Coffee Talk : Mortgage Secrets Of Rich People

I had coffee with a wealthy old friend the other day and he revealed he was renovating his second GCB in the Bukit Timah vicinity. He assured me the first one which I like very much is still around, private lift, walk in cellar and all. Art gallery moving to the new one with him.

So we know he is rich although not as rich as someone else who had bought his own bulldozer for his renovations because it worked out cheaper (please don’t be reading this !!).

Is that how they stay rich ?

End of their story.

I do know that the mortgage market is 2 tiered. Rich people do not have to take normal mortgages like everyone else. They can choose to hedge their mortgage rate whenever they want, into fixed or float and, for whatever tenors with interest rate derivatives.

So he was asking me if he should hedge his loan of several millions into a fixed 5 year loan because currently, he is paying 3M Sibor +0.70% which works out to be roughly 1% every quarter.

Now, you may ask me why would a wealthy guy be having a mortgage, and a mortgage for a second GCB. Well, because it is free money. And I wish I had a mortgage too because whatever I make above 1% (his funding cost), is my PROFIT !

I do not want to be seen griping here, so there.

I worked out. He pays 5Y interest rates at 1.03% (current market for interbank derivatives). In the IRS (interest rate swap), you pay fixed vs receive 6M SOR float rate which means 1.03 – 0.45% (using current rates) = 0.58%, semi annually.

Cheap, cheap, cheap. Until he found out his bank was going to charge him just about 1.25%. Ok, not too bad. Still 0.8% semi annually. Buy a nice bond and that is 4% per annum. Enough for a new 6 series, at least.

I understand that some of my other friends are paying normal mortgages. The usual local bank deal. 3M Sibor plus plus plus. They have no access to the “hedge” game that rich man has.

Not jealous although I could live off 4% on several million each year.