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Should M’sians Take A Housing Loan Vs Paying In Full?

The more you pay upfront, the lesser you pay in interest.

 

For most normal Malaysians, buying a new house would naturally mean taking out a mortgage to finance the cost of the house.

If an average condominium in KL costs RM550,000, that would mean paying RM50,000 (10%) in deposit and taking out a RM500,000 30-year mortgage.

What Is The Real Price Of Your House?

On paper, it seems like a straightforward deal. You pay RM550,000, you get your house.

However, what most people do not realise is the real amount that they would be paying for their house over the period of their mortgage (usually 30 years).

With current interest rates, that could amount to about twice the amount you thought you were paying for your house on paper!

Read Also: How Much Are You Really Paying For A New Car In Malaysia?

Have You Calculated The Interests Over 30 Years?

With current home loan interest rates of between 4.5% to 5%, a RM500,000 home loan would require a RM2,500 to RM2,700 monthly repayment. Assuming that you were lucky enough to get the lower of the two, you would still be paying RM2,500 x 12 months = RM30,000 per year.

Over 30 years, you would have to pay 30 x RM30,000 = RM900,000 for your RM500,000 loan.

If you factor in the RM50,000 (10%) deposit that you paid upfront, the total cost of your RM550,000 house is actually RM950,000, close to a million ringgit. That’s RM400,000 more than what you thought you were paying!

2 Times More Than The Retail Price

Hence, the next time you buy a house, remember to keep in mind the true price that you are paying over 30 years. With current interest rates, you will probably end up paying close to 2 times the retail price of the house over 30 years.

If you’re buying a 1.1million ringgit terrace house and took out a 1million ringgit loan, you would have paid close to 2 million ringgit on your 30th year.

Can You Afford To Pay In Cash?

Most of us do not have a choice but to take out a 30-year mortgage to finance our purchases.

However, if you are fortunate to have enough cash to pay the full purchase price, you might want to consider paying as large an amount of the purchase price in cash as possible. This helps to reduce the unnecessary interest that you would be paying.

Although some people can afford to pay the full amount in cash, they would usually still choose to take up a loan so they do not raise any alarms with the Inland Revenue Board (because it is unusual for people to buy a property without a loan) and go through unnecessary trouble.

Should You Pay Down Your Loan As Soon As Possible?

However, they would usually take up a much smaller loan by paying a larger amount upfront in cash and pay down or settle their loan as soon as the lock-up period is over, typically after 3-5 years.

For the rest of us Malaysians, we could also try to do so after 5, 10 or 15 years should we get a huge bonus, pay raise or somehow managed to tremendously increase our earning power in an attempt to reduce the interest that we would ultimately end up paying over the years.

Read Also: What Is The Best Way To Spend Your Bonuses?

Do You Have Better Investment Opportunities?

However, you might have limited cash and better investment opportunities that would give you a higher return than the interest you are paying for your housing loan. Then, it might be better for you to continue paying your housing loan and take those investments instead because you can make more in the long run that way.

Some go on to buy more properties that would appreciate in value and sell them off after a couple of years. That is how those who managed to build a portfolio of properties over a short span of years did it, by leveraging their cash and increasing property valuations.

However, that can be extremely risky if you do not know what you are doing or when the property market turns bad, because you will be stuck with a lot of properties with mortgages to finance when the value of the various properties are not really appreciating.

Others would choose the better way of building a diversified investment portfolio.

Read Also: What Is A Diversified Investment Portfolio

Do You Have A Choice?

If you do not have any extra cash to spare, then you probably have no choice but to continue paying your mortgage. It is not that bad as the value of properties tend to appreciate over the years. Properties are an asset. Hence, you might end up paying what your property is truly worth at the end of 30 years anyway.

However, if you do have the choice of paying down your mortgage or settling it after the lock down period is over, and have already invested in other investment opportunities; then there is no reason for you to continue paying unnecessary interests to the bank.

In that case, you should consider settling your mortgage as soon as possible.

DollarsandSense is a website that aims to help people make better financial decisions, one interesting bite-sized article at a time. Like us on Facebook to stay in touch with our latest article. 

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DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.