Tuesday, September 24, 2019

Reloading Warchest & Unlocking Value Through Cash Out Financing

It's been more than a month and half now since we last rented out our home in order to generate a healthier cashflow due to the unexpected situation that happened back in the family.

Things are looking much better these days, with my Dad stabilizing and improving every single day through the rehab and he is also able to eat like a normal person now (he wasn't able to swallow when it first started).

Our family also managed to turnover some of the business around and cashflow is looking very much healthier than before, though there's still way to go before we can rest on our shoulders.

For myself, I have also started a new role this month which means cashflow will be alright in terms of the incoming salary every month. Whilst feeding the family and paying the school fees are not an issue, we are still very much vigilant on our spending as we tend to save as much as possible.

We probably have to cancel overseas trips and travels in the next 2 years until things get a lot more stable. If we have time, we will most probably head a trip back to visit my Dad.

The Original Idea

For a few months now, I've been looking for viable ways in order to increase the amount of warchest I'm holding.

While there are no immediate compelling investment opportunities at the moment, I do have some use for it in my mind which may or may not come true depending on the situation.

Still, I would think that raising the amount of warchest would come in handy at some point, especially with borrowing costs very low these days, and I have the choice to repay all of them back after the lock in period (usually 2 years) is over, should I want to.

My original idea to increase the warchest was to sell the property we lived in, and then move my family to some place which costs cheaper. Buying a resale HDB comes to mind, especially given that my wife and I had now converted to a Singaporean status, and we certainly want to make the full use of it.

However, we managed to find a tenant to lease our property at the end, for a lease tenure of 3 years, which now means the rent itself will be able to take care of the mortgage costs over the next 3 years.

To me, that itself, turns a "liability" into a "cash generating investment machine".

Our cashflow looks a lot lighter from thereon, but the fact that we are still "renting" a place from our in-laws doesn't solve the long term solution at the end of the day that we still need a roof over our head.

Cash-Out Financing

Then comes Cash-Out Financing.

Cash Out Financing is basically a concept of borrowing from the bank.

It involves putting your property as collaterals to the bank, who then values the property based on current market situation, and then decides how much cash they are willing to disburse to you as a loan.

This usually works in an advantage where you purchase your property long ago and you decide to unlock the value by cashing the difference out in cash, while still keeping the name to your property.

Putting your property as collaterals to the bank is definitely less riskier to the bank than taking out personal loan based on income because the bank knows that in the event of default, it still has assets that they can auction off to get some money back.

Because of this, the loan rate tends to be usually very low (compared to personal loan), and in my case, I get a rate that is slightly cheaper than the mortgage rate I'm currently paying.

For example, the bank values your property at $2.1m and you have an existing loan with the bank of $400k.

The bank will take an approximate amount of 70% hair-cut from the valuation and then deduct the full existing loan before deciding how much to disburse the rest of the cash to you as additional loan.

If you have used any of the CPF amount in your purchase previously or used them as loan repayment (which I think everyone does), the bank will have to deduct and discount that too.

So what we have in the example is something like this:

From a borrower's point of view, the risk discretion will still apply on whether you are ultimately able to repay your loan amount back.

Do take note that you are also incurring a financing charge cost to the bank, and unless you can churn out higher than what you borrow at, then it is likely that it is not a good idea to proceed with that.

I'll take a risk with this one, just because I think I have some ideas on where to put my money where it can churn out higher than the 1.85% I am paying, and more importantly it allowed us to unlock the value of our home at today's current market valuation without having to sell them.

Thanks for reading.

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