If you were cash rich and had RM1,000,000 (although not everyone considers this cash rich) sitting in the bank – would it better to save on all interest by paying for a piece of property in cash or take a loan and stretch out payments while maintaining cash in hand?
Based on a verbal survey performed by this writer on about 15 respondents (mostly friends), 36% of people choose to buy cash to avoid loan interests; 54% choose to pay a higher down payment and take shorter term or smaller loans; whilst a small 9% choose to go with the longest possible tenure.
None of the above options are wrong, as they each have their own financial benefits. Let's now assume you do have the privilege of having loads of money (may apply if you have saved up just shy of a million too) and we'll explore what your best options are in a little more detail.
Full Cash Payments
When you buy a property with cash, the main thing you end up saving on, is the possible interest that would accrue over the years.
If you let a housing loan stretch out for a total of 30 years, with a loan amount of RM450,000 at 4.25% p.a. interest rate, you would end up paying an approximate total of RM347,000 in interest.
Comparing the initial loan amount against total interest paid, it almost sounds ludicrous not to go with this option. But some may have other ideas with the disposable money they have, let's see how those options weigh out instead.
The Full and Partial Loans Option
If you opt for a property loan instead, be sure to factor in additional costs of housing loan agreements and lawyer fees. Along with these initial costs, interest charges could be heavy and can cause monthly commitments to skyrocket.
But you would have excess money to invest elsewhere. Rather than buying two properties at RM500,000 cash each (considering there were no additional costs), it may be a lot better to invest in three or four properties by financing it via home loans instead.
This allows an individual to earn rental income to cushion and pay for the housing loan while allowing the investment property value to grow over the span of a few years. When it hits the desired benchmark, you can sell and expand that investment portfolio with the profits made.
All this with excess money from the million still in hand. But are there other options to our million Ringgit scenario?
Flexi Home Loan
If you did have a lot of cash in the bank, a smart option would definitely be to explore a flexi home loan. A flexi home loan allows you to deposit extra savings or cash in hand into an account, which off sets the interest. Best part is, this account can be treated like a savings account, we'll show you how.
For example, if your home loan has a balance of RM400,000 and you deposit RM350,000 into the account, interest will only be charged onto the remaining balance of RM50,000.
Excess cash (RM350,000) that you have deposited into the account could be easily be withdrawn when ever you feel the need to dip into your savings for things like a new investment opportunity, medical emergency, or require big movements in cash (usually the businessmen).
Your other option would be to take the full loan of RM450,000 (90% of RM500,000) and choose to deposit an equal amount into the flexi account to avoid interest charges completely.
Some prefer having this flexibility with their loan. It allows them to easily access the exceeding amount in the account rather than having to sell or re-mortgage the house that was earlier paid for in cash.
However, most banks charge a monthly fee for maintenance of the current account, ranging from RM5–RM10 per month. In addition, banks may offer better interest rates for term loans, so be sure to do your homework before investing time and money.
So, Which Option is Better?
Paying for a home loan in cash allows you to save a lot on interest, whilst taking a loan allows you to have more freedom to move your money around. There is no foolproof method that proves either one method to be better than the other - it all depends on an individual's situation.
Some simply prefer to secure their family home with cash rather than taking risk with the money, whilst others prefer to play the investment game. A certain group may not even be able to stretch a loan's term due to old age.
Whatever your needs or restrictions may be, some of the above options may be worth considering if you did have loads of money stashed up. If you're looking for a dream home or would like to expand your investment portfolio, be sure to check out our wide range of home loans available.
Which option would you go for - cash or loan? Tell us in the comments section below.
Image sources: Image 2 from The Rakyat Post