Should you pay off your mortgage loans or invest your money for your retirement? This is a question many often grapple with. Strict financial prudence advises that you should not carry any debt and your personal balance sheet should have minimal liabilities. However, no debt is not necessarily the best situation as you may not be using your available leverage effectively.
So, which should you do the next time you have some available funds? Read below for some suggestions.
Create Emergency Funds
The first thing you should do, if you don’t already have one, is to create an emergency fund. Start with a level that is comfortable for you and you can start small. Just ensure that you continue to keep it growing every month. If you already have one, top it up because you never know when you might needs funds for a rainy day.
Take Advantage of Cheap Debt
The falling interest rates worldwide and the recent downward revision of the Malaysian overnight policy rate to 2% by Bank Negara (source) will likely mean another drop in the Base Lending Rate and cheaper debt. With cheaper debt, interest payments cost less and you might want to leverage on it by investing in property. Otherwise, pay off part of your mortgage but take advantage of this situation to also invest your money instead in higher yielding investments.
Identify High Yield Investments
There are not many good investments at the moment in the current state of economy. However, there are many potential gold nuggets lying around if you can discern them. Undervalued properties or equity are a good buy as they will definitely earn you returns many times over when the market recovers in the next few years.
So in summary, should you pay off your housing loan or invest? Ultimately, it depends on your comfort levels. Those who are uncomfortable with holding debt should pay it off fast, regardless of the investment opportunities out there. However, depending on your age and number of working years, now could be a good time to top up your emergency funds, manage your debt with the cheaper debt available and still ensure you have some cash to build your retirement funds with.
February 25th, 2009 at 1:02 pm
Yes, the emergency fund is the most important thing for all of us. But people nowadays will forget about that because there is personal loan available anytime.
February 26th, 2009 at 10:00 am
[...] financier how you can maintain your monthly repayments. It works to your advantage as well if you have spare cash as putting in higher monthly repayments when interest rates are low will reduce your principal [...]
February 27th, 2009 at 11:05 am
Hi Kong – Then again a personal loan is still debt! So it is always better to ensure you have built up a good emergency fund before committing to more debt.
March 3rd, 2009 at 4:26 pm
there is always good debt and bad debt..
March 5th, 2009 at 12:57 pm
Hi Iris – The trick is knowing which is which and using it to your advantage!
July 30th, 2009 at 2:21 am
Nice article, also emergency funds become more important with the bad economy and people needing more buffer to find a job/income.
One thing to also note, there is a chance the bank will penalizes you for early payment, or prepayment penalty.
Also, the interest can be lower but if stretched over longer period for refinancing, the overall interest can be higher since you made less payment again.