Why do you need to pay so much interest to bank?

funny money
Creative Commons License photo credit: Material Boy

Recently I received an email from a humble 22-year-old student questioning about why should we borrow and pay so much interest to bank for our real estate investment.

It is very encouraging to read his email. As a student of his age, I have to say it’s not easy for him to think so deep about issues of real estate. He has performed some in-depth observation and analysis using our property investment evaluation spreadsheet to prove his points. I still can remember 10 years ago when I was at his age – as a student also, I didn’t even bother to know what is a mortgage loan…

Here is a summary of his mail:

Hi Ongkl, in your previous article “How to finance your real estate investment for maximum return?”,you encourage us to get the longest tenure available to us when we apply for a mortgage loan.

But, isn’t it the longer the tenure the higher the total interest payment?
Also, isn’t it the more we borrow the more the interest payment?

Let’s take the default values from your property investment evaluation spreadsheet as an example. We assume that:
1. The property is not sold for the next 30 years.
2. The interest rate and maintenance cost are fixed for these 30 years.


According to the table above, the total net profit in 30 years is increasing as the % of loan is decreasing.

Then why should we still want to take the highest % of loan and the longest tenure? Let’s say we have cash on hand, shouldn’t we put as much cash as possible into the down payment? Even if we can’t make a full payment with cash, 30 to 40 thousands still can reduce the amount of interest payment substantially.

Home buyer or real estate investor
Many people do not know how to select the right approach when they first come to real estate investment. This is because we all have the same mind set as if we are buying a home. I have to admit that it took me quite a while to learn the difference between buying a home and an investment property before I acquire my very first investment property in Singapore.

As a home buyer, we don’t like to pay more interest to bank. This is understandable since buying a home can only be considered as an expense instead of an investment. Why? Very simple, because we don’t get any income from our home… So we should try to pay as little interest as possible when we buy our home. If possible, purchase it with cash.

On the other hand, in real estate investment, or maybe all other kinds of investment, what we emphasise most is the maximum return – how can we get the highest return from the minimum amount of money invested?

100% cash or 90% loan
Take the case showed in the above table as a an example. Yes, if you borrow 90% to purchase the property, total net profit in 30 years is RM43,166 only, compared to RM157,680 in the same period of time if the property is purchased with 100% cash.

However, take a look at the money required by both scenarios. For 90% loan, the required capital is RM31,750, compared to RM166,750 if you purchase it with 100% cash. That is more than 5 times different!!

If you invest the RM166,750 in 5 similar properties with 90% loan, the total net profit that you can expect in 30 years is RM43,166 x 5 = RM215,830 instead of RM157,680! If you can earn another RM58,150 with the same amount of money (RM166,750), will you still use that money to buy one property only with 100% cash?

Even if you can just find 4 similar properties, the total profit in 30 years (4 x RM43,166 = RM172,664) is still higher than one 100%-cash property’s, and not forgetting, you still have RM166,750 – (4 x RM31,750) = RM39,750 cash on hand.

Moreover, with 4 or 5 properties on hand, capital gain from the appreciation of estate value is also 4-5 times.

I think this should be enough to stress my point – focus on the maximum return that you can get from real estate investment instead of the interest. Interest is only part of your costs of investment. Just take all the costs into account before you calculate your return, and then choose the right strategy to go for maximum return.

For the above example, I would definitely go for 5 properties with 90% loan, even if I can buy one with 100% cash. What about you?


About The Author


Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore - a conurbation with 6.49 million still fast growing population - since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.


  • YONG

    Reply Reply June 8, 2009

    Hi ,nice to meet you all Kawan REIJB,

    I was the silly questioner who embarrassed to ask such a stupid question here ,so i e-mailed the question to ONGKL.Very thanks for his reply.

    I am not expected my question will show up here.Hahaha.

    I like here very much ,alot of gem to learn, thanks for his unselfishness sharing.

    Best Regards,


  • Apex

    Reply Reply June 8, 2009

    Thanks for the sharing. Totally agree with you. It is much better to buy 5 properties than putting all the cash into one properties. This technique can ensure us that we have 4 extra incomes by using same amount of modal that we have.

  • Lee

    Reply Reply June 14, 2009

    it’s also a better idea to spread the risk of investment by not putting all eggs in one basket

  • Ck Wong

    Reply Reply June 20, 2009

    Loan is good for young working adult especially when their cash is not too many.. good loans like mortgage is the best tools to leverage against all the return in the future especially if you have “TIME”.

