Paying off a mortgage early

[Thai Chi]

My wife (Thai) has a mortgage with The Government Housing bank.

She is about 10 years in on a 30 year loan.

She has recently inherited a sum of money that will easily pay off the balance.

I have suggested to her, that is exactly what she should do. Thus saving 20 years of interest payments.

She is of the belief that an early payment of the mortgage will not save any money.

I think she is wrong in this assumption.

I know I could just tell her to go to the bank and ask, but I would like to find out the reality of the situation first.

Anyone been down this road before, or has any solid information ...... ?

[Crossy]

It very much depends upon the actual contract and how big an early payment penalty there is. No two banks are the same, our mortgage penalties ended at 3 years, some friends are stuck with 10 years.

Read the contract before deciding when to pay off for maximum benefit.

[Thai Chi]

Thanks Crossy.

No penalties on her contract after 3 years.

I assume from your last sentence that a "discount" would be in place if paid in full now?

[Crossy]

Probably the easiest solution (and easy for the lady to understand) is to ask just how much she will need to pay now to close the mortgage.

Then add together the remaining payments she would make if things remain as they are now.

The smaller sum is the correct course of action.

[Thai Chi]

Agree Crossy and thanks

[thaimlord]

Hi

Banks can be pretty rough on you so you'll need to see the contract to know. However, if it turns out that there is no financial benefit to be gained (as she believes), or only a small one, you might consider another option.

For instance, assuming there is ฿1m owing now on the house, you could let her continue to pay it off over the 20 years, whilst giving her right now the ฿1,000,000 for her to put on deposit with the government or a bank that pays a good safe compounding interest (and renewing once a year/quarter or however it works with the institution you choose).

At 2% compounding, she'll have nearly ฿1.5m at expiry and at 3%, around ฿1.8m - taxes not factored in, etc.

If she were to fall on hard times during the 20 years, she could remove some to cover herself until she could start to pay again on her own, but all going well, she could do much better out of it than simply having the house paid off, particularly if there were some periods of high interest rates during the time.

Cheers

TL

[Ombra]

My wife was in this situation some years ago. She still owed about a million to the bank and she was paying about 6% in interest. As we had spare cash and we couldn't earn 6% on any account, we decided to pay off the remaining debt - after talking to the bank staff.

[Guitar God]

This may vary by bank but from what I heard, in, Thailand, car loans, and possibly mortgages too, the pay off amount is:

monthly payment amounting ฿ x number of months in loan - ฿ total of monthly payments made to date.

If the loan amount is ฿1,000,000 and you've paid ฿200,000 after 2 years, payoff is 800k, no matter it it's a year , 9 years or full term.

The reason for it is so the bank or lender earns their whole interest, no matter if you pay it early or not.

True? Possibly

Fair? No

Reason it's probable? Banks influence laws everywhere.

[xtrnuno41]

all depends on your financial status. If you have more then enough to live, then you can considder.

Otherwise it's always nice to have some for rainy days. If house breaks down and you need repairs or hospital issues

or what ever comes up. Its not wise to spend it on luxury goods, but just tickle some and leave it in the bank for interest.

And then live on, on the way you are used.

It's all about your financial status.

[tifino]

from what I have experienced, and I'll just step into me missus's shoes here - the thai wife must have cash, and lots of it always available (says she don trust the bank).

All the while that she owes money, whatever hasn't been paid into Mortgage, is therefore still in her hands.

Pay off Mortgage - big time; and she will have that dreaded feeling, even if only for a short time - of not having any spare cash on her

In my case - I pulled enough out of my Super, to kill the mortgage - and wife was very happy, as she got the change

[Suradit69]

This may vary by bank but from what I heard, in, Thailand, car loans, and possibly mortgages too, the pay off amount is:

monthly payment amounting ฿ x number of months in loan - ฿ total of monthly payments made to date.

If the loan amount is ฿1,000,000 and you've paid ฿200,000 after 2 years, payoff is 800k, no matter it it's a year , 9 years or full term.

The reason for it is so the bank or lender earns their whole interest, no matter if you pay it early or not.

True? Possibly

Fair? No

Reason it's probable? Banks influence laws everywhere.

"If the loan amount is ฿1,000,000 and you've paid ฿200,000 after 2 years, payoff is 800k, no matter it it's a year , 9 years or full term.

The reason for it is so the bank or lender earns their whole interest, no matter if you pay it early or not."

Have no idea if you're right about what the lenders actually do. In the US at one time a lot of poor people were given "contract loans" for homes where, no matter how long they had kept up payments, if they missed or were late for one or two payments, they lost the house and any equity they should have accrued, so it's not hard to believe that lenders here could make loans with really punitive conditions. I think the practice in the US was eventually outlawed or such loan agreements didn't stand up in court.

