## EPF Withdrawal for housing loans reduction – aye or nay?

Question I have been asking: Is it always wise to do EPF withdrawal from Account 2 for Home Mortgage Capital Repayment or in layman terms, reducing housing loans? Generally, if the “mortgage interest rate far exceed 5% (EPF dividend return)”, then it is advisable to apply for EPF withdrawal.

Next question is, how much is “far exceeding” in this case, to justify for the EPF withdrawal?

I have been doing some simulation.

**Loan amount**

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

**Base Lening Rate (BLR) – 2.25%**

The average base lending rate. Current Mortgage loan interest rate offered is around Base Lending Rate minus 2.20% to 2.30%. Let’s take 2.25%. We start with current Base Lending Rate of 6.60%, up to, say, Base Lending Rate 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Assuming RM 60k is withdrawn from EPF Account II and transferred into the mortgage account principal repayment on the first day you start to service the loan repayment.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)**

**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 EPF withdrawal is not made, and 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 and let the compounding interest to work its magic over the years.

Points to note

- 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, Base Lending Rate hit a peak of 12.25 percent in 1984, as compared to the significantly lower current Base Lending Rate.
- 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.
- A projection of a mean annual return of 5.04% dividend rate might be too optimistic over a period of 3 decades. Base Lending Rate 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.