20180810 Mortgage slave?

20180810 (Fri)

Putting same amount of money into saving for 20 years versus repayment of housing loan.

The comparison:

RM1,042,687 (Saving in bank) versus RM762,292 (20 years’ payment inclusive interest).

The part on the saving in the bank is obvious. The part of the property worth (market value) is uncertain. The total cost paid is RM762,292, but the property value might have appreciated more than this. So, let us look at historical pattern. How much appreciation for property over 20 years?

Taking average price increase of property in Malaysia over 20 years from 1997 – 2017, which is 6.5% per annum, the RM500,000 property after 20 years should be:

RM500,000 (1.065^20) = RM1,761,823.

If it is a Condo, most likely it won’t appreciate so much as after 20 years the services of the building and facilities might be poor. So, if we just take 5% (based on the MHPI of 5.3%), the value of this condo would be:

RM500,000 (1.05^20) = RM1,326,649.

In simple term, a RM500,000 house in Selangor, after 20 years would have cost RM1.7 mio (6.5% – average) or RM1,3 mio (5% – condo).

This is higher than RM1,042,687 of the money earned from putting the same amount of monthly installment into saving account at 3%. Of course, if you would invest in Mutual Fund or Stock Market, the return would be much higher.

On the other hand, if you have RM500,000 now and put this money in Fixed Deposit at 4.2% p.a. Interest rate, after 20 years it is worth:

RM1,156,486.17 (FD 20 years, Initial amount = RM500,000; i=4.2%)

We will discuss about returns from Mutual Fund and Stock Market tomorrow.



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