“Must I pay off my mortgage before I retire?”
This is the most common question Malaysians face as there are approaching retirement. After all, nobody wants to enter their golden years still “serving” a house loan or dragging the tail of a mortgage behind them.
But if you ask me, my answer is always—don’t rush to pay it off!
Why? Because smart investors know how to make their mortgage “work” for them, rather than spending their lives working just to pay off the loan.
1. Mortgage Rates vs. Investment Returns
In Malaysia, mortgage rates currently hover around 4% (depending on whether you have a floating or fixed-rate contract). However, if you know how to invest, whether in high-dividend stocks, REITs (Real Estate Investment Trusts), or even your EPF (Employees Provident Fund), you can generally achieve annual returns of 5% to 7%.
This means that dumping all your savings into clearing your mortgage might not be the most financially sound choice. You lose the cash flow that could have generated higher returns, and you might miss out on the opportunity to accumulate more wealth that enable better lifestyle.
Suppose you have RM100,000. If you use it to pay off your mortgage in one lump sum, your monthly stress decreases, certainly.
But if you invest that same RM100,000 into a tool with a 5% annual return, in 10 years, you would have earned over RM60,000 in returns. This far outweighs the “psychological comfort” of simply paying off the debt early. Smart investors always ask: “Where will my money grow faster?”
2. Liquidity is More Important
Retirement life involves more than just daily expenses. It often comes with unexpected “surprises”:
- Sudden medical expenses.
- Assisting children with weddings or starting a business (though I don’t recommend unconditionally supporting adult children unless they truly need a leg up).
- Travel, hobbies, and lifestyle pursuits.
If you pour all your retirement funds, EPF, or savings into your mortgage, you may find yourself “house rich but cash poor.” When an emergency strikes, a lack of liquidity leads to even greater anxiety.
Why not you maintain sufficient liquid capital? Balance your investments and loan repayments so you can respond to life’s variables with composure.
3. Mortgages are Actually “Good Debt”
In my book, Money Smart, I discuss the difference between “good debt” and “bad debt.” Most people get this mixed up!
Many believe: “Buying an iPhone on credit is bad debt; taking a loan for a house is good debt.” In reality, that is only surface-level thinking.
The truth is:
- Is buying an iPhone with a 24-month 0% interest installment plan necessarily “bad debt”?
- Is a mortgage with a high 10% interest rate necessarily “good debt”?
The core of good or bad debt is the interest rate, not the purpose!
A 0% interest loan is always better than a 10% interest mortgage. Furthermore, the item you buy determines if it is a “good asset” or a “bad asset”:
- A sports car is a depreciating asset; it is a “bad asset.”
- Ferrari stock is an appreciating asset; it is a “good asset.”
Mortgages are generally “good debt,” especially when interest rates are low and there is no “sudden-clawback” clause that out of the blue, mortgage officer calls you up to ask for all the money back in one shot. Why?
- Low rates and inflation help “dilute” the value of the loan over time.
- The property itself has potential to appreciate.
- In some cases, investment properties offer tax benefits on interest.
4. Flexible Debt Restructuring
If you find that your mortgage balance is still significant as retirement approaches, or if monthly installments are becoming a burden, there are solutions.
You can consider:
- Extending the loan tenure to reduce monthly installments.
- Negotiating with the bank for a lower interest rate.
- Refinancing to cash out a portion of the home’s equity as a backup fund for retirement.
Simply put, rather than rushing to kill the debt, be smart and let your property act as a “cash machine” to give you peace of mind.
Summary: Re-evaluating “Debt-Free” Living
Retirement has never been about achieving “zero debt”. I see it as achieving freedom.
True financial freedom is knowing how to manage debt, investments, and cash flow. It’s about making money “work” for you, rather than locking all your capital inside a pile of bricks and mortar.
I never rush to pay off my own mortgage because I know “Money in hand is the most flexible capital.”
Of course, everyone’s financial situation is different. You should make the decision that best fits your risk tolerance, loan balance, and investment proficiency.
I’ll leave you with my usual money tips: “The smart person isn’t the one rushing to pay off debt. It’s the one who knows how to make money work for them.”
