By Michael Tan | Mar 29, 2010
How to squeeze your housing loans to maximize your returns?
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First things first, decide. Are you planning to make money or save money in properties? If you answered “Saving money from properties”, this article may not be suitable for you. I’m here to share with you how you can use your property loan to make money for yourself. In fact, I know some people who have such proficiency at earning via this method, that they have retired within 5 years of starting!
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With the information I am about to share with you, doubtless some will disagree. And to take all potential variables into consideration would be an endless task, however, should you use this method with care, you should be able to maximize your returns from your loans and make tons of money from your property while still keeping it!
To understand how this works, let’s go through a couple of basics. In general, does a property appreciate or depreciate in price? Now, how about a property loan? The answers are quite obvious; a property should, one hopes, appreciate in value whilst your regular monthly payments will reduce the amount outstanding on the loan secured against it.
So looking at the diagram above, how can you make money from your loan? As your property appreciates in price, and your loan reduces, the amount of equity (in other words, cash) in your property increases. In this situation, there is an easy way to access that tied-up capital: refinancing. The banks will also be aware if your property has increased in value, and the majority will be more than happy to increase the loan amount on it for you, assuming that you can demonstrate you can afford the increased loan, and there is sufficient equity in the property. This way, you still own the property and are able to cash out some money from it. Ideally, it would be best not to increase the loan tenure whilst refinancing, even if the new monthly payments are a little higher, as this will end up costing you more in the long run.
Here’s an example of how this works. Let’s take a property worth RM300K, with a loan of RM270K. We assume that the property does NOT appreciate with time. The illustration below is with a fix loan of 6% p.a.
Looking at the table below, you can easily take out RM20,000 every 5 years. However, you should only do this for your investment properties which are bringing you good rental yields. If you are able to rent your property out for 7% and above, you can be rest assured that your tenants will be paying for your profits while you are cashing out on your property at least every 5 years.
However, there is never a guarantee that property prices will ALWAYS go up, so it is never wise to overextend yourself completely. The clever investor will always keep a rainy day fund to ride out dips in the markets.
With that in mind, Happy Investing!
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