Monday, March 5, 2012

Loans & Liabilities

How I make use of assets to buy more assets.
There is possibility to loan at Sibor + %spread (commonly around 1%).
All you need is for the bank to recognise your assets(cash, property, etc) under the bank management.

For private banks(eg, UBS, CreditSuisse, DBS Pte bank, SCB Pte Bank), it is called a credit facility and they charged sibor+%spread. Currently, it is around 1.3-1.5% pa. What we do is we pay only the interest, not the principal and the term of the facility can be renewable weekly, monthly, yearly etc. For the retail investors, I believed anyone with access to priority banking, my friend is using CIMB  offers that.  
So for a sgd bond, you can borrow 1.5% sgd loan and buy 5.5% corporate bond to yield 4% spread. The risk therefore would be the rising interest rate and a perpetual would actually be a bad investment. This strategy would be better using short duration bonds like 3-5yrs.
If you are buying USD bond, it will be the same. Borrow USD fund at 1+% and buy the 5+% usd bond. No exchange risk as far as I know. Apart from when you take the income in USD and you need to convert to SGD, but that is income that is earned from the spread and you could always continue holding onto the USD or use the USD to buy US stocks or usd gold/silver .

Of course, you are not restricted to buying bonds. You can also buy blue-chip dividend paying stock paying >5% and paying the 1.5% interest cost.

Have you ever wondered why some property agents will tell you a buyer paid a million dollar property in full CASH. One possibility would be he was using a credit facility as he is expecting to FLIP the property(during the flippant days). He can hold for 1-3yrs for the TOP too and nett off the proceeds. No need to apply for bank mortgage loan. Or have you seen the buyer who paid cash again for that ferrari or the mercedes.. One possiblity is again using the credit facility. But in most cases, they will pay back very soon (within the year) since their passive income can generate that much cashflow to fund the purchase, but they want the car NOW instead of 12mths later. Possibilities are endless, but whether you dare to do it. I am not too daring..hehe.. 

Disclaimer : Not much leverage here as I still feel more comfortable leveraging for tangible assets. Prudent use of leverage is recommended. For most HNWs, they have at least $1 in asset to back up their $1 in loan. So they can pay back and take a lost(if any). So if you are retail and intends to do this, I think it's also better to be this "safe' and not depend on the value-at-risk model to determine your leverage.

For liabilities like cars, holidays, I will use the cashflow generated from my portfolio to fund the loans (as long as it make sense in terms of interest rate spread). My motto for liabilities , "Never touch the capital, always use the cashflow".

For cash-generating properties, I am very comfortable leveraging 80% as they are essentially self-paying assets. Make good use of the debt option available to you.


Calvin said...

Hi wealthjourney,

That’s interesting. It’s the first time I have heard of this. Are you referring to only clients within private banking? I know that some private banks can lend against the stocks held, but the interest is about 4%. Which bank offers this for retail investors?



SmartPassiveCashFlow said...

I like your motto 'Never touch the capital, always use the cash flow'. Well Said!!

OT83 said...

Hi WJ,

"So for a sgd bond, you can borrow 1.5% sgd loan and buy 5.5% corporate bond to yield 4% spread."

I guess borrowing from 1.5% only for NHW individual like you? Sorry I noob in this so asking you for advice :)

Wealth Journey said...

Calvin, i just added the comments into the post. For retail(actually priority banking), my friend is using CIMB and CIMBInvest.

Thanks. I liked your very illustrative drawings on passive income concepts. Very refreshing!

Yes, you gained the spread and alot of HNWs are doing that. But the upside for most HNWs is we have the money to pay back if anything goes wrong. ie, $1 dollar of liquid asset against $1 dollar of loan. However, more aggressive HNWs uses 10x magnifier.. Crazy.. but they dare and you see them in newspaper clippings for the wrong reasons.

Calvin said...

Hi wealthjourney,

If I understand it correctly, you are saying that the bank will lend against your liquid assets at about 1.3%-1.5% based on current sibor.

However, it means that your funds are probably locked up with the bank when you do this in either form of savings deposit or fixed deposit.

Since your funds are locked in at such low interest rates i.e. 0.5% to 1+% for FDs and you are paying 1.3%-1.5% on the loan, doesn't it make sense to just use the cash instead of taking a loan?

I am with Standard Chartered priority banking and I doubt they will give you a interest only unsecured loan or such low interest rates based on assets such as equities, it has to be very liquid assets such as cash, money market and FD.

My friend with Julius Baer gets about 3.5%-4% for borrowing against his equities portfolio with the bank.


YJ72 said...


Just compared some private banks credit rates and DBS is offering Sibor + 0.75% spread compared to most Swiss banks at 1% spread. Any better lobang you can share?

Wealth Journey said...


You should have better rates if your account is big with them. I believe my level is still the entry level HNW rate. Probably there will be a big jump if you are at the >$10mil bracket. I think we have to ask the bankers about this. :) You asked and let us know :) But ya, I think DBS have very competitive rate against the foreign banks. Even their AUM charges and stock transaction charges are way lower than the rest. Very good :)

Liquid assets are blue-chips stocks, cash, deposits(foreign or local), investment-grade bonds. So, you are not tied to only holding low-yielding cash. For example, there was an issue of Bank of East Asia 10yrs NC 5.5Yrs Tier-2 subordinated bond today yeidling around 4.5%. It has a lending value of 65-70%. So if you had bought this at $250k, you can draw out 65% of the value at Cost-of-Fund plus spread. It will not be 4-5%, it's definitely below 1.5% at the moment. YJ72 should be able to confirm that as well since he should have accounts with the private banks.

Anyway, so you have $250k BEA bond yielding 4.5%, nett interest cost of 1.5 gives you a yield of $3%. With the borrowed fund, you could for example, buy another corporate bond yielding 4% giving you a total of 7% nett yield on your $250K. Like I mentioned in the article, u need to take care of the risks.

Wealth Journey said...

sorry, the nett yield should be around 6%(just an estimate, too late at night to calculate) for the bond example. But you could also put the money into equities yielding 5-10% div yield plus capital appreciation or depreciation ..hehe..

P/S : I do not advocate leveraging for equities/bonds too aggressively. Properties can, but not anything else. Too many examples of rich people who get burnt playing with leverage. Probably some things are meant to be leveraged on, some things aren't.

YJ72 said...

The net cost of borrowing is indeed 1.5% or less for the private banking platform. The example you gave for leveraging is similar to what I know. It seem like a safe method to make money using 'borrowed' money but I am too 'chicken' to try it out. However, I did took a 3 year fixed home mortgage loan (avg 1.68% p.a. for 3 yrs) from a local bank and used it to buy bonds and earn the interest difference of about 3% p.a.