But to say they would expect all payments and interest for the next 10 or 20 years "so the bank or lender earns their whole interest," would not be a very convincing argument since the money they get paid could be redeployed in a new loan to someone else so the interest income would not be lost.

If the current interest rates on such new loans was less than in the original loan that was paid off, I could see them wanting to collect the difference when the loan was paid off and maybe full interest payments for 6 months or a year in case the money sat idle for a period before it was loaned out again.

Edited May 30, 2015 by Suradit69

[Robert24]

It's a no brainer, you pay back the loan and save huge amounts of interest that you would have to pay to the bank otherwise.

The only reason not to do it is if you have an alternative investment that would give you higher returns than what you currently pay in interests to the bank. But my approach has always been to pay back debt first before I start investing somewhere else, just simply because I like to be debt free.

[Robert24]

just an idea to convince your wife: calculate the interest she would have to pay to the bank over the next 20 years (obviously on top of the principal debt she will have to pay back). I would assume the interest is probably at least the same amount as the principal. That should make a compelling case.

[Gsxrnz]

Irrespective of the cost/penalty to repay earlier and the alleged benefits of not paying interest for the next 20 years, you need to assess what can be done with the cash rather than retiring debt.

I've always had the philosophy in business and in personal life that debt managed properly is a very healthy thing. Especially if the debt is relatively cheap.

Obviously, if the cash is used to consume rather than invest, you would be on a rocky road. So I'm not talking about buying a new car, a holiday, double glazing, a new Omega, or a Cartier ring.

But if you can take what is essentially the bank's money at 6% and earn at least 7% on it, you're on a winner. Ideally of course you want a better rate of return than that to reflect the risks taken.

But if you have a serious chunk of money, consider other investments that if managed correctly can meet your monthly interest costs plus generate a profit.

The added advantage is that you can maintain liquidity for emergencies and/or opportunistic investments.

Debt is the cheapest form of equity for any solid business. If you can manage debt profitably and manage cashflow accordingly, you'll never go wrong.

[Thai Chi]

My wife was in this situation some years ago. She still owed about a million to the bank and she was paying about 6% in interest. As we had spare cash and we couldn't earn 6% on any account, we decided to pay off the remaining debt - after talking to the bank staff.

Thanks for that info Ombra.

Just one question ... was the amount paid off equal to, or less than the amount remaining on the loan?

[Thai Chi]

all depends on your financial status. If you have more then enough to live, then you can considder.

Otherwise it's always nice to have some for rainy days. If house breaks down and you need repairs or hospital issues

or what ever comes up. Its not wise to spend it on luxury goods, but just tickle some and leave it in the bank for interest.

And then live on, on the way you are used.

It's all about your financial status.

I have that side of things covered.

If there is a significant reduction in the amount owed by paying the loan off now, I think she should.

If there is no reduction by early payment, I will point out to her some of the suggestions that have been mentioned.

A visit to the bank should reveal all.

[Thai Chi]

It's a no brainer, you pay back the loan and save huge amounts of interest that you would have to pay to the bank otherwise.

The only reason not to do it is if you have an alternative investment that would give you higher returns than what you currently pay in interests to the bank. But my approach has always been to pay back debt first before I start investing somewhere else, just simply because I like to be debt free.

I am with you on this one Robert.

I personally hate having any debts hanging over my head.

As she is paying 6.85% interest on the loan I doubt she could find any alternative investment that would cover that.

[mango66]

This may vary by bank but from what I heard, in, Thailand, car loans, and possibly mortgages too, the pay off amount is:

monthly payment amounting ฿ x number of months in loan - ฿ total of monthly payments made to date.

If the loan amount is ฿1,000,000 and you've paid ฿200,000 after 2 years, payoff is 800k, no matter it it's a year , 9 years or full term.

The reason for it is so the bank or lender earns their whole interest, no matter if you pay it early or not.

True? Possibly

Fair? No

Reason it's probable? Banks influence laws everywhere.

thats not truth !!

when you have a loan of 1 ml thb, / 20 years - about 7% interest , you will pay back around 1,6 mill thb !

so your monthly rate would be 1,6 mill / devide by 20x12 months !!

depending on contract, you will pay a fee anyway if you pay back earlier, but maybee also a penalty;

[Dogbreath]

Always prepay a mortgage if you can. You will save a huge amount of interest that you would pay over the next twenty years. Go online and find a mortgage calculator. It will tell you how much you will save by paying off the bank. I have known many people who paid off their home mortgage early and no one ever said they regretted it.

After paying the bank off, pay yourself. Deposit the same amount of the current monthly payment in a savings account, conservative mutual fund, or some good utility stocks or a combination of all three and in 20 years your wife will be very well off, indeed.