  • Zavier

    Reply Reply July 8, 2009

    Technically i agree but practically i don’t. Loan approval will be the constraint depending on the income. In reality, one has to buy one property and be able to rent it out higher than mortgage installment before he can move to the next. And problem lies with getting the right property that give a good yield is not so easy.
    Solution is to get a flexi loan that u can park additional money in it while reducing the interest. Then take the time to hunt for another good property.

  • Eric

    Reply Reply July 13, 2009


    Frist of all, thanks for this website, it is very infomative.

    I think your caculation makes sense only if we are assuming:

    1. You can find tenants and rent out the place at expected price and without interruption.
    2. The house price wouldn’t plunge.
    3. No others events like build quality, developer default or natural disasters.

    Otherwise, if this is a sure-win deal, then banks wouldn’t lend you money, they will buy the property themselves.

    • ongkl

      Reply Reply July 15, 2009

      Hi Eric,

      Thanks for your comments.

      1. I treat this as a positive drive to keep investors aggresively improving their investment properties in order to make sure they are always competitive in the market. If they are not in a hurry to find tenant for their property, it could be a bad thing to the property itself and eventually a waste to economy.

      2. As long as your investment property brings you cash flow, you don’t need to sell them away even though its price plunges. Dip of property price will just limit the amount of refinance, if you need one.

      3. This risk is higher for new development projects. Damages caused by natural disasters should be covered by insurance company, that’s why every mortgage loan requires its borrower to acquire sufficient insurance for his/her property.

      I would say interest rate hike should the biggest risk which is out of our control when you borrow from bank to invest in real estate. That’s the reason why I suggested investor to keep their monthly installment below 60% of their rental income. See “What risk you may face if you borrow too much and how to manage it?“.


  • KC Low

    Reply Reply March 14, 2010

    Hi all,
    This is exactly kind of “spread sheet” I am looking for, for my part time career as property investor which I just decide to do it. (I am very very begineer with a strong passion in property). Anyway I already bought one house where I am staying with my family. So it is not generating any income, just expense. but this post will be my reference to make another spread sheet to justify as I should finish my current home loan ASAP or buy one more property on bank loan and let the bank suck off maximum interest from my current home loan.I hope some one some where already make one such spread sheet 🙂

    As for the spread sheet on this post, buying 5 properties seem to have some risk which we should look into really carefully. If you are not full time property investor (like myself), we are prone to making mistake like choose wrong location to buy house, no experinece in picking good tenant, developer unable to delivere the property or CF is some where else but not in our hand. I believe most people here have a fulltime job and some extra cash decided to invest in property.

    Also imagine the time we need to really look into good property to buy for rental and then the time we need to manage it. Bad tenant, renovation, repair the house after old tenant leave, etc….if we alredy have a full time job, how can we have enough time for managing 5 properties???Also even we manage to pull out some time from our 24 hr a day, i think it is undeniable we will have our full time job performance drop which will delay or even stop us from getting promoted. Full time job with a bad performance and bad feedback from our boss is a big cost for us.

    I think on top of this spread sheet we should also have it compared (even qualitatively on each option) to time needed, associate risk, also to such detailed extent of drop in full time job performance and the risk of losing certain merit due to lack of focus in job.

    Many of us are part time in this property investment. We have the will in it but lack of time and experinece. Also bear in mind if make a wrong decision the first time we invest we are afraid to move on any more in property investment. Is not to say it is not good, but how we can manage it without scarficing our full time job and most of all, right at the first attempt.

  • Prem Kumar

    Reply Reply June 14, 2010

    Dear Mr. Ongkl,

    I am considering of purchasing a service apartment near PJ area (Alam Idaman Service Apt) for RM252,396. They are offering 90% loan and 40 years repayment period. I am buying it as an investment and this is the first time I am buying a property. I am writing now to have a second opinion on whether it is a good buy.

  • Alan

    Reply Reply July 2, 2012

    Dear Onk KL ,

    I am not agree your idea , Economy will not perform good every year , One day it will became as EUROPE CONTRY . Did you faced 1997/98 the economy collapsed , thousand of poeple lose thier job . If there finance loan to maximum how they can afford to paid the loan.

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