31 July 2011

Housing Loan Reduction from EPF Account II - To withdraw or not to withdraw?

Question I have been asking: Is it always wise to withdraw EPF Account 2 for Home Mortgage Capital Repayment or in layman terms, reducing housing loan?

In the The Do’s and Don’t’s of EPF Withdrawal during an interview session at ntv7, Mr Yap Ming Hui stated that generally, if the “mortgage interest rate far exceed 5% (EPF dividend return)”, then it is advisable to do so.

Next question is, how much is “far exceeding” in this case?

I have been doing some simulation.
Referring to the table here:

Loan amount
In this case, let’s take a round figure of RM 200k.

BLR – 2.25%
The average base lending rate. Current Mortgage loan interest rate offered is around BLR minus 2.20% to 2.30%. Let’s take 2.25%. We start with current BLR of 6.60%, up to, say, BLR of 11%.

Tenure (years)
Standardize tenure to 30 years

Total interest paid
Total amount of interest paid over loan amount based on amortization schedule. I use
Home Mortgage Calculator from Vertex42.

EPF Withdrawal for Principal Repayment
Assuming RM 60k is withdrawn from EPF Account II and transferred into the mortgage account principal repayment on the first day you start to service the loan repayment.

Total interest paid with EPF Withdrawal @ Pmt1
Total interest paid over the same timeframe and mortgage interest, but only with remaining principal of RM 140k (remainder of RM 200k loan after RM 60k capital repayment on the first day loan is being serviced).

Interest savings
Difference between total interests paid with and without the RM 60k capital repayment from EPF into the home mortgage.

Geometric mean of EPF dividend return over the past 10 years (2001-2010)
Dividend payout historical data retrieved from WikipediaGeometric mean rate of return is commonly applied in the financial calculation to obtain the average rates of return where dividends are reinvested (compound interest).
FV of PV=60,000 for N=30, i=5.04%, minus PV
Future Value for RM 60k over the period of 30 years, with annual compounding of 5.04%, minus original principal of RM 60k. This is the potential monetary gain should the RM 60k remains reinvested in EPF.

For a RM 200k home loan, net interest savings is only accomplished if the mortgage interest rate is higher than the EPF mean dividend rate by 2 percent or more. Else, it is probably better to leave your Account II balance in EPF for the sum and the compounding interest to work its magic over the years.

Points to note
  1.  I did not take the geometric mean for EPF dividend rate over 20 or 30 years because the dividend payout in the 80’s and 90’s it not an accurate representation of current dividend rate. The geometric mean will then be biased towards the 7 to 8 percent dividend then. EPF claims that, for capital preservation, a sizeable portion of its investment portfolio has always been in low risk fixed income instruments (such as Malaysian Government Securities); and that the interest rate regime, for which the risk-free instruments’ return are based on, were high during the 80’s and 90’s. For instance, BLR hit a peak of 12.25 percent in 1984, as compared to the significantly lower current BLR.
  2. The compounding interest of RM 60k is in reality, will be much higher from consistent and potentially increasing employer and employee contribution, especially for salaried individual.
  3. A projection of a mean annual return of 5.04% dividend rate might be too optimistic over a period of 3 decades. BLR has been in a downtrend for the past 3 decades, and it could still drop. Legally though, EPF is obligated to provide minimum of 2.5 percent dividends.
Any differing opinion?


  1. Good posting :P With the current weak economy, the BLR will mostly like stay low.

    One point to ponder is that, the 1st repayment of the 1st property/house is a direct bank-in into your current/savings account. You don't really "forced" need to use that money to pay-off the housing loan :P

    On 2nd withdrawal onwards, you are "forced" to use the withdrawal to pay for the loan because EPF will directly bank into loan account just reduce capital. You cannot use your money to roll it over to do other stuff.


  2. Thanks Kris. Yea, normally if on tight budget, that's the amount being used for renovation.


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