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Showing posts with label Mortgage loan. Show all posts
Showing posts with label Mortgage loan. Show all posts

Saturday, July 12, 2014

Is timing right for Bank Negara Malaysia interest rate increased now!?

Bank Negara says going forward, the over all growth momentum is expected to be sustained.



We are actually quite surprised that Bank Negara chose to make this measure this month!

AFTER keeping interest rates low for the past three years to support economic growth, Bank Negara has finally decided that it is the time to “normalise” interest rates.

In response to firm growth prospects and expecting inflationary pressure to continue, the benchmark overnight policy rate (OPR) was raised by 25 basis points (bps) to 3.25% on Thursday.

This is the first hike since May 2011 and the reasons, although not spelled out, were broadly hinted towards containing inflation and curbing rising household debt.

Most economists are unperturbed with the move, as the central bank has hinted of an imminent hike in OPR after the Monetary Policy Committee (MPC) meeting in May.

According to a Bloomberg survey, 15 out of 21 economists estimated a hike.

“Amid firm growth prospects and with inflation remaining above its long-run average, the MPC decided to adjust the degree of monetary accommodation,” Bank Negara says in a statement.

The economy grew by 6.2% year-on-year in the first quarter with private consumption up 7.1% and private investment expanding by 14.1%.

The prolonged period of low interest rates in Malaysia has been supportive on the domestic economy, hence the recent rate hike has sparked the question whether the time is right for a hike amid a recovery in the global economy.

“Despite higher costs of living, stable income growth and favourable labour-market conditions are expected to buoy private consumption growth,” said CIMB Research in a report.

It expects the country’s economic growth to increase to 5.5% this year and 5.2% in 2015.

Bank Negara remained positive on Malaysia’s growth outlook, riding on the back of recovery in exports, robust investment activity and anchored by private consumption.

Financial imbalances

“Going forward, the overall growth momentum is expected to be sustained.

“Exports will continue to benefit from the recovery in the advanced economies and from regional demand. Investment activity is projected to remain robust, led by the private sector,” says Bank Negara.

There are a lot of factors that could derail the recovery in the world’s economy, including a risk in China’s growth slowing and a slower recovery in Europe and the United States.

“We are actually quite surprised that Bank Negara chose to make this measure this month. The fact that the latest normalisation drive would push the ringgit higher and that puzzles us as export momentum may decelerate in the next few months due to waning competitiveness,” says M&A Securities.

Nonetheless, it believes the economy is capable of absorbing the adjustment.

Prior to the 2008-09 Global Financial Crisis, Malaysia’s OPR stood at 3.5%. The country’s OPR was subsequently cut down to as low as 2% to support the domestic economy during the height of the global downturn in early 2009 before being raised gradually to the present level.

Between November 2008 and February 2009, Bank Negara had cut the OPR by 175 basis points in response to the global economic crisis. “The rise in OPR will likely to improve Malaysia’s attractiveness amongst foreign investors, leading a stronger capital inflows, lower bond yields and appreciating ringgit,” says AllianceDBS Research chief economist Manokaran Mottain in a report.

He says that since the previous MPC meeting in May, the market has been influenced by this expectation.

Year-to-date, the ringgit had rallied to RM3.172 per US dollar on July 9, registering a 2.06% gain. However, at the close yesterday, the ringgit closed lower at RM3.21 against the greenback.

The central bank also highlights that the increase in the OPR is to ease the risk of financial imbalances, which may effect the economy’s growth prospect.

“At the new level of the OPR, the stance of the monetary policy remains supportive of the economy,” Bank Negara says.

The OPR is an overnight interest rate set by Bank Negara. It is the interest rate at which a bank lends to another bank.

A rate hike would have an impact on businesses and consumers, as changes in the OPