Hi, I’m KC Lau. I am a financial educator and a personal finance author. Today we are going to talk about “Should you settle your mortgage?” In fact I’ve received a lot of emails with this similar type of questions. “All my readers they will ask me :”When I have money in FD, should I use it to settle my mortgage?” “I have money in my EPF account, should I use it to pay off my mortgage?” And sometimes they say :”I have a few months of bonuses paid, and I’m thinking of using that money to pay off my mortgage.” In fact this is quite common because most people will say if you want to become financially free, than you should be debt-free. You have to settle your loan as soon as possible. Today we are going to discuss about this situation and what I will do about it, and I will give you some insights to see what to do. Let’s start with a very simple example So now obviously you have a house, and it is on a mortgage. For example, let’s say your loan is RM 150,000 and you already paid off maybe RM 50,000 of it. And you still left with RM 100,000 of outstanding loan. Now the question is first one: Let’s say for example, you have in FD of RM 100,000. Now you have a choice, whether you want to use that RM 100,000 to leave it in FD, or use it to settle the loan, so that you can save on the interest and you don’t have to pay anymore interest in the future. When you want to compare this way, the easier way to look at it is you want to look at the effective interest rate. For FD, you have that money for 365 days, then you are going to get paid, let’s say 3%, Then you will have RM 3,000 extra for that year. So after a year it will become RM 103,000. Then how about this case, if you have outstanding RM 100,000 loan. The Effective Lending Rate, which is the interest you are paying right now, if it is 4.5%, that means over the 1 year, you will be paying RM 4,500 over here. This is a simplified version, of course you are paying a little bit less because everyday the interest is calculated, so you will be paying a little bit less than RM 4,500 but generally it will be around RM 4,500. So in this case, if you don’t do anything, you have the money in FD. Then you will get extra RM 3,000, but you are paying RM 4,500 interest that means you will be loosing out around RM 1,500 in this case. In this case obviously it is wise to put this FD to settle the loan, so that you don’t need to pay the interest, and you will be RM 1,500 richer. So the second case, how about if you have EPF money, just assume your EPF money in Account 2 alone where you can withdraw to settle your home loan. This account 2 also has RM 100,00. How much is EPF paying right now? The dividend? It will be around 6%, for the past many years is that they have been paying more than 6%. So 6%, that means if you don’t do anything with your EPF money, it is going to give you RM 6,000 at the end of the year. So compare to this case, obviously then of course if you don’t do anything, don’t withdraw that EPF money, you will have RM 6,000 extra in the EPF account. So you will be richer actually if you calculate the net worth. You will be richer after 1 year compare to you using that money to settle the loan. It is very simply to compare this rate. Now the third option is, what if you have RM 100,000 also the same, but you are putting it in investment. Let’s say you are a very good investor, you know how to invest safely, profitably in stocks and properties, So if you know how to do that, I will assume that you are getting better return than even EPF, maybe you are getting 8%. Maybe you are getting 10% or more, some very good investor they can get 20% or more in a year. So this is investment in stocks, in properties, you can do that and get this kind of return, same with RM 100,000. So in this case, if you calculate the net worth, of course after a year in the third situation, you will be ending up richer than the second case and the first case. So obviously, it is in fact very simple just to compare the rate you are getting every year. This is the effective rate. So look at this rate now you know where to actually put your money.
So for what I am doing, if you want my opinion on what I am doing here, of course I don’t rush to settle my home loan. I will keep that money, because I know how to invest. I can get more than 10% return a year. I will invest in stocks and in properties as well. I will do that. In this way I will be able to compound my wealth. In fact, if you do this, it is actually safer than to pay of your mortgage. I give you an example, let’s say, not to say RM 100,000. Now, you are owing RM 100,000. Let’s say you just have RM 50,000 not RM 100,000. So you have RM 50,000 of cash. Whether you want to put in FD, or you want to invest getting better return. Or you can actually settle your mortgage. But when you settle your mortgage, you pay off the principle, you still left with another RM 50,000. So you still owe the bank money, you still have to pay that instalment. Every month you still have to pay the instalment. But once you settled this RM 50,000, you don’t have any liquidity left. You don’t have any more money and any more cash. You have to depend on your monthly income to actually supplement that instalment. So if you do that, you are putting yourself in the liquidity issue.
You might not have the money. When you still owe the bank money, they will want you to pay the instalment every month. So, for sophisticated investor, they will have that money invested, let’s say invest in stocks.
Then you still own the stocks and you also own the house. As long as you pay the instalment, you will be fine. Just make sure that you are able to pay the instalment in this case.
I will throw back the question to you, whether you should do no. 1, no. 2, no. 3. Whether you should settle your loan with these money, that’s actually up to you. How good you are as an investor? So if you are confident you can do well with your money, you can make more money, you can do business with it. Then it is actually no hurry to settle your mortgage. If you don’t know what to do, all your money is just in FD, then of course it will be actually wiser for you to do this to settle the loan. But my suggestion to you is learn how to do no. 3. Not to speculate, but to become an investor yourself.
This is the money tips I’m talking about today. Should you settle your mortgage? Of course it is depending on what is the rate of return you are getting from your money, So that determines where you should put it. If you want more money tips, it is all in my Money Tips eBook, which is downloadable free. You can just go to my website, KCLau.com. Where you can download my ebook. Of course, you will need to subscribe to get it. Hope to see you there! Bye bye.