Calculating a home loan with EPF dividend return in 2024

EPF return is better than settling home loan debt

My conclusion might sound contradictory to me. The EPF dividend return does come with some risk, although it is minimal IMO.

The image was generated by Grok AI and inspired by WeirdKaya

On the wake-up call on the EPF dividend announcement in the morning, I might want to cash out partially from my EPF account to reduce my home loan debt. People started to queue up at the KWSP Bayan Baru near Queensbay. EPF web server hogged our internet lines until the server refused to service queries, returning a 404 error. At a luckier time, the server could poll for another ~10 minutes in the queue until the web server is ready to pick up graciously. I regret owning more than one property, not to mention a bungalow like the one in the picture 😅 by WeirdKaya.

Home loan debt to whom? I have just blogged a sample calculation from my experience to service my loan debt.

In Malaysia, the maximum loan tenure is 35 years, or until the borrower reaches the age of 70 (whichever comes first). My new unit in the condo started construction in 2022 and was completed in 2024, and my age has exceeded the allowable limit for mandatory years.

# Number of years loan
>>> 70-2022+1974
22

According to the DOSM survey, the life expectancy for Malaysians is 75.2 years (for both sexes). Males tend to be shorter-term due to their harsh treatment at their workplace 😅

My home loan charges me a 4.2% interest rate for an initial total loan is RM 460,000, covering a 264-month (264/12 = 22 years) tenor when I signed up with the Bank for my home loan term. Fortunately, I have some balance in my EPF (Malaysia KWSP) account to pay off my debt due to my home loan.

The question is whether to pay off home loan debt or keep it in an EPF account, waiting for the price to appreciate further.

Based on the data I gathered together:

Home Loan:

• Initial loan amount: RM 460,000
• Interest rate: 4.2% per annum (assumed variable as it’s common in Malaysia)
• Tenure: 264 months (22 years)

EPF Account:

• Funds in Account 2 can be withdrawn for housing loan payments or to purchase a home, subject to eligibility.
• EPF dividend rates for 2024: 6.30% for Simpanan Konvensional and Simpanan Shariah.

I wrote about the EPF subject 2023 a year ago, a risk-averse option for investments with a 5 to 7 percent annual dividend return.

For educational purposes, our loan interest rate is calculated based on Base rate **+ Spread **(Bank’s Profit Margin), e.g., BR 3.00% + 1.20% = 4.20%. Bank Negara has provided a website since 1997 with up-to-date rates.

Understand Your Home Loan Costs

Let’s calculate the total cost of your home loan and my monthly repayments to understand the interest you’re paying over time. Assuming a standard amortizing loan with a 4.2% annual interest rate, we can use the loan amortization formula to estimate payments.

Now let’s calculate my home loan cost and monthly repayments using the loan amortization formula for a standard amortizing loan with a 4.2% annual interest rate.

The formula for the monthly payment (M) is:

M = P × r(1+r)^n / ((1+r)^n – 1)

Where:

P = Loan principal (RM 460,000) r = Monthly interest rate (4.2% annual = 0.042 / 12 = 0.0035) n = Number of months (264)

Plugging in the values:

# M = P*r*(1+r)**n / ((1+r)**264-1)
>>> 460000 * 0.0035 * 1.0035**264 / (1.0035**264–1)
2672.51~

This would be my prospective monthly (M) payment: 2,672.51

Total repayment over 264 months:

# total_repayment
>>> 2672.51*264
705542.64

The total interest paid will be the total prepayment minus the principal on the loan. We will have to pay approximately RM 245,542.64 for the total interest at a 4.2% interest rate per annum at the end of the tenure, assuming the rate remains constant (if variable, it may change based on Malaysia’s Overnight Policy Rate, OPR).

# Total interest paid = total repayment - principal on loan
>>> total_interest_paid = total_repayment − P
245542.64

The next step will be to determine whether the EPF annual dividend can cover our costs.

The total amount of the loan with a principal of 460,000 will be completed in 22 years. I checked in on my GitHub repo here for an initial template for my similar scripted calculation and my sample Excel calculation.

Early loan payoff theoretical scenario

If you use EPF savings (above RM 100,000) to pay off the loan early, it will reduce the outstanding principal, lowering the total interest paid. Let’s assume you have a lump sum available now and want to evaluate paying off the loan partially or fully.

