Should You Increase Your Monthly Mortgage Payment Increase with Interest Rate Rise?

Well most of you with mortgage might already received the letter from your respective banks telling you that Bank Negara increases Overnight Policy Rate and they feel bad but still needs to charge you higher interest rates because the boss bank says so… While we keep Fixed Deposit rates fixed and revise maybe after CNY holidays.

Obviously, they didn’t ask you increase your monthly payments immediately on this month’s mortgage payment but you can pay more if you like. But the fact is, you will be bearing a higher amount of loan than what it was before the rate hike.

Now the question is, should you increase your monthly mortgage payment in tandem with interest rate rise?

Historically?

First, we look at some historical data.

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If you look at Consumer Price Index since 30 years ago, it rose 218% which meant that your plate of Nasi Kandar rose from RM5.00 to RM10.90 (that sounds more like it)…

But if you look at housing price index data, it rose higher than consumer price index over the same period to 272%. Note that this is overall in Malaysia. Major cities register higher inflation on housing.

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Over 30 years, assets such as real estate really fly high and in top cities such as Kuala Lumpur, Johor or Penang, we aren’t surprised to see a 400% rise.

Payment Schedule

Second, we take a look at housing loan payment schedule.

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The table above shows the total payments with different interest rates under a 30 year tenure for a RM500,000 loan.

Assuming that we see a 3.0% rise in interest rates over the next few years which we believe it’s possible. This brings most mortgages to roughly 7.6% interest per annul (one of the highest recorded so far in 2008). With that data, we came up with the table above comparing how much more you would have to fork out in the end.

You can see that over the course of 30 years assuming a permanent 3% rise in interest rates, at the end of life we are only looking at 37.73% rise in total payments. Comparing this value with the change in real estates prices, it far exceeds the inflationary boom for houses in Malaysia.

But one might felt that paying another 135 or 10+ years (possible with re-financing) is a complete burden. But it totally logical because long term payment weighs heavily for one with declining number of years to their life. The feel being debt free definitely feels good no matter what people tell you and we have no offense even if you plan to do so.

But in short, the bigger picture is that money not spent to pay up loan quickly could be used to obtained other financial assets like shares or merely sitting on fixed deposits because housing price change grows slow for the first 10 years but accelerates over the next 20.

Our advice is, don’t be too quick in repaying your mortgage with the rising rates. Take a good look at your wealth and plan a conservative approach in dealing with higher interest rates. Holding cash is good for rising rates and long term assets should be paid slowly even with the rise.


Obviously we made a few assumptions for this case:-

  1. Interest rates can spike to god knows where.
  2. Inflationary prices for CPI and HPI is based on historical. Nobody knows what the future is.
  3. Data comes from a very generalized view of the whole country.
  4. If housing crash would to happen, god knows how many years it would take to recover.
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New Market Participation Stimulus Under PM’s Initiatives

1. Increasing Participation

  • Small Caps and Mid Caps trades are waived from stamp duty from March 2018 for 3 years
  • Availability for retail investors to increase margin financing
  • Allowing short-sellingĀ  by retail investors
  • New investors receive a 5 months trading and clearing fee waive

What We Think?
Small Caps and Mid Caps valuation might increase further and penny stocks might be pushed ahead once again anticipating this change. Although stamp duty isn’t a huge payment in Malaysia (Max RM200) compared to Hong Kong which are calculated based on a percentage with no limit upwards, we think that the effect on increasing market participation can be short lived rather than long term.

2. Malaysia Singapore Connect

  • This effort would lead to increasing market participation as well
  • The market base would be bigger for investor

What We Think?
We felt that this would benefit Malaysian market more than Singapore market. Investors in Singapore with higher purchasing power due to currency might be more interested to buy Malaysian stock as more quantity can be secured in terms of trading. Investors would be indifferent since the leverage of quantity isn’t quite needed for the long term.

