My husband and I paid off our house in March of 2020 just before the Covid pandemic reached our country’s shores, and let me say I haven’t felt that same ‘high’ from paying off debt since the last time I paid off my long-standing student loan debt in 2018, which ended my 8-year long commitment to my monthly student loan repayment.
In the case of my student loan repayment, that year our government offered a 20% discount for those who can pay off their student loan debt in full in one single payment. So I paid it off in full and managed to save approximately RM10,000 with this discount, as my remaining outstanding loan at that time was about RM50,000. If I had to do it over, I would have probably tried to get a scholarship upon applying for university. But alas, financial wisdom came late to me.
But this time, the home loan was a significantly higher amount of money, it took up a large chunk of our monthly commitment, amounting to a monthly repayment of RM1,336 to service the 30-year loan period.
Our loan was 90% of the property cost which we borrowed from the banks in our early twenties. It was a bungalow unit with 5 bedrooms and 3 baths, purchased in 2009.
When we listed our large debts from highest to lowest, the house loan took one of the highest positions, as it will for most people. So, paying it off was no easy feat.
My husband and I had already been planning to clear off our home loan in the past few years leading to the final payment. We took steps to cut down on the monthly interest applied on the loan and not only did we never skip a payment, but we also made sure to pay extra every month.
To hasten the repayment, every year, we would take out a small chunk from our mandatory retirement savings plan, known in Malaysia as the Employees Provident Fund (EPF) to pay up to over RM20,000 at a time. The EPF funds were split into two accounts and the money from EPF Account 2 (30% of the retirement savings allocation) was allowed to be withdrawn to be used for specific reasons such as home loan repayment, home purchase, higher education, and payment for medical expenses.
At the same time, whenever we had managed to save more in our personal bank accounts, we will throw in a sum of our savings at the loan. We started to see the light at the end of the tunnel when the principal loan amount was reduced from 6-figures to 5 figures, and then eventually below the RM50,000 mark.
In total it took us 10.5 years to pay it off.
We were 33 and 34 years old respectively when the loan was cleared, and we received our house deed and the redemption letter from the bank.
Now, I know some may debate that we could have used the money for investments instead, or to keep it ‘invested’ in our retirement savings plan instead of taking some of the money out for loan repayment.
Why aggressively pay off our home loan?
I have my reasons, but to sum it up, you may refer below.
Scenario 1: Using The Cash for Other Investments (Opportunity Loss Concept)
To make it worth more to invest it would mean I needed an investment that can guarantee me returns that is equal to the amount of interest I saved by repaying my home loan early. However, to match that amount would mean I needed a high return rate investments portfolio such as stocks, crypto, or high-risk actively managed unit trusts funds and the like. Even so, there is no guarantee of the same returns in either of these.
On the other hand, money saved is guaranteed with the home loan repaid in 10 years versus 30 years. Following the 30-year repayment plan would have meant we would have doubled the payment of our property due to interest accrued over the period.
Scenario 2: Keeping The Money in Our Retirement Savings Plan (EPF)
We looked at the principal amount between the total amount of money owed for our house versus how much we had in our retirement savings. In Malaysia, we had a cushy dividend rate of 4–6.5% historically for our retirement savings plan or EPF. Our home loan interest rate was 4.5%.
Only if the retirement savings in both our accounts equaled to the principal amount owed on our home loan, would it have made sense that we could earn more dividends from EPF versus saving on our home loan interests charged. However, the total home loan amount owed was way larger than our retirement savings, and hence we were losing more money keeping the home loan as is, or just following the monthly repayment schedule (for 30 years).
That being said, we have only withdrawn an allocated portion of our retirement savings from our EPF account 2, which made up 30% of our total contributions and was only taken out once a year. The remaining 70% of our contributions in Account 1 of our retirement savings was intact and untouched, and still accumulating yearly dividend gain.
Anyway, the final reason, and this is important as this was one of the main reasons why we pursued to clear off this loan, is that I wanted peace of mind.
Peace of mind and the certainty of knowing that I do not owe any more money to the bank and that the house was ours.
The house was ours.
I have three young children, and having kids made me think long-term.
If anything, the pandemic has thought us that nothing is really guaranteed, even job security and health. We never want to be in a position where we have to worry that we could lose the house should either of us lose our jobs or fall ill.
Having kids may also be the reason that my risk appetite is more conservative, so unless I have accumulated ‘throw away’ type of money to spare and to play with stocks and the like, I am cautious about what I choose to invest in.
So we proceeded to make that last payment, and we obtained the declaration from the bank that the house was paid in full.
The day our lawyer gave us the papers and the title deed of the house with our names on it, I felt a load lift off my shoulders and liberated. I recall leaving the lawyer’s office and me and my husband giving each other a high five as soon as we were out the doors, house title deed, and a stack of documents in hand.
After that, the house and the almost 5000 square feet of it felt different, even the grass on our land felt ‘greener’. I always imagined rolling around on the dirt outside my house after we paid our home off, but I decided not to since we had a dog and we had yet to clear his wastes. Anyway, you get my point.
Needless to say, since we paid off our house, the monthly cash flow increased and we were able to divert the cash to our kids’ education funds, clear off our car loan and start other investments.
We also plan to reimburse back and further top up the contributions to our EPF retirement savings that we had earlier withdrawn to make payments to the house loan. We have a separate excel calculation for that on how putting in an RM20,000 a year back to EPF will yield a significant increase in years and can maybe even help us reach the 1.05Mil mark in EPF earlier. That is when the money in our retirement savings will be ‘touchable’ should we choose to. I will write about that in a separate post.
So, I’ll end this with an imaginary ‘clink’ of my glass cup to another and I say cheers to removing debt and gaining a step forward towards financial freedom.