The Problem with Mortgage Refinancing
I recently commented on the How to buy additional properties with mortgage refinancing? and wanted to further develop my opinion here.
The advice given in this article is valuable, and spreading the word about re-financing option is a good idea; yet, in my opinion, promotion of such strategies should always come with BIG warnings signs. In capital letters and bold – as you can see.
Why should they come with such warnings? These strategies are the exact replica of the ones that were broadly promoted and followed in the US between 2000 and 2007; and we saw where the American Real Estate owners ended up.
Fauzi and KCLau argue that, should you know what you are doing, then there should be no problem… Yet, many Real Estate / Finance billionaires lost fortunes in the US Krach; and they certainly were better informed than most of us will ever be. So knowledge and information, while important, are not enough when dealing with Refinancing. Especially as these leverage-strategies can haunt you should the market turn around.
IMHO, we should follow Morningstar’s Why Diversification Still Matters advices. The past few months were certainly painful for just about all investors; Stocks of all kinds, commodities, and even bonds posted significant losses. Yet we should not forget the wisdom of the old saying: “don’t put all your eggs in the same basket”. This manifesto does just that, and I’d argument that you need to do just the same when dealing with refinancing.
I strongly believe you should diversify your positions when refinancing, and reallocate your realized-profit(s) to other asset classes to maintain a diversified portfolio. Otherwise you may end up with a portfolio inflated in one asset class – Real Estate in this discussion – which is unhealthy in the long run.
I agree with Fauzi and KC that information and knowledge are important. They are essential on your path to financial-freedom. But don’t forget one of the oldest wisdom of all on the way. Always keep your portfolio as diversified as possible, so you can weather down any bad surprises.
Do you agree / disagree with me? Do you want to join us in the discussion? What’s your take? Would you refinance to leverage within the same asset class, or would you diversify your positions? Would you do it reagularly? The comment section here under is yours 
Mortgage refinancing has its problem. In fact, it is the people who uses this financial tool indiscriminately that creates the problem.
The housing debt to equity ratio (also called loan to value) increases when homeowners refinance and tap into their home equity through a second mortgage or home equity loan.
As of 2006, several areas of the world such as US are considered by some to be in a housing bubble state. Major causes of the bubble include overvaluation and excessive borrowing based on those overvaluations, which increased the debt to equity ratio of most houses rapidly.
Eventually when the bubble bursts, and house value drops, the debt to equity ratio of most houses become negative. This triggered a dramatic rise in mortgage delinquencies and foreclosures in the United States, and then the well-known subprime mortgage crisis, with major adverse consequences for banks and financial markets around the globe.
The crisis became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system.
Cheers
Thank you, Jacques, for your comment on the article “How to buy additional properties with mortgage refinancing?” and for further sharing with us The Problem with Mortgage Refinancing.
Cheers
Thanks Ong
Glad to discuss this with you.
My post is exactly to warn people who may use this financial tool indiscriminately, and too aggressively.
'I strongly believe you should diversify your positions when refinancing” i certainly agree
to this.
Hi Jacques, great discussion here. For diversification matter, yes, I do 100% agreed with you. Do not put all investment in one bucket. In fact, I would encourage people out there to stash their cash into safe heaven deposit likes FD, ASW, ASB. On top of insurance, I myself put 40% into guaranteed (liquid) savings instruments, 30% allocation for property and the rest in unit trusts, stocks and coop instrument. Some points that I missed out was perhaps, we should be extra careful when we opt for refinancing to grow our asset for instance, not simply buying because of sentiment, totally understand the market needs (rental return and potential capital appreciation in future) of the property that we buy, affordability base on our nett take home income etc.. And certainly, avoid greediness..
Maybe you can share your practice wrt your investment allocation.. Cheers..
Hi Fauzi. Good idea to share our portfolio break down here.
For now we keep things quite simple. We focus with my wife is on topping up our mortgage reimbursement. The mortgage reimbursement surplus represent roughly 20% of what we would pay for rent. Another 30% goes into overseas FD and ASB. The remaining is invested in an offshore ILP with diversified funds, mostly index and trackers. Here you are
Yes, it's nice to share our portfolio here. Here is my latest personal investment portfolio since last quarter of 2008:
Real estate – 50%
Precious metal – 20%
Cash (FD, ASW, high yield savings) – 20%
Stock & unit trust – 10%
I totally agree with Fauzi that one should avoid greediness when come to real estate investment. Affordability should be the first priority at this juncture, not excessive leveraging.
There are always opportunities out there and it is our responsiblity to equip ourselves with the right attitude, knowledge and options available to us.
Jacques, don't mind we link your blog from reijb.com? Thanks.
Cheers
Thanks for the link
i like your blog. thanks for the info.
i like your blog. thanks for the info.