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Nov. 22nd, 2005 | 08:29 pm
mood: thoughtfulthoughtful

Houses are expensive :(

With that as the premise, it's time to start wondering how we will be able to afford one. Taking out a mortgage with only 10% or 20% deposit will leave us paying quite a lot in interest. If the house costs $400k and we pay $80k up front, and the home loan is at 7% p.a., then we are paying $1867 per month in interest. Plus we have to pay off part of the loan amount itself as well. Given those figures, it's cheaper to rent while saving money first. Particularly if we are living here in Singapore, with such cheap rents.

The breakeven point seems to be with a mortgage of A$120,000. At that point, it's cheaper to pay off the interest than to pay the rent we are paying over here. That would mean paying $280k up front on a $400k house! So how?

Recently we've been looking a lot at unit trusts as well as interest-bearing cash accounts. Commonwealth Bank's Netbank Save gives 5.4% p.a. with no restrictions on deposits and withdrawals (but minimum balance A$5000). It's very flexible, but 5.4% is not much. Inflation eats some of that, and the Australian government takes 10% of it (0.54%).

So what about unit trusts? The traditional unit trust is a fund with cash from many small investors, allowing the fund to diversify among various stocks and bonds. A fund manager decides which stocks and bonds to invest in, guided by the fund's rules. But these funds have high fees. Typically you will pay 4-5% of each deposit to the fund as a sales fee. Then you will be paying between 1% and 2% each year as a management fee. Those few percent are a lot when your expected return is no more than 10% at the best.

On the positive side, unit trusts in Singapore are tax-free! This is a big advantage, especially compared to Australia, where taxes can eat a good proportion of any returns.

What about index funds? These are a type of unit trust where the fund invests in stocks (and possibly futures) in order to approximate closely a particular index, such as S&P 500 index. There are several good reasons for this:

- The performance of these indexes is well-known, with histories going back decades in some cases.
- The fund manager has less work to do, as he/she just follows the index. This means lower management fees.
- The sales fee is also lower (2% for a small investor, and even less for large investors).

It seems like a very good idea.. and I am currently considering investing in one of the singapore funds which feeds into an index fund. The worries I have are:

- Will I be investing the money long enough to get the annualized 10% or so returns that indexes give? The 5 years left until we go back to Australia may not be long enough.
- Are these funds exposed to currency movements? If anything happens to the singapore dollar or australian dollar, that could have a big impact, if I plan to take the money back to Australia afterwards. I've heard that some funds hedge against currency movements between themselves and the fund they feed into, but that doesn't protect me against singapore vs australia dollar changes.

It seems there are three main feeder index funds in Singapore:

Infinity European Stock Index Fund
Infinity Global Stock Index Fund
Infinity US 500 Stock Index Fund

Each one feeds into a Vanguard fund (seems to be a respected company with good track record). The index used varies in each case, and sales fees and management fees vary a little. So this is what I am trying to decide right now :) It's occupying a lot of my time, but I am enjoying all the learning!

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