Taiwan’s Mortgage and Interest Rate
As the central bank of Taiwan raised the interest rate, most rate of index-rate
mortgage will follow the rising move. Thus we need learn how to forecast the future interest rate. Current discount rate set by central bank of Taiwan is 2.375%. And the mortgage rate of government sponsored home purchasing is 2.98%. (2.375%+1%-0.125%) If central bank of Taiwan raise the rate 0.125% four times in the coming year, the mortgage rate will rise to about 3.5%. If the interest rate is raised continually for two years, it will become around 4%. If anyone applies for a fixed rate mortgage at 3.5% now, then he will be still paying at the fixed loan rate of 3.5% two years later. Fixed rate mortgage is better than applying a government sponsored mortgage now, and get raised to 4% in the future. Especially for people applying for mortgage of 20 years or even longer, now it is a good time to use fixed rate mortgage.
You can see a lot of banks offering long years’ fixed interest rate mortgage now. Insurance company in Taiwan provides most of long term fixed rate
loans. Some offers 20 years to 30 years fixed interest rate mortgage for their customers. We should also be aware of the possibility that anther interest rate declining cycle might begin in 5 to 10 years. Fixed rate mortgage will become unfavorable again when rate start to decline. But considering that you might be able to
refinance to a index rate mortgage in the future, it is still a better idea to apply for fixed rate loan nowadays. The current fixed rate of loan, 3.5%, is even lower than the estimated return rate of some Real Estate Investment Trust. From the past five year’s interest rate history, we can conclude that now is not the highest point of interest rate.
Life Insurance & Estate Taxes
Life insurance is the most frequently used method for estate taxes planning in Taiwan. Even though life insurance carries higher expense, and the estimated rate of investment return, because of low interest rate, is lower in recent years. Though the beneficiary might pay income tax due to the latest minimum tax bill, life insurance still has some advantages.
First, life insurance can be used as the
source of the estate taxes dues for the heir. The cash payout from the life insurance can be easily considered as the source for heirs to pay the estate taxes.
Second, the money paid as insurance premium is no longer considered part of the estate as long as the insurance policy has a beneficiary. The value of the insurance policy will be excluded from the estate, thus it will
reduce the total value of the estate and the applied estate-tax rate.
Third, life insurance can be used as a
specific transferring vehicle. Because life insurance with beneficiaries is exempted from the estate, it is also exempted from the entailment of Taiwan civil law. You use life insurance to transfer asset to specific heirs after your death.
Fourth, according to the condition of the life insurance, an ancestor/Policyholder can borrow against the policy as an unsolved debt in the estate. An unsolved debt can be used as a debit of the estate. Though borrowing from life insurance carries interest, it will not increase the total value of the estate no matter how much money is borrowed. The ability to borrow from life insurance
provides needed liquidity while living.
About unsolved debt, Taiwan Tax bureau might ask heir taxpayers to explain the reason and usage. Bad estate plan with unexplained debt should be avoid, otherwise Tax bureau could reject the debt. The tax evasion could cost heirs
double of the original tax.
Trident Real Estate Investment Trust Fund (01005T) approved
After the trident real estate investment trust fund, first one designed by foreign investment bank Lehman Brothers, approved by Taiwan government, total number of Real Estate Investment Trust Funds
(REITs) available in Taiwan grew to five. Trident Real Estate Investment Trust Fund will raise 3.85 billion NT dollars from market. Total market value of all five REITs will be over 43 billion NT dollars. If we try to create a total Taiwan Real Estate Investment Trust Index, the free float factor for Trident REIT will be 100%.
To manually create your own passive Taiwan Real Estate Investment Trust Index portfolio, the weights for each of the five REITs are as following:
Assets of Trident Real Estate Investment Trust Fund include Chen-Jian 21 building, 1.6 billion NT dollars, Champagne building, 1.5 billion NT dollars, and Elite logistic building, 600 million NT dollars. Elite group will be responsible for day to day management of the assets. Estimate yield for Trident Real Estate Investment Trust Fund will be 4.031%.
TAIEX fell 288 points again
2006/6/8 TAIEX fell 288 points again. TAIEX index was now at 6331, trading volume was slighter larger than previous decline of 244 points. Market was primarily affected by the uncertainty for the political scandal of President Chen Shui-bian. Yesterday US stock market was affected by interest rate rising. All of a sudden people decided to sell their stocks at the same time. TAIEX was now lower than what it was at the beginning of 2006. You should consider yourself in good shape if your net asset value was higher than January 1 2006.
If you agreed with me that Taiwan’s economic growth is good this year. The GDP growth can no longer be compared with high growing area like mainland China. But Taiwan’s economic growth is stable this year. With TAIEX falling back to this year’s starting position, now is buying opportunity rather than selling. Be cautious not to gamble all of your money in one day. You can shorten your buying waiting interval for your regular investment plan.
Those who invest 1 unit of TTT
(Taiwan Top 50 Tracker Fund) every month should consider buying two instead of one. Furthermore, you can transfer out some of your bond or deposit position to equity portfolio. For long term investors now is definitely not a good time to sell your holdings.
Now is also a challenging time for investor’s ability to control their cash flow, especially for those who use leverage to invest in stock market. As the price drop suddenly, most people have lots of unrealized lost on the book. You will have to realized lots of lost if you need to use cash for living now. The source of income to repay the monthly due becomes very important. It is fine for those have a day job or rent income investors, because they have plenty of income to pay the due. They don’t have to sell stocks for cash just because TAIEX falling 288.
I consider myself quite lucky this time. Since the core equity portfolio is for long term profit not for short term selling, it does not matter even if TAIEX falling more. Not like I could predict the falls, it was just lucky. In May I made a decision to sell a failed stock position for years. I had hold that stock for more than 2 years, including all dividends, I still lost a single digit percentage. The company’s revenue dropped again this year, and one of friend who left one of the company’s invested company. Their new product development project is not doing well. Thus I decided to sell that position in May before this falls happened. This left me 10% of cash position to use in the current opportunity.
