Reverse Mortgage VS Refinancing in Malaysia: How to Secure Both a Roof Over Your Head and Cash in Your Pocket

When people think about paying off their mortgage, they often feel a sense of dread. The idea of being stuck with a huge debt for years is daunting, so many of us rush to pay off the mortgage as soon as possible. We might even dip into our EPF (Employees Provident Fund) Account 2 to do it, believing that getting rid of this “financial burden” is the key to financial freedom.

But what happens when you finally retire? Sure, your house is paid off, but what if your cash reserves aren’t enough to sustain your lifestyle for the next 30 years (from 55 to 85)? Many retirees face this exact problem: owning a fully paid-off home but not having enough liquid cash to live comfortably.

The Cash Dilemma

You might be wondering, “Where can I get the cash I need?” Do you sell the house? But then, where would you live? Or do you consider refinancing? But how can you get a loan without a steady income during retirement?

These are common concerns among retirees. While having a paid-off home saves you on housing costs, other expenses—like healthcare, medical bills, and daily living costs—still need to be covered. What’s worse is the worry that you might outlive your savings.

Time Without Money: A Recipe for Regret

Imagine having all the time in the world during retirement but being afraid to spend money. You might hesitate to take that dream vacation or even think twice about buying some Musang King durians because of tight finances. This isn’t the retirement anyone dreams of. Worse yet, what happens to all that money you’ve scrimped and saved if you don’t spend it before you pass away? As my wife often says, “Do you really want to leave all that money behind for someone else to spend?”

Then there’s your fully paid-off house—who will inherit it when you’re gone? Will your children even want the house, or would they prefer to have cash that’s readily usable?

A Smarter Approach: Refinance Before Retirement

So, what’s the solution? It’s simple—refinance your home before you retire.

Refinancing can give you access to cash that you can use to enjoy your retirement. This requires a mindset shift: you don’t want to become a “slave” to your house.

You might argue that paying off your mortgage completely frees you from debt, but think about it: if you’re cash-poor and all your wealth is tied up in your house, aren’t you still a slave, but to your home instead?

By refinancing, you can unlock the value of your home and access cash, giving you more freedom and flexibility. Instead of sacrificing your quality of life just to own a paid-off home, you can enjoy a more comfortable retirement.

An Alternative Option: The Reverse Mortgage

If refinancing doesn’t sound appealing, there’s another option to consider: a reverse mortgage. This financial product allows retirees to unlock the value of their home without needing to sell it or make monthly loan payments, making it an attractive alternative for those who want to stay in their home while accessing additional cash.

How a Reverse Mortgage Works

A reverse mortgage works differently from a traditional mortgage. Instead of you making payments to the lender, the lender makes payments to you, based on a percentage of your home’s value. You can receive this money as a lump sum, monthly payments, or a line of credit. The loan is typically repaid when you sell the home, move out, or pass away.

Here’s the key point: with a reverse mortgage, you still retain ownership of your home, and you can continue living in it. The loan is secured by your home, and the interest is added to the loan balance each month. Over time, as you receive payments and interest accrues, your equity in the home decreases.

My Webinar Experience: The Cost of Reverse Mortgages in Malaysia

I once hosted a webinar to dissect the only reverse mortgage offer available to Malaysians at that time. While reverse mortgages can be a good way to free up cash during retirement, the financing cost can be significantly higher than a regular mortgage. In this case, the cost was around 6%—about 50% more expensive than a typical mortgage.

This higher cost means that while a reverse mortgage can provide immediate financial relief, it’s essential to weigh the long-term impact on your home equity. As the interest compounds, the amount you owe can grow quickly, potentially leaving less inheritance for your heirs. However, I wouldn’t mind to leave less for my heirs, but compared to the normal mortgage rate of 4.5%, why wouldn’t I opt for that much lower financing cost, better than a reverse mortgage product.

How to Use the Cash after Refinancing

Once you refinance and have cash in hand, what should you do with it?

Here are a few suggestions:

• Invest in Higher-Return Investments: Think about putting your money into investments with higher returns. This approach can help you grow your wealth while keeping cash on hand for your needs. If you’re working with a substantial amount, consider consulting multiple fund managers and directly engaging one to manage your portfolio. Look for managers with a strong track record who focus on value investing and understand how to manage risk. A good manager should be able to deliver returns of over 10% per year after fees over the long term.
• Put it Back into EPF: If you’re not comfortable with high-risk investments, putting the money back into your EPF is a solid option. With EPF offering a dividend rate of over 5% and mortgage rates under 5%, you can still earn a net return.
• Stable Financial Products: Besides EPF, you can look into other stable financial products like bonds or high-yield REITs. These might not offer the highest returns, but they’re stable and can provide a reliable cash flow for your retirement.

The key is to make your money work for you, instead of locking it all up in your house. This way, you can enjoy your retirement while ensuring financial stability and freedom.

A Success Story: How Refinancing Transformed a Retirement

I know a retiree who refinanced all his properties to get more cash, which he then invested in the stock market. His annual returns exceeded 10%. Not only did he live better, but he also moved into a larger, newly renovated home. Unlike retirees who worry about running out of money, he had no such concerns. Through smart investments, he achieved financial freedom and now enjoys a worry-free retirement.

This success story shows that with proper planning and the right investment strategies, you too can enjoy a high-quality retirement, free from financial worries.

Conclusion

Don’t let your house become a stumbling block in your retirement. By refinancing before you retire and smartly using the funds in higher-return investments, you can ensure that you have both a secure home and the cash flow needed to enjoy your retirement. Financial freedom isn’t just about owning a fully paid-off house; it’s about having the cash and flexibility to live the life you want.

I’d love to hear your thoughts—do you have any experience with refinancing or reverse mortgages? Drop a comment below and share your story. Also, if you’re interested in an updated webinar on reverse mortgages, let me know! The more comments we get, the clearer it will be that there’s interest, and I’ll figure out something special for you all.