Monday, January 24, 2022

Agent Likens Premium Financing to Property Investing

" Property very high now man, just when i saved up $300 k to buy my $1 million property, it shoot up again!"

" Why you want to buy property?"

"For retirement loh...Cash flow incoming in retirement years"

That's when it started.

The sales pitch.

If one were to google premium financing, one would notice that the examples shown are normally portraying people in their 40s. The ripe age of wanting to buy an investment property and yet may not be able to due to property prices rising too much.

In a nutshell, premium financing insurance product is borrowing money from a bank to buy an insurance product. The series of monthly cashflow from the insurance returns is used to net off the monthly loan paid to the bank. 

This is akin to buying an investment property and borrowing money from a bank to buy it. The series of monthly cashflow from rental is used to net off the monthly mortgage payment to the bank.

Both require a downpayment and both are custodised with the bank.

Actually, on the surface both looks the same but actually its more similar to property investing more than 15 years ago when they allow payment of interest only and not the principal. 

Now a days, property investing requires payment of both interest and principal in the monthly mortgage payments. In premium financing, one only pays the interest and not the principal. The loan amount stays the same.

Hence, using the simple formula of (annual net inflow/down payment) multiplied by 100%, rates touted by financial advisors for the premium financing insurance product can be mouth wateringly 8% - 18%pa! And comparison with property investing now can be very misleading because in property financing, the net inflow is surely smaller as the mortgage payments include paying off the principal loan!

It is also when interest rates are low that such aggressive selling of such products are pervasive. 

Truly financial engineering at work!

I have summarised some information from a case study from MoneyOwl.


  • loan rate : 1.267%pa 
  • Insurance return: 3.648% pa (1.248% pa guaranteed + 2.4%pa non guaranteed)

If loan rate rises to become 2.91%pa and insurance returns stays the same.

How did 8%pa - 18%pa advertised returns become such low returns as shown on the tables?

And the funny part is, the low returns shown on the table are based on insurance returns where 2/3 of it are non-guaranteed insurance returns!

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