I know a lot of Thais don't think long term, but it will be her best bet for a very comfortable old age. I spent nearly twenty years in the investment game and I feel this is a fortunate circumstance that you should not pass up.

The temptation to spend a little of this "found money" may be too much and over time it can dwindle to very little or nothing. Personal experience taught me this.

[FiestyFarang]

Also if the interest rate is lower than some savings plans better to lock in the profit. Difficult to say without knowing the numbers but paying off the mortgage does drain your liquidity for emergencies.

[Eaglekott]

It's a no brainer, you pay back the loan and save huge amounts of interest that you would have to pay to the bank otherwise.

The only reason not to do it is if you have an alternative investment that would give you higher returns than what you currently pay in interests to the bank. But my approach has always been to pay back debt first before I start investing somewhere else, just simply because I like to be debt free.

I am with you on this one Robert.

I personally hate having any debts hanging over my head.

As she is paying 6.85% interest on the loan I doubt she could find any alternative investment that would cover that.

The problem might be that you might have a contract with the bank that actually gives you a lower interest per month, but locks you to the loan until the end date of repayment.

If this is the case you usually have to pay the interest you should have payed during the time until it should have been fully payed back. So you might end up pay exactly the same amount of money you would payed if continue to pay monthly.

The difference is that if you continue to pay monthly, money tends to get lower and lower value over time, so you probably would gain from NOT paying back the loan in one go.

if the interest is calculated on a monthly or Quarterly basis on what is left on your loan the best is definitely to pay it emidiate.

[Robert24]

Also if the interest rate is lower than some savings plans better to lock in the profit. Difficult to say without knowing the numbers but paying off the mortgage does drain your liquidity for emergencies.

you really think Thai mortgage rates are lower than the interest rates on a savings account?

[ericjt]

As long as there are no pre payment penalties, and if you're paying 6.85% on your mortgage, then by paying it off, you're saving 6.85% a year on the money you are using to pay off the mortgage. Or, looking at it from the other side, you are making 6.85% a year on that money. If you can make more than 6.85% a year on your money, then don't pay off the mortgage. If you can't, then paying off the mortgage is your best investment, or best use of your funds.

One other thought: This does drain your liquidity. You should always keep at least enough money in savings to live for 6-12 months. So, if you decide to prepay your mortgage, make sure you still have enough cash left to live for 6-12 months. Otherwise, just pay it down. Don't pay it off in full.

Hope this helps.

[sead]

Depends on the contract. But i would wait until you get until the baht gets lower.

[Anthony5]

Normally with a mortgage, where the monthly payment is a fixed sum for the whole period, the Interest/capital ratio changes every month.

In the early stadium of the repayment the fixed sum will consist of almost only interest and little capital, while the last monthly payment will almost be solely capital.

Plenty of mortgage calculators available on the web.

[Shiver]

There are quite a few variables here:

• What do you think the 'real' inflation rate is? (imho it's generally about 100% per decade based on a combination of the rule of 72, and just looking at prices of things over the previous decades).
• Is she good at handling money, and not spending cash in the bank thinking it's hers rather than money owed to the bank? (credit card thinking).
• Can she earn more in a savings account than a mortgage cost (likely not, but have to table that idea).
• Would you anticipate that property value would increase enough in the remaining mortgage years to outpace bank costs?
• Is there an opportunity elsewhere that can earn more money than the bank is charging (the idea of using other peoples money to gain more than using your own aka 'OPM')?

That's a starter, but obviously there are other variables that would come into play in real life compared to back of the envelope ideal scenarios.

[umbanda]

If the present monthly payment of the property is equal or lower than the rental value, another choice will be to keep the mortgage and use the cash to buy a piece of land, another house, or to build one, depending on the condition of the actual property, or plans to move or upgrade in the future.

[Thai Chi]

So much information / advice given ..... thank you

I will accompany the wife to the bank next week and see exactly where she stands,

Then discuss it with her and hopefully get something sorted out.

She has recently stopped working, so that may have some influence on her decision.

I will hastily add that she has stopped work to look after her Mother, not because of the inheritance.

She is quite good with money and normally is right on budget every month.

[Thai Chi]

If the present monthly payment of the property is equal or lower than the rental value, another choice will be to keep the mortgage and use the cash to buy a piece of land, another house, or to build one, depending on the condition of the actual property, or plans to move or upgrade in the future.

This was an idea that I was thinking about a few months ago.

Unfortunately, the land / house prices where we live are crazy !!!!

The money she has now is enough to pay off her mortgage, but not enough to buy into anything else.

She already has an unencumbered property in town, so she may be able to do something with that in the future (?)

[rijit]

easy to make monthly payments?.if so carry on, why,, not very easy or often in life you get a lump sum..