$3,000 monthly rental from a S$1.2 million dollar property and the instalment based is on 2.4 percent interest rate for 30 years will be at $3,500 per month and now at this point,
I would like to have it to break down instalment to the two components and to clearly show you the concept of the principal and the interest component of your money installment if your monthly instalment is S$3,500 based on 2.4 percent interest rate the starting principal is actually about S$1700 and then the interest portion that the bank needs to earn from you is a S$1800.
The principal and the interest will change along the way of the tenor but the simplify for you right now let’s assume that it stays constant at S$1700 for principal and S$1800 for interest.
Why is there an interest component? Well it is because you leverage to buy a 1.2 million dollars property you come up with a 25 percent for down payment five percent cash 20 percent CPF or cash and then the buyer stamp duty which the calculations is 4 percent less S$15,400 and that will bring it to be about S$300K and you loan S$900K from the bank.
As you wanted to leverage and own a property right now rather than saving up to S$1.2 million dollars by the time you’re already old so you don’t need to wait for that to happen, you can actually own the property right now if your income can loan a $900k loan from the bank so the very first benefit that you have is that this then gives birth to a rental strategy you now have an asset that can help you to earn rental as a form of income.
Let’s term this first benefit as rental strategy , as we go back to earlier where we discussed about installment hence technically speaking you can use a $3,000 to take care of all the interests that is used to pay to the bank so S$3,000 less S$1,800 and you still have a balance of S$1,200 which you should then contribute to your principal;
Hence, if your monthly installment being at S$3,500 and your rent is S$3,000 there’s a short fall of S$500 that you need to fulfill and that actually goes to the principal portion, this S$500 portion you need to top up for the entire tenure.