If my rental is lower than the mortgage, should I rent or buy?

If my rental is lower than the mortgage, should I rent or buy?

Simple question does not mean an easy answer. However, we can start with the number of years which the mortgage could be stretched to, or from another perspective would be how young is the borrower. The younger, the better of course because the younger the borrower, the longer the mortgage could be stretched and thus the lower the monthly repayment could be.

Take a look at two examples below. One is 30 years and second one is 35 years. Both would be for the same loan amount, RM500,000.

Difference is just RM156 per month

For a 30 year loan, the monthly mortgage is RM2,148 while a 35 year loan will mean a monthly mortgage of RM1,992. The difference would be RM156. Amount is not a lot when we look at it from a monthly basis. However, the total amount of interest for a 35 year loan is 46 percent while that of a 30 year loan is 42 percent.

What if the possible rental is RM1,700 per month?

Number wise, a 30 year loan means RM2,148 minus RM1,700 and that’s a negative RM448 per month. Meanwhile, if it’s a 35 year loan, then it’s RM1992 minus RM1,700 and that’s a negative RM292 per month. Logically speaking, if the rental cannot even cover mortgage, then why bother to buy? If we are renting, we are only paying RM1,700 but if we are buying, even if it’s a 35 year loan, this is still a negative of RM292 per month. First question is for how long will this negative situation be?

It can be the same if the interest rate and the rental stays the same until the end of the loan period; 30 years. Which has a higher potential to change? Interest rate or the monthly rental? Second question is to look at the actual interest portion for the monthly mortgage. Let’s take a look again at both the 30 and the 35 year home loan for some reference.

For a 35 year loan:

Interest portion per month is RM17,890.44 divided by 12 and that’s RM1,491 per month. This will continue to reduce with every passing month. The remaining amount after the deduction of the interest portion is principal. This is RM1992 minus RM1,491 and that’s RM501 per month. RM501 is the principal portion of the home loan. In other words, if the rental is HIGHER than the interest portion; RM1,491 then the renter is helping the home owner to pay not just the interest but also some portion of the principal amount too.

For a 30 year loan:

Means should buy or should not buy then?

Means you decide based on your own circumstances lah. If you are buying the place as your own place and you intend to stay, then buying means you are not making other homeowners richer lah. You are paying a mortgage which by the end of the 30 or 35 years, the home is yours. Even assuming conservative calculations, the home price by the time you have finished paying would have appreciated too. We just need to assume 1 percent up every year based on the price and that’s already over 30 percent or 35 percent by the end of the loan period yeah.

If you are buying the place and you intend to rent out, then the above shows to you that as long as rental is RM1,700 or higher, you already cover all the interest (which is not yours) and also some portion of the principal (which is yours when you sell the property in the future). However, this is not as good option for you if you have to rent another place to stay and then buying this and yet the rental does not cover the loan payment fully and you have time to pay both sides; your own rental and also the mortgage balance for this property. Not such an amazing decision, right?

Another way to do it?

We could also choose to buy the unit and then rent out the rooms instead of the whole unit too. In this way, we have a place to stay and people are also paying rental which could probably cover the interest portion of the loan. If you ask me, I think this is the best of both worlds, you have your own place and you are still renting out the place and after 35 years, the unit is yours with the help of your tenants. Of course, if you are getting married, then your partner can help with the payment too after you have kicked out the tenants…

By now, you should have a better idea already. Happy deciding!

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