At first thought, it might appear prudent to pay off a property loan as quickly and as soon as possible. However, consider using cheaper home loans to grow your net worth, says Lee Mun Wai in StarBiz’s Financial Snacks column.
Home loans usually have lower interest rates than vehicle loans and other unsecured credit, because the use of a home as collateral reduces the lender’s risk of financial loss.
So if you have other debts with higher interest rate, like credit card debts which have rolled over several months, pay these off first, before paying off your home loan.
If you don’t have other debts to pay off, consider using your excess cash to invest in 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%!
If your home loan terms are not very good, if the interest rate has dropped since you first executed your home loan, consider refinancing it. 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 than 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.
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