Well most of you with mortgage might already received the letter from your respective banks telling you that Bank Negara increases Overnight Policy Rate and they feel bad but still needs to charge you higher interest rates because the boss bank says so… While we keep Fixed Deposit rates fixed and revise maybe after CNY holidays.
Obviously, they didn’t ask you increase your monthly payments immediately on this month’s mortgage payment but you can pay more if you like. But the fact is, you will be bearing a higher amount of loan than what it was before the rate hike.
Now the question is, should you increase your monthly mortgage payment in tandem with interest rate rise?
First, we look at some historical data.
If you look at Consumer Price Index since 30 years ago, it rose 218% which meant that your plate of Nasi Kandar rose from RM5.00 to RM10.90 (that sounds more like it)…
But if you look at housing price index data, it rose higher than consumer price index over the same period to 272%. Note that this is overall in Malaysia. Major cities register higher inflation on housing.
Over 30 years, assets such as real estate really fly high and in top cities such as Kuala Lumpur, Johor or Penang, we aren’t surprised to see a 400% rise.
Second, we take a look at housing loan payment schedule.
The table above shows the total payments with different interest rates under a 30 year tenure for a RM500,000 loan.
Assuming that we see a 3.0% rise in interest rates over the next few years which we believe it’s possible. This brings most mortgages to roughly 7.6% interest per annul (one of the highest recorded so far in 2008). With that data, we came up with the table above comparing how much more you would have to fork out in the end.
You can see that over the course of 30 years assuming a permanent 3% rise in interest rates, at the end of life we are only looking at 37.73% rise in total payments. Comparing this value with the change in real estates prices, it far exceeds the inflationary boom for houses in Malaysia.
But one might felt that paying another 135 or 10+ years (possible with re-financing) is a complete burden. But it totally logical because long term payment weighs heavily for one with declining number of years to their life. The feel being debt free definitely feels good no matter what people tell you and we have no offense even if you plan to do so.
But in short, the bigger picture is that money not spent to pay up loan quickly could be used to obtained other financial assets like shares or merely sitting on fixed deposits because housing price change grows slow for the first 10 years but accelerates over the next 20.
Our advice is, don’t be too quick in repaying your mortgage with the rising rates. Take a good look at your wealth and plan a conservative approach in dealing with higher interest rates. Holding cash is good for rising rates and long term assets should be paid slowly even with the rise.
Obviously we made a few assumptions for this case:-
- Interest rates can spike to god knows where.
- Inflationary prices for CPI and HPI is based on historical. Nobody knows what the future is.
- Data comes from a very generalized view of the whole country.
- If housing crash would to happen, god knows how many years it would take to recover.