Singstats does produce CPIs for the different income groups.
http://www.singstat.gov.sg/news/news/cpi...un2012.pdf

ok, thanks.
Unfortunately, it shows that inflation hits the poor the hardest. While others can downgrade from branded goods to house brands, or reduce their consumption of luxury goods or discretionary items like travel and leisure, the poor may have to cut down on their basic needs.