Monday November 19, 2012
Is paying off a property loan as quickly as possible a wise move?
Financial Snacks by Lee Mun Wai
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.