EPF opportunity cost:

If I have enough EPF savings in Account 2, let's say starting with RM 560,000:

• 560,000 - 460,000 (P) = RM 100,000 in EPF account
• Withdrawing RM 460,000 to pay off my loan debt, leaving RM 100,000 in the EPF account
• Opportunity net loss ~788,324 to potential EPF dividends. Calculation below the sheet:

# FV = P x (1.055)**22
>>> FV = P * (1.055)**22
1493867.03~

# Dividends earned = FV - P
>>> dividend = FV - P
1033867.03~

>>> net_loss = dividend - total_interest_paid
788324.36

By paying off the interest on the loan of ~246k, but forgoing the potential EPF dividend of ~1,034 million and the opportunity net loss of ~788k after interest paid.

Refinancing to Partial Payoff

Suppose I would like to do a partial payoff, withdrawing a smaller amount, RM 100,000, from my EPF Account 2 to reduce the loan.

New principal on bank debt: 460,000 - 100,000 = RM 360,000. Calculating changes by executing a partial payoff would be:

• Recalculated for new debt of 360,000 and new monthly payment of 2091.53
• Future value would be less than refinanced after a partial payoff.
• More interest will be paid after the refinance for the new principal
• Lower opportunity cost due to net loss, leading to lower dividend income.

# FV = new_P x (1.055)**22
new_P = 360000
>>> new_FV = new_P * (1.055)**22
1169113.33~

# Dividends earned = FV - new_P
>>> new_dividend = new_FV - new_P
809113.33~

# M = P*r*(1+r)**n / ((1+r)**264-1)
>>> new_M = new_P * 0.0035 * 1.0035**264 / (1.0035**264–1)
2091.53~

>>> new_total_interest_paid = new_M * 264
552162.82

>>> new_net_loss = new_dividend - new_total_interest_paid
256950.51

The tooth fairy visits us, leaving a small reward with a lower monthly payment; however, we pay larger interest payments over the cost of the loan tenure.

Another situation when liquidity matters is, for instance, when you would like to refinance. If RM 100k is in EPF, the user can potentially withdraw it (for emergencies, etc.) under certain conditions, whereas once paid into the loan, it’s not accessible unless via refinancing, which might incur costs.

Advance payment

Borrowers can pay in advance, in excess of the normal schedule, to reduce their debt load via withdrawals or advance payments, usually every month. The bank prints home loan debt on a semiannual and annual basis.

Let’s say I decided to pay a one-time advance payment of 210k to reduce my interest payment at 4.20% annually, the total interest will shrink to ~53k from ~246k, paying more principal than interest. In practice, we usually pay in Advance payment sporadically or regular payments at some monthly interval.

The loan balance could be shortened to near zero, nada/zilch, dramatically after the loan tenure is reduced to 9.5 years. See my spread below: -

With advanced payment of 210,000, we could reduce my loan tenure to just 9.5 years, considerably shorter than the original 22 years, and an increase in principal, albeit the same repayment amount.

Several reasons why people want to reduce their home loan debt:

1. Lower Interest Costs: Home loans often accrue significant interest over time, especially with long-term mortgages. Reducing the total interest paid hence increases of principal, saving more money.
2. Financial Freedom: High debt can strain monthly budgets, limiting disposable income for other goals like savings, investments, or lifestyle expenses. Paying down the loan reduces this burden.
3. Faster Equity Building: Reducing debt increases home equity (the portion of the property you own outright), which can be leveraged for future financial needs or provide a sense of security.
4. Reduced Risk: Less debt means lower financial risk if unexpected events like job loss, illness, or economic downturns occur, making it easier to manage payments or avoid foreclosure.
5. Peace of Mind: Debt can cause stress. Paying it down provides psychological relief and a sense of accomplishment, improving overall well-being.
6. Improved Credit and Borrowing Power: Lower debt levels can improve credit scores, making it easier to qualify for other loans or better interest rates in the future.

These are some factors to reduce home loan debt, aligning with both practical financial goals and emotional benefits. It makes some sense, too. It would be better if we want both of the two options, the option that gives us the best of both worlds benefits of EPF and paying off the debt loan.

Wait a minute, before you are about to pull out your trigger.

EPF Returns and Growth

If you keep funds in EPF instead of paying down the loan, the money deposited in KWSP continues to earn dividends. The EPF has delivered an average dividend of 5.91% over the past decade, with 6.3% in 2024, better than the recent loan interest of 4.2%. Since EPF dividends are relatively stable and risk-free compared to other investments, retaining funds in EPF is more appealing if the dividend rate exceeds the loan interest rate (current interest of the loan 4.2%).