 

One Month Before INARI’s Earnings

So Apple will announce Q1 2018’s earnings on February the 1st. This is where the official numbers for iPhone X would be out. A source from Fortune covered this.

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You can click on the link above and read about it but here is what the preliminary numbers are at.

The tech giant sold 29 million iPhone units in the fourth quarter. That was enough to make the iPhone X the most popular iPhone Apple sold during the period, topping the iPhone 8 and iPhone 8 Plus.

As we know, INARI has a very strong relation to Broadcom which is Apple’s top supplier for RF Chips and the highly anticipated iPhone X remains the top product that could help Broadcom in breaking its historical barrier.


In relation to that, Apple’s iPhone X sales is what made us held on to INARI all this while and we didn’t bother to sell although it went all the way to RM3.80. Previous quarter’s results reported by INARI have yet to include 100% of the numbers by the latest iPhone X and we think that this quarter should show clearly the inclusion.

It would be a week from now till Feb 1st until we get the latest numbers of the iPhone X. We should be able to see spikes within this week and possibly pushing the price to close to previous high of RM3.80.

Putting a bet that iPhone X sales would be good, we think that the holding period continues up till the week prior to INARI’s results release. Which meant that it all comes down to the week right before Chinese New Year.

We would revalue then… For now the wait begins!

IPO – Binasat Communications

It has been awhile since we found solid IPOs that are worth to subscribe. Binasat seems to be interesting with its prospectus. The attachment below contains things that are important and extracted from the prospectus so you don’t have to go through 350 pages of it.

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As usual this is how we start and rate the fundamentals.

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Growth 7/10

The story for growth is strong where in the pre-prospectus stage, we see the company talking about expansion into frontier markets like Myanmar, Vietnam and Laos. If you are positive on the ability of the company to growth there, then this would be a good choice.

Furthermore, the fibre optic segment is still something that many have yet to tap on for the South East Asian region. We forecast that this would be the difference maker in the future comparing to how much the company relies on satellites for its current revenue.

Industry 7/10

Unlike telco service providers that we dislike to invest, this seems like a a telco company but the different is totally different from the likes of Maxis or Digi phone line providers. Binasat is more towards a service provider for telco companies.

Maxis in particular uses the satellite services at the current moment where the services includes satellite.

Extracted from The Sun

Domestically, the group claims to have a 57% market share for maintaining satellite ground stations located at petrol stations and 64% market share for O&M for all satellite ground stations.

Financials 8/10

Indeed very solid margins and we can only hope that the company continues to perform so. The consistency can be seen over the years not only the year prior to IPO. Basically we do not sense any form of beautifying the income statement just for the current IPO.

Moat 8/10

Going back to the extract above, it stated that they have 57% market share for ground stations. We believe this form of moat is high and its customer base has one of Malaysia’s largest telco operators which makes it hard for other opponents to enter the market.

Proceeds 8/10

Top class proceeds where we always like to see. Most of the money goes into investing in assets that provide a continuity to the business and long term gains. Only 27% of the proceeds would be used on working capital. It is very unlikely that this would be used to pare down debt since the amount of borrowing merely hits only 28% debt to equity.

Valuations 5/10

Although all the other fundamental numbers are more than satisfactory, we felt that the stock is listed at the more expensive end of things. You might question paying only PE of 11 is quite low seemingly the KLCI PE is somewhat close to 16. As a matter of fact, we have to factor in that IPO valuation needs to be much lower in term of premium to buffer our investment.

We have ensure that there is a likelihood of a quick flip on the first day or being really cheaply priced for long term holding in the case where it doesn’t boom in the first day. We felt that a PE of roughly below 9 is much better to get a higher valuation score.

Conclusion

Average valuations suggest that we do not go all out on the subscription, we suggest that you subscribe 70% of what you are used to for this issue. We felt that on the first day of listing, it might spark a 8-9% gain. Considering as well new year and many investors are seeking new things to put money into.