Should I Take A Loan To Buy Property - Part 2

Assuming you are now renting a property for your own stay. You came across one property that you like in terms of its design and comfort. Now a major decision looms whether you should continue to rent or part with your hard earned savings to purchase the property. Your savings are probably sufficient to pay the down payment, remainder to be financed by taking a housing loan from a commercial bank. Assuming property value = $250k, loan amount = $200k, lending rates = 7%p.a., loan tenure = 30 years. Your installment amount would work out to be $1,330.60 monthly. Interest calculation is based on reducing balance method. Based on the loan repayment schedule, you would have paid a staggering amount of $279,018.02 representing only interests portion by the end of the loan tenure! That is more than what you would have paid for the property itself by today's valuation! So many people would have deterred from buying and financing such a property based on the above simple calculations! So you decided that you should continue to rent and put off the plan to own a piece of property. Is this a wise decision? Not really. Although it appears that you are paying the Bank a lot of interests, you should consider the following factors:

1. Property valuation tends to appreciate over time, as property is the best hedge against inflation. Assuming the property appreciates by 5% annually, the property will be valued at $1,080,486 after 30 years. Your capital gains = $830,486, which is a staggering 332%! You would not have been able to own such a property at the first place if you do not purchase through financing.
   
2. Assuming if you have the cash to finance the full purchase price of the property, would it be wise to settle the entire purchase by cash? The answer is no! This is because the excess cash could have been invested in other high yielding assets or investments that exceeds the bank's lending rates. eg. You invested your money in stocks and mutual funds, the average returns of your investment say equates to 12% per annum. You would have gained 5% Net Return on a yearly basis assuming bank lending rates is 7%! In another words, you should learn to invest the money otherwise used to settle the property amount in a higher yield assets or instruments.

The same prinple applies to corporations seeking a commercial loan to part finance their investments or factory expansion. You could often see that big corporations often still borrow even though they have sufficient cash pile to finance the deal, using the same theory of higher yield investments to more than offset the loan. Effectively this is how you could make more money by leveraging on 3rd party's funds! It is also the reason why you should learn how to invest wisely!