Falls into mortgage trap(s) ...

Written on 9:34 AM by Yuen Lung

Many of us felt into debts for our home or properties and we spend our life, work hard, trying to run out of it. I called it mortgage traps as we are trapped into it after we sign the sell and purchase and loan agreement. There are many reasons we falls into the mortgage traps.

Wrong believes? (What we were told are wrong?)

"Your home is your greatest asset. You will never lose to invest in your home."

"The price of properties will always grows. It is safe to invest in properties."

Sounds familiar? Well, these statement are not always true. Simple example, take out The Stars papers (Malaysia), go to classified, zoom into properties in Rawang and properties for auction. You will be amazed that how many properties are there for sales (or should I say the owner want to get rid of it fast) and auction.

Have you tried to slow down when driving and take a look at the apartments, houses and shops along the road site? Will you spend your free time, go hunt for properties and such. You will notice that not all area are developed according to plan. Price of properties in some areas are depreciate due to many reasons such as flood, crime, supply over demand, etc.

Lack of knowledge or information

There is an article title "Mortgage - friend or foe" (By Lim Siew May, Personal Money, April 2008) discussed about mortgage. The author talked about leverage and gave an example as followed:

If RM20,000 was paid as down payment for a RM200,000 house and the value of the house (RM200,000) grows by 10% to RM220,000, there will be capital gain of 100% (RM20,000 / RM20,000).

This sound fantastic for some investors. It is not difficult to discover realise how true is the example. Some points for my dearest reader to think about:

  1. Why the cost of purchase for this house was not mentioned? Lawyer fee, MRTA/insurance, Stamping fees, etc.
  2. How about the cost of sales? example, agent fee, advertisement fees, etc.
  3. Mortgage interest was not included.
  4. Maintenance cost of the house

This is a very good example of lack of knowledge or information. People always ignore these cost while invest in the house. Failed to calculate the break-even point may cause the investor fall into cash flow problem.

(P/S: Personally I am not sure why this example was coded in Personal Money magazine. It is misleading)

False or Partial information

Another fantastic example in the same article in Personal Money, April 2008. The example mentioned about taking 90% loan to purchase a properties allow the investor to spread their funds among various instruments to take advantage of opportunities.

Let's look into the cost of taking 90% loan. To simplify the analysis, we calculate based on a property that worth RM100,000. The loan amount is RM90,000, based on the current BLR 6.75%, 30 years loan, the total interest is more than RM120,000.

Therefore in order "take advantage of opportunities", the "various instruments" needs to deliver the same amount (>RM120,000). RM120,000 is the opportunity cost for taking the bank loan and invest in other instrument. If the instrument does not perform, the investor will be in greater debt.

Laziness

How many of us actually monitor our mortgage closely and make sure it tally with the amortization schedule? In some case, people does not have the amortization schedule from bank when they sign the loan agreement. To go further, how many of us know what is amortization schedule?

People always say that make extra payment will decrease the total interest and cut short the repayment period. How many of us go one step further to ask for the amortization schedule and check if the extra payment helps in cut short the payment period and reduce total interest? How bank handle the extra payment? Is the extra payment be used to reduce the balance of the principals? Is the extra payment be "park" in a suspended account?

Last but not lease, will you write letter and negotiate interest rate with bank if the BLR decrease? Do you know that by reducing the interest from 6.25 to 5.75 will help you save RM50,000 of interest and 4 years or repayment period? This can easily be done by just sending few official letters and phone call after you collect your negotiation bullets.

Conclusion

Lack of financial knowledge is the main reason of falling into mortgage trap. In my opinion the best way to avoid or get rid of mortgage trap is to gain more financial knowledge. Read more, study more and use your CMS (common sense) to analyse. Engage services from professional if you have less time to study and search for knowledge yourself. The amount you pay for the service will always help you save more money if you found the right financial planner or professional.

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Get out of debts: Are you ready for the change?

Written on 2:23 AM by Yuen Lung

Did your primary school teachers ever asked you to write an essay talk about "Your ambitions"? Can you recall what have you written? I guess most of our answers could be ... that is kid's talk, can't remember, that is pure academic, not realistic, etc ...

Let's move the "time pointer" nearer to recent. Do you have some short term goals? Such as take a course, complete your degree, cut down your weight, become healthy, purchase a house, purchase a camera, etc. What is the progress of achieving it? Are you closer to it everyday or it is still far away from you? Are these goals really unachievable?

Some abnormal things happened to some of my friends or relatives. Some says want to work hard to increase income and yet everyday spend hours on watching drama; some says want to get their master/bachelor degree and yet cannot "force" themselves study but prefer clubbing and shopping; some says want to buy a house as soon as possible and yet paying car installment that take up most her monthly salary; some say want to save money for applying for tourist-working Visa to UK and yet spend most of her money in another unrelated course.

Ideas from an inspiration audio CD: We all do thing with two possible intents/forces: A. To gain pleasure. B. To avoid pain. These two forces (pleasure and pain) form the basis of everything we do or fail to do. It happens that force to avoid pain is much stronger than pleasure.

Example 1, We always say health is wealth. Undoubtedly, there is pleasures for us to live healthy. On the other hand, to stay healthy we need to exercise at least 3 times a week (each time more than 1 hour), be aware of our diet, etc. All these are pain.

Example 2, further study and life long learning is good for personal development and career advancement to certain extend. Before we enjoy the pleasure to become a degree, master or PHD holder, the pain comes first. Study hard, more homework, less clubbing, less happy hour, less money to spend as need to pay school fees, etc.

Therefore it is not easy to stay healthy and further study as all the pains come first before the pleasure. Furthermore the force to avoid pain is much stronger than pleasure. Many people will choose to avoid pain instead of gain the pleasure (Including myself). It is painless to give reasons/excuses for not achieving it. No time, no money, no life, etc ... Guess what, those are the reasons for failure and getting away from your life vision.

This happened to people who try to get out of debts too. Control expenses and increase income are both painful tasks to do as compared to spending future money. Therefore before we discuss about tips and tricks to get out of debt we need to overcome this "pain" in our unconcious mind.

NAC (Neuro-Associative Conditioning) is a science of success conditioning developed by Anthony Robbins. It leads people away from behaviors that create limitations or pain. It is believed that by changing the associations that people have between certain situations, people, ideas, emotions or contexts with pain and pleasure, will help people success.

THE NAC 6 STEPS OF CHANGE: (source: http://www.sportshealth4u.com/nac.html)

  1. Know What You Want.
  2. Know What is Preventing You From Getting What You Want.
  3. Interrupt that Pattern or Break the Old Behavior, Remove the Obstacles.
  4. Choose and Install the New Behavior or Pattern You Want.
  5. Condition Yourself for the New Behavior or Pattern.
  6. Do an Ecology Test for the New Behavior to See If You Have Successfully Installed and Conditioned It To Be Your New Automatic Response.

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