The longer the mortgage tenure, the higher the interest payment. Bad thing, right?
No property comes poverty.
Imagine never ending rental for generations and you will understand why this is the case in all countries where the people do not own their own property. Then again, if you are earning way above everyone else, then property or no property does not concern you. You can even afford to stay in different 5-star hotels every week. The below is more for typical working people who needs a property.
It’s always good to have researchers / analysts who have access to data and they do a lot of number crunching and then they write an article about their analysis. This is especially true for the property market. There’s one which said that the mortgage tenure should not be increased and this increase will disproportionately increase the total interest payment versus just a small saving with a longer tenure period. Read below:
Article in nst.com.my The increase in house prices in real terms is partly due to longer mortgage repayment periods, rather than current house values.
“The proliferation of unaffordable homes in Malaysian cities is not primarily a wage stagnation problem. This is because no amount of wage increment, even with the minimum wage intervention can realistically keep pace with Malaysia’s rapid house price escalation.”
“House prices have been growing much faster than household incomes, further widening the affordability gap,” Khazanah Research Institute (KRI) researcher Theebalakshmi Kunasekaran wrote in her view entitled “Affordable Housing or Affordable Debt?” published on KRI’s website.
Do read here for the full article: Article in nst.com.my
Paying more in the future is not necessary more than today
If I owe you RM500 today but I pay you back only 5 years later, do I still pay you RM500 or do I pay you RM500 plus inflation or plus the potential loss in returns on investment which you could have done with RM500? I am very sure everyone would not lend RM500 to someone only to have the someone paying us the exact same amount 5 years later.
This is why when we look at the repayment, it’s also important to look at the potential returns on investment and not just the increase in interest repayments alone. If our data showed that the home prices are rising faster than the salary increase, what should be a better advice?
Cheaper home, maybe?
Perhaps it could be to accept a cheaper priced property in a slightly further area from the city centre or some popular neighborhoods or maybe it is to accept a cheaper priced property but with a smaller size. When one has bought a RM500,000 property and we use half of the inflation number of 3 percent, then after 5 years, this same property could become RM538,642. This is an increase of RM38,642. We do not need to calculate what’s the price going to be 35 years later. Just ask our parents who bought a home 30 years ago to know.
When the value of money shrinks, the price goes up to balance this decrease. This is why people say a house is a hedge against inflation. At the same time, because we bought today and not 5 years later, it also meant that 5 years later, with a higher salary, the repayments we are paying today has become smaller too.
Imagine someone earning RM6,000 buying this house and his / her increment is just following inflation for the next 5 years. His / Her salary would have increased to around RM6,955 5 years later. Maybe more, maybe less depending on circumstances and what industry. The repayment for a RM500,000 home could be RM2,500 per month and this is 41.7 percent of the RM6,000 income. 5 years later, if repayment remains at RM2,500 then this is only 36 percent of the person’s income.
Repayment as a percentage continues dropping
As the repayment stays almost the same while salary increment continue to happen (if this does not happen, need to find a better job), the percentage continues to drop and this is why one should buy a property as early as possible based on affordability. Please do not over-stretch financially yeah. Hopefully this give another perspective to you from a working professional.
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