I’m not sure if you heard of this: 

Assuming that you are buying a property worth RM 500k. You intend to place as much as RM 50k in down payment and fund the remaining RM 450k with a loan which carries 4.5% in interest rate for a tenure of 35 years. Then, you visited the infamous website: “calculator.com.my”, inserted the relevant figures and swiftly calculated that after 35 years of mortgage repayments, the total interest cost in entirety works out to be RM 444,455.23 (double the original loan principal). 

LinkHome Loan Calculator

Common Responses: 

How do you feel about borrowing RM 450k and paying RM 444k in interests? To many, such can be overwhelming, which led to financial decisions as follows: 

1. For the cash-rich, they prefer to buy real estate with cash. 

2. For mortgagors, they try to settle off their outstanding mortgages ASAP. 

3. Elderly people withdraw from their EPF to settle their mortgages in full. 

4. Some are reluctant to buy real estate due to a fear of such commitment. 

5. Few opt for a lower-priced property as a means of “damage control”. 

Time Value of Money

Personally, I learnt that the above view is flawed. 

The above view is valid if RM today has the same value as RM 35 years later. So, from this example, your mortgage installment is RM 2,129.66 a month. It would be RM 25,555.92 a year. So, if you tell me RM 25+k today and 35 years later will be valued the same, then, it makes complete sense to decimate your mortgage. 

But, the purchasing power of RM 25+k will diminish over time due to inflation. I recalled back just 15-20 years ago. RM 25+k at that time can be placed as a 10% down payment for a RM 250k terrace house in the Klang Valley. Today, RM 25+k in 10% down payment would get you a small apartment in the Klang Valley. The cash that we hold onto “rots” like our Gardenia Bread. 

Thus, it makes no sense to look at the above with absolute numbers. Instead, in today’s context, we should understand the concept of “Time Value Money”. We would make better financial decisions if we appreciate this concept. Such works also on the decisions related to our mortgages. 

Options Other Than Settling Mortgages

Let’s assume you have RM 30k in excess cash. What are the options available to utilize these cash as opposed to reducing mortgage balances?

Personally, I would consider 3 factors: 

  • Productivity (returns)
  • Liquidity
  • Volatility

So here, let me explain them: 

1. Productivity (Returns)

This refers to income / cost savings resulting from your financial decision. So, as I write, FDs are offering 3%, the EPF is paying out 5-6% in dividend yields and as for your mortgage, it sits in between as it is costing you 4.5% a year. Thus, if you base your decisions solely on “productivity”, then, it is more practical to put the excess cash into your EPF account. Productivity wise, it is not smart to take your money out from EPF to reduce your mortgage balance. 

2. Liquidity 

This refers to the accessibility of your excess cash. So, if you choose to place the excess cash into your EPF account, you’ll lose the accessibility of it for your cash would be locked in until you hit 55. Of course, if your loan is a full-flexi facility, it is ideal for you to reduce your mortgage balance as the money placed into your account remains highly accessible. But, if your loan is a semi-flexi facility, then, I would say that, FDs in this case, would offer the best in terms of liquidity. 

3. Volatility 

This refers to the degree of fluctuation in asset prices. The 3 options: FDs, repay loan and the EPF are not volatile in terms of asset prices. But, if you believe this excess cash could be invested in stocks, unit trusts, ETFs, gold, Bitcoin and so on and so forth for “better returns”, you have to accept that these assets would be more volatile in asset prices. 

Conclusion: How to Make This Decision Wisely?

This would depend on your priority: Productivity, Liquidity and Volatility. Here, I think that if you lack an emergency fund, liquidity should be prioritized. As such for you, you can just set aside cash in FDs or places like KDI Save. But if today, in your case, you have an ample emergency fund, then, you can explore which assets are more suitable for you to park your excess cash. 

If you are an experienced stock investor, you could add onto your positions. But if you are not interested and inexperienced as an investor, you can consider EPF as a vehicle to build onto your retirement fund. Hence, I believe there are more options that we can choose to utilize our excess cash than just reducing loans.

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.

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