Should you overpay your mortgage?
By Khalil Adis

I have a confession to make.

I have been overpaying my mortgage for two years now. 

I know, it’s not the norm but I sleep better now knowing I can miss a few months of payment should something unforeseen were to happen.

However, I plan to keep at it so that I can finish my mortgage earlier.

So how did it all start?

It was COVID-19 and the uncertainty surrounding it combined with my commitment to living a debt-free life that spurred me to take the plunge.

While we are still battling with COVID-19, l would say, in hindsight, it was the best decision that I had made. 

The question is should you overpay your mortgage? 

Well, it depends on your circumstances.

The advantages

From my personal experience, it is worth it.

Firstly, you will be less stressed knowing you are now several months ahead of your mortgage. 

Being able to sleep easy are just some of the intangible benefits that come with overpaying on your mortgage

Secondly, if you do not have any other debts like credit cards, car and renovation loans, you can direct more money each month towards paying the principal while lowering the amount of the interest paid over the mortgage term. 

Thirdly, from the point above, it enables you to build equity earlier in your property. 

When you save on interest by making extra payments each month, your home equity savings will start to accrue every month.

Thirdly, you can be mortgage-free much earlier than your original mortgage term.

Fourthly, with rising inflation and interest rates, you will be able to save on interest by paying more each month.

The disadvantages

However, there are also some disadvantages.

Firstly, some banks may impose a penalty for early payment of your loan during the ‘lock-in’ period. Thus, you should check with your bank if there are any penalties involved.

Here are some common examples of bank charges and fees that you may incur:

1. Pre-payment of capital sum
Buyers must give 30 days prior written notice or payment in 'interest in lieu' in the minimum of $10,000 and in multiples of $1,000.

2. Pre-payment fee
If pre-payment is made within the 'lock-in' period from the date of the first loan disbursement, a pre-payment fee of 1.5 per cent of the ledger balance will be charged.

3. Redemption
Borrowers must give 3 months' written notice or payment of 'interest in lieu’.

4. Redemption fee
1.5 per cent of the amount redeemed will be charged if made within the 'lock-in' period from the date of the first loan disbursement date.

Secondly, if you have an existing credit card debt that incurs a higher interest rate than your mortgage, then you should not do it.

Instead, you should aim to clear your credit card debt first and any other loans that have a higher interest rate.

Thirdly, you should not do it if f you do not have at least six months of savings.

This is because you may need access to extra cash on hand in case something were to happen.

Fourthly, you should not do it if you are currently not investing your money in unit trusts or any other asset class.

This is because you may miss out on good investment opportunities that pay a higher rate of return than your mortgage.

Conclusion

Whether or not you should overpay your mortgage depends on a lot of factors.

I would advise you to do a quick personal finance check and speak to your bank if there are any penalties should you wish to do it.

Overleveraging means to commit yourself to more debts than you can handle.

Of late, there was a social media buzz that highlights this danger that apparently led a young man to commit suicide.

The young man had apparently bought several properties at a substantial discount and had hoped to generate positive cash flow from the rental.

However, in light of the severe oversupply in residential units in Malaysia as well as the very soft market, I am afraid he may have been taken advantage of by unscrupulous developers who are desperate to offload their units.

With the current market reality in Malaysia, I doubt his rental can cover his mortgage resulting in negative cash flow.

Assuming he has to top up RM1,000 per unit, that works out to RM4,000 per month.

Also, there is a possibility that the developer had priced up the unit and then sold it off at a ‘discount’ to make the buyer feel good.

However, in the resale market, valuers will take into account the current transacted value of the area and not the selling price from the developer.

Let’s do the math.

Assuming the developer had priced it at RM1,000 per sq ft and he now wants to sell the unit, valuers will value the property accordingly.

Should recent transactions show that units in the area were sold at RM700 per sq ft, he would have to sell it at a loss of RM300 per sq ft.

For a 1,000 sq ft unit, that works out to RM300,000!

Let’s not even talk about the possible commission the expert may have earned on the side from the units sold as well as from bank referral fees.

Ultimately, the one at the losing end is you.

A word of caution

I would urge consumers to do a lot of research, check the expert’s credentials and analyse if their methods make sense.

You should also conduct your own due diligence by going down on site to study the area to check if there is demand in the rental and resale market for the project that is on offer.

Find out what is the resale value current via Brickz and then compare it to how much the developer is selling it.

This will give you an estimate on how much the developer had marked up the unit.

Also, you should plan your exit strategy should you not be able to get a tenant. Can you do an Airbnb instead? Also ask yourself, “can I afford to take up so much loan?”

I would also like to remind consumers not to be easily blinded by the show of material wealth on social media.

They are most likely curated image meant to create an illusion that you too can live that ultimate lifestyle.

Live within your means, enjoy a good night’s sleep and don’t get trapped in the debt cycle.

Remember this, if it is too good to be true, it probably is.