Assume you have RM 100,000 invested in your EPF Account 2; you can scale the calculation to your actual balance. We’ll project its growth over 22 years (matching the loan tenure) at an average dividend rate.

Historical EPF Dividend Rates (past 10 years, Simpanan Konvensional, from web sources):

Historical EPF dividend rates Stashaway

Average dividend rate (2014–2024): ~5.91%. For conservatism, let’s assume a future average dividend rate of ~5.5% (slightly below the recent 6.30%), as future rates depend on market conditions and EPF’s investment performance.

Using the compound interest formula:

FV = PV × (1+r)^n

• FV = Future value
• PV = Present value (RM 100,000)
• r = Annual dividend rate (0.055)
• n = Number of years (22)

# FV = PV × (1+r)^n
>>> 100e3 * 1.055**22
324753.70~

With a 100k invested in EPF dividend will compound 22 years later, while the home loan interest (interest rate of 4.2%) is calculated on the reducing balance sheet. Based on the CAGR (compound growth rate) of 5.5%, that would amount to RM 324.754, ~3x the original amount.

# Profit = FV - Total Interest paid
>>> 324753.70 – 245542.64
79211.06

We can still make a net profit of ~79k mathematically after deducting interest paid,. Some borrowers are not comfortable despite the theoretical profitability of EPF for several risks.

Reduction of debt load and psychological risks by reducing property-related risks such as flood, economic downturn, and so on. Example of risk:

• Too many unpopulated condo units, low occupancy rate
• Unfinished or halted construction
• Lesser than a strategic location
• Too crowded or road congestion in the vicinity of the area
• Psychological well-being, bad feng shui, e.g., sharp corners, is less than favorable to the Chinese occupancy.

Another consideration is liquidity. If the RM 100,000 is kept in EPF, it’s relatively liquid (depending on EPF’s withdrawal rules), whereas once used to pay the loan, you can’t get it back unless you refinance or take another loan, which might not be advisable.

Property Price Appreciation

Most of my loan debts are held up to my condo rental or housing market price. My experience of selling out my landed house at Gunung Rapat, Ipoh in 2015 was profitable at 5.9% per annum average after 17 years, does not beat EPF dividend, but is in line with EPF dividend of 5.35%–6.75% based on the recent past 10 years.

However, my venture in a condo apartment in 2018 has been less than optimistic, invested in a prime vicinity at KL: RM 804/sq. ft. A condo invested in 2018, we may see a slight appreciation of the KL property market in 2024. I would be lucky if I could get breakeven or perhaps 1%-2% appreciation, but future appreciation is uncertain with abundant condo units flooding the market. I still think landed property has a better investment than a condo in real estate.

Investing in EPF dividends that can generate a return of 5.35%–6.75% offers better liquidity than investing in real estate, free from property maintenance. For a fair comparison, property owners may calculate rental yield and ROI (PropertyGuru blog), similar to the stock investor return (Total Shareholder Return).

Other Considerations

• Liquidity is a concern to real estate investors, it may take one to two months if we want to sell, and luck, which could be problematic in an emergency case. EPF funds may take just 2 days on weekdays to process withdrawal requests.
• EPF Withdrawal Rules: A partial withdrawal from Akaun Sejahtera is available at age 50, intended to assist with pre-retirement financial planning. EPF members with savings exceeding RM1 million have the flexibility to withdraw and manage their excess funds.
• Tax Reliefs: Contributions made under the mandatory 11% deduction are eligible for tax relief. The tax relief for mandatory EPF contributions is **capped at RM4,000** annually. This cap also includes any contributions to approved retirement schemes.
• Psychological Benefits: Paying in advance (advance payment in many banks) can provide peace of mind, reduce uncertainty in the financial market, and reduce financial stress. This may outweigh pure financial calculations if being debt-free is a priority. In my case, owing RM 460,000 is a hassle in the long term for 9 to 22 years. I am trying to avoid touching my EPF dividend account except for special conditions, an excess amount greater than RM 1 million, and an age limit >50 years old.

Perhaps I should arrange with my bank to instruct Direct Debit to deduct the instalment automatically (standing instruction) from my savings or current account each month until the instruction expires.

