Multi-generation property loan makes sense

MULTI-GENERATION loan for property purchase is a good move, in my opinion, but only for a “freehold” property.

Most people will agree that property loan is a good type of debt. Property investment, no doubt, has its cycle of up and down. However, in the long run, property prices will increase.

The only setback is that in a property downturn, you might not be able to make the required instalment payment resulting in an auction or forced sale.

If you can weather the storm, though, eventually the property price will rise again. As such, the best way to mitigate this risk would be to opt for the lowest instalment possible.

Let me back this up with some simple figures. A 30-year loan of RM500,000 at 5% interest requires an instalment of RM2,700 compared to a multi-gen loan of, say, 99 years, of about RM2,100. That’s a saving of RM600 per month.

Of course, many people would say that, in the end, interest paid on a 30-year loan is RM470,000, while a 99-year would be close to RM2mil. But bear in mind that a property loan is different in that you can always pay more at any time.

But the most important aspect is that you keep your monthly commitment low.

Property works well in an inflationary world. Your “roti canai” is no more 10 sen. Property price cannot be sitting in that low price level back in the early 90s to be deemed affordable.

My dad used to tell me that in the 60s, a landed house cost somewhere from RM4,000 to RM8,000.

Maybe he couldn’t afford it at the time, but if he could have secured a multi-gen loan for 60 years, for example, the instalment would be like RM50 per month, total interest paid RM30,000 even if the interest would have been 10% on average at that time.

What is your property worth in 99 years’ time? Your grandchildren would thank you.