This week I use my EPF to have monthly withdrawal to reduce my loan principal.
I have a question whether to use the extra fund to save in ASB or reduce my loan principal.
So which one will give me higher return?
To do the analysis I need to know what will be:
1) Effective return of saving in ASB vs reduce principal loan.
2) How long it takes to settle the loan
What I meant by Effective Return?
For me it is the amount of dividend / saving from interest that I get by year end.
Example: ASB dividend rate is 7.42% and I make a monthly saving of RM1,074 per month.
So usually, we calculate the dividend by end year we get is:
RM1,074 x 7.42% x 12 months = RM956.
But ASB will calculate based on monthly minimum amount. Based on that calculation the dividend we will get is RM519.
So effective return is RM519 / (RM1,074 x 12) = 4.03%
1) Property Loan
- Outstanding amount as of 1st August 2018: RM48,152
- Monthly installment: RM630.96
- Interest rate: 4% fixed
2) ASB Dividend Calculations
- I take only last 3 years ASB dividends from 2015 to 2017.
- So average dividend within those 3 years: 7.42%
Comparing the Results
- In 1 year, ASB gives better return vs settle off my loan principal.
- In 1 year, ASB effective return is 1.42% extra vs settle loan principal
- 2nd year, settle loan principal effective return is 13.34% extra vs ASB.
- By 3rd year, settle loan principal effective return is 14.30% extra vs ASB and it gives available fund of RM25,560 as the loan is fully settled off.
Why settle off property loan gives higher effective return in the long run?
- Interest amount over monthly installment getting less and less when the principal is reduced. This helps accelerate the principal reduction.
- Hence, better effective return from the interest saving.
At first thought without deep analysis, I thought I want to put the money in ASB as ASB gives 7.42% dividend vs loan interest rate of 4%.
However, based on the analysis, I will pay off my loan principal instead of putting the money in. ASB.
Furthermore, by 33rd month, I have fund from monthly EPF withdrawal of RM1,074 + loan monthly installment of RM630 which I don’t need to pay anymore.
So total extra cash flow is RM1,704.