Is paying off a property loan as quickly as possible a wise move?

At first thought, it might appear prudent to pay off a property loan as quickly and as soon as possible. However, is this really the wisest and smartest financial decision? Consider using cheaper home loans to grow your net worth. - LEE MUN WAI writes...

Home loans usually have lower interest rates than vehicle loans and other unsecured credit, because the use of a home as collateral reduces the lenders risk of financial loss.

People can refinance an existing loan and extract additional funds to pay off credit cards and other debts. Refinancing enables homeowners to lower their overall monthly payments or frees up funds for other purposes and simplify their lives by having to make just one payment.

Refinancing a RM1mil, 30-year loan from 7.5% to 6.5% would save more than RM240,000 in interest over the life of the loan, or more RM150,000 in today's dollars given a present value discount of 3%, all other elements remaining equal. Despite market turmoil, interest rates remain at attractive levels.


Alternatively, consider investing the additional funds into solid, reputable investments (such as unit trusts, Amanah Saham Malaysia, real estate investment trusts, etc) that can potentially give you returns in excess of what your home loan is costing you.

If your home loan is costing you 5% but you can derive returns of 8% from your investments, you are growing your net worth by 3%!!

Start comparing loans from several different financial institutions before deciding and get information in writing.

Carefully consider your cashflow situation, if you have the income to handle your new refinanced home loan obligations, it might just be more prudent to refinance that house of yours and start growing your net worth. Seating your assets and start letting them work for you. - Financial Snacks by Lee Mun Wai (The Star)

10 comments:

November 20, 2012 at 1:01 PM Chong said...

To those employed,

Pay off your housing loan is an release to yourself.

U can have few houses, but remember to have at least One is loan free.

Don't believe bankers' agent to refinance, it never cheap unless they bearing the moving cost (legal, stamp duty, revaluation) and not binded for more than 3 years.

Use your calculator/excel worksheet to do your own calculation, dont use bankers' diagram or schedule, it never works for u.

Financial freedom is all employed people target, we don't work for boss and banker for life, remember.

Refinancing only usefull for business operation not for individual.

 
November 20, 2012 at 2:12 PM Kevin said...

Chong,

What if your rental can cover the monthly loan repayment, do you still need to clear the loan even if you are employed?

my personal opinion is, not necessary always need to pay off the housing loan if still got positive net income from rental.

 
November 20, 2012 at 6:44 PM Chong said...

Hi Kevin,

if from net cash flow perspective, sounds good, but your partial cash flow is flowing to bank interest if you dont mind.

for those know how to do own calculation on monthly interest charge & principle portion, and have loan reducing schedule then u know better. No need such Expect to show u how much you can save.

generally, net cash inflow is acceptable but if u are able to settle the loan, what for still refinance







 
November 21, 2012 at 9:42 AM Derick Corithians said...

hi,
if after you pay off your loan, and you still left enough extra cash to invest then it will be good.

But if you want to build your wealth, you should rent out your property to pay off interest, while waiting for your property price to appreciate.

Instead of paying off the loan, use the extra money+refinance your existing loan to buy another property.

Even if you want to pay off or settle your loan, do not make settlement or close that account, so that you will have ready credit to invest or should banking is tightening the loan approval, you have your loan ready anytime.

 
November 21, 2012 at 11:35 AM twyeow88 said...

i agree with Derick. financial freedom means one can choose not to work anytime, not owning a 1m house with no loan. coz we can't eat the grass and bricks in that fully paid house.

Eg. 5m gross assets with 2.5m loans (net 2.5m) is better than 1m net assets with no loan.

 
November 21, 2012 at 9:41 PM Chong said...

we always like to use extream example for comparison and caught ourselve in unneccesary complication.

for me own 1 mil property is better than borrowing 2.5 mil to own an 5 mil property. Why?

simple; let say we stay in Penang island as whole case.
- 1 mil property in island about a 3 story terrace house
- as no loan instalment to pay, u easily have 50% of of monthly salary to put in bank, if earn 5k a month nett, then we have 2500 to save per month for other investment. another 50% for other living expenses

- how much to pay for 2.5mil loan per month for instalment? 15-20k at least. Only those employed CEO , CFO and professional can have such income.
- how much u left for other investment, even u have 2.5mil excess if u sell the property, u can use if as your asset is pledged to bank.

So...



 
November 21, 2012 at 9:49 PM Chong said...

correction:

the last sentence:
...,you can't use it as your asset is pledged to bank.

xxxxxxxxxxxxxxxxxxxxxxxx

if we change the 1 mil to 400k, and 5mil to 1 mil, the scenario impact still the same.

 
November 21, 2012 at 11:42 PM Derick Corithians said...

if u stay in 1million house , early pay off, then earn 5k use half save half ok also. but think about this, how long u can work? after you retire u ll take out your saving to spend for the rest of your life. if you have only one property , no matter 1 million or 2 million, it's difficult to realize that into cash, unless you sell your house and move to smaller house. but if you use your credit to purchase another property , you can wait appreciation, while rental covering the loan interest . 5y 10 y, down the road, you sell your investment property you could use the profit to settle your loan as well., plus additional cash.remember , this is not your saving, it is profit from your investment .

but of course you must earn 15-20k per month only bank will give you loan of 2.5m.:)

 
November 22, 2012 at 12:49 PM Chong said...

correct, the 2,500 can use for property investment too, but not touching and fully paid own stay house.

forever i have 1mil property for my children, they can get 5-10x fold of this asset in 15-20 years later.

the $2500 can pay for 500k loan, and doing wat u say to rent it out. we are in same page, Just i said earlier "u can have many property, but must have at least One loan free property"

same i can make money with excess of 2,500 right?

not neccesary to eat grass and brick of 1 mil house.

objective same, approach same, just principle not same.

 
November 22, 2012 at 12:58 PM Chong said...

to close my chapter.

u can refinance for reducing interest and get pay off loan earlier, but not to increase your borrowing's principal balance.

sit down and do own calculation to match with your overall financial plan.

property investment can make money for inflation factor, but beware of bubbles and over confident on the price escalation.

10 people invest, how many can gain by end, most are short term gain and need to pay back later as burst of bubble.