• Risk: EPF dividends are not guaranteed, though historically been stable. Loan interest is a variable fixed cost, and EPF dividends are largely driven by Malaysian economic prosperity and the uncertainty in the market. However, ~5.50% is still a safer bet compared to the volatility in the open market and the risk in the bond market.
• Financial Crisis: In 2008, as the crisis unfolded (subprime mortgage crisis), the dividend dropped to 4.5%, the lowest in over a decade, reflecting the global equity market slump and reduced returns on investments. By 2009, as markets began to recover, the dividend improved to 5.65%, showing the EPF’s resilience due to its balanced asset allocation and focus on stable, long-term investments.

Economics crisis

1997 Crisis: Dividend rates were relatively stable (6.7% to 6.2%), as the EPF’s conservative investments cushioned the blow from the regional crisis.

2008 Crisis: The sharpest drop occurred here (4.5% in 2008), as the global nature of the crisis heavily impacted equity markets, where the EPF had exposure.

COVID-19: Dividend rates (5.2% in 2020, 5.0% in 2021) were moderate, reflecting a milder impact on investments due to quick market recovery and stimulus measures, but withdrawals pressured overall returns.

During the abnormal period 2020 (COVID-19), the EPF dividend delivered 5.2% (EPF conventional accounts), beating the OPR rate of 1.75% and home loan rate of ~3% to 3.6% in 2020. The EPF dividend in 2020 can still thrive, although it was a tad lower than the average EPF dividend rate of ~5.91% over the past 10 years.

On the other hand, during the unusual periods in 1998 and 2008, the Asian Financial Crisis affecting Thailand and Malaysia, and the subprime mortgage crisis, banks’ borrowing in Malaysia was much more expensive when the EPF dividend failed to beat the home loan rate.

The table below summarises the three unusual events: the Asian Financial Crisis (AFC) and the Global Financial Crisis (GFC, subprime mortgage crisis) in 1998, 2008, and 2020 (COVID-19).

• 1998 & 2008: Home loans were more expensive than EPF returns.
• 2020: Home loans were cheaper than EPF returns (best time to borrow).

Those were the three unusual events in the last ~27 years in history. EPF mostly outperformed loans. For this reason, I still keep my dividend in my EPF account until I can find a more attractive investment than EPF.

U.S. tariffs uncertainty (US imposes 24% reciprocal tariff on Malaysia) may affect Malaysian’s which might affect EPF dividend lower than 5.5% 🤞that is beyond my foresight, I still think EPF dividend is a safer bet than investing in the stock market despite the hiccup. The odds are lower, as we have seen in the GFC 2008 and AFC 1998, when EPF delivered 4.5% and 6.7% when the home loan rate was > 8%, two unusual events (~7% chances out of 27 years when EPF dividend failed to beat the bank rate).

Overall, EPF’s ability to navigate through tough terrain, despite EPF dividend delivering below home loan expectations: GFC 2008, the AFC crisis 1998, and delivered 5.2% during the COVID-19 crisis better than loan interest rate is commendable, highlighting KWSP’s prudent investment strategy focusing on low-risk assets such as bonds and a long-term approach in equities.

Conclusion

With an initial principal of 460,000 invested in EPF at a compound growth rate of 5.50% over 22 years, I could still earn RM ~788,324 after paying interest on the loan payoff based on the housing unit I invested in 2022.

# FV = PV × (1+r)^n
>>> P = 460e3

# Earning after compound at 5.5%
>>> earn = P*1.055**22 - P
1033867.03~

# total_repayment
>>> total_repayment = 2672.51*264
705542.64

# Total interest paid = total repayment - principal on loan
>>> total_interest_paid = total_repayment − P
245542.64

>>> earn - total_interest_paid
788324.39~

I will still pay my monthly regular housing loan installment at my loan balance in the bank, trimming my bank debt gradually while keeping my balance in EPF, unless I can find a better opportunity than EPF. In the meantime, any excess amount in my pocket money, I will use the excess money to pay down my home loan debt gradually at my local bank through “Advanced payment”.

EPF is a long bet for Malaysia.

Source code

I deposited my home loan code on GitHub here based on a sample scenario analysis. The script generated an Excel with two sub-sheets with “Loan without prepayment” and “Loan with prepayment”.

Another related code that tracks KWSP (EPF) historical return since 1960; however, the source code is not updated to the current year 2024 yet, since the latest KWSP communication, blog, and latest EPF result are posted on the website regularly.