Recently, we did a webinar session to discuss if we should settle our mortgages, as soon as possible. Of which, we unanimously concluded that it is not prudent, wise, and savvy to settle off our mortgages quickly. However, we had made one exception to our conclusion and I’ll illustrate this one exception below: 


Scenario: 

Here, we have Richard, a 35-year old senior manager working for a MNC. 


Property 1: 

When Richard was 25, he bought an apartment for RM 80,000. Today, the same property is valued at RM 150,000 and he has an outstanding mortgage of about RM 40,000 on this property. Richard collects RM 700 per month in rent from his property. 


Property 2: 

When Richard was 29, he bought a condominium unit for RM 350,000. The unit today is still worth RM 350,000 and his outstanding mortgage is RM 300,000 on this property. Richard currently resides in this property. 


Property 3: 

Today, Richard intends to buy a terrace house for RM 700,000. He wishes to live in it and thus, will be renting out his condominium unit. 

Richard now has RM 300,000 in his bank balances. 

His question is, ‘What is the best way to finance his purchase of Property #3?’ 


Under Normal Circumstances

Richard has outstanding mortgages on two residential properties. Thus, Richard would be required to place a 30% down payment to buy Property #3, which will work out to be RM 210,000. If we budget about RM 35,000 in transaction costs, which is 5% of its purchase price, Richard’s total capital outlay is RM 245,000. In his case, Richard would be left with RM 55,000 in his bank accounts. 


But Instead

Richard could choose to do the following: 


Step 1:

Richard can settle off his outstanding mortgage of RM 40,000 for Property #1. It will reduce his number of mortgages on residential properties from two to one. Also, his bank balances will be reduced from RM 300,000 to RM 260,000. 


Step 2: 

After settling the mortgage for Property #1 in full, Richard is now eligible to buy Property #3 with a 90% mortgage and thus, needing him to put only as much as 10% in down payment, instead of 30% under normal circumstances. Why is this possible? This is because property buyers are eligible to borrow up to 90% of its property price for two residential properties. Since Richard has paid off his first, then, the mortgage for Property #3 would be viewed as Mortgage #2 on a piece of residential property. 

Instead of RM 210,000 in down payment, Richard’s down payment works out to be RM 70,000. If we add RM 35,000 in transaction costs, the total capital outlay Richard would incur is RM 105,000. Thus, Richard shall be left with RM 155,000 in his bank accounts, RM 100,000 more compared to normal circumstances. 


Step 3: 

Now, this is optional for Richard. 

After Step 1, Richard has a fully paid apartment worth RM 150,000. He could go to his banker and refinance the property. As this would be his Mortgage #3, the maximum mortgage amount he could qualify for is 70% of the property’s value, which is RM 105,000. 

If we include the cost of MRTA of RM 5,000 into Mortgage #3, the installment is RM 423 a month, assuming that he takes a 35-year loan at 3% interest rate. The mortgage installment is lower than his rental income of RM 700 a month and as such, Richard’s RM 105,000 from Mortgage #3 is essentially ‘free money’ and in his case, his bank accounts would now have RM 260,000, up from RM 155,000. 

This places him in a better financial position as he has more cash at his disposal and he could use them either as a buffer or to reinvest them to grow his wealth much further. 


Conclusion: 

Yup, that is the only exception as to why one should pay off his mortgage ASAP. 


For more information, please check out our latest webinar on mortgages: 

Webinar: Pay Off Your Mortgage ASAP: Is it Good for You? 


If you have any questions related to mortgages, please leave them below:


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

    5 replies to "The Only Exception to Paying Off Your Mortgage ASAP"

    • Hana

      Hi.i currently have 2 housing loan.1st house (double storey terrace),freehold ,joint loan with husband.we made a refinance at 430k I think,and now outstanding balance about 240k. 2nd house (single storey semi D corner lot,leasehold) bought in 2013 at abt 390k,and i’m about to sell at 430k.is it worth to sell my first house for a single storey terrace ,Malay reserved. what should I do with the balance I will received from the selling of my 2nd house? Reason to buy 3rd house to replace 1st house because of the location and preference to stay in a single storey rather than double storey.

      • Hana

        And will I get 90% loan for the 3rd house if I buy it after I sell my 2nd house?

        • KCLau

          Yes you will be able to get 90% loan if your DSR (debt service ratio) qualifies.

      • KCLau

        Hi Hana, it is your money. What’s plan for the fund you receive? I usually just invest and grow wealth for financial independence.

      • Ian

        Hi Hana,

        I’m a little confused. Are you selling your first house or your second house? But regardless of which house, after you disposed it, you would be left with 1 residential mortgage. Of which, you would be qualified to obtain another residential mortgage at 90%, which allows you to finance the 3rd house at 90% loan-to-value (LTV) financing. So, the down payment for your 3rd house would be 10%.

        Regards
        Ian

Leave a Reply to Ian Cancel Reply

Your email address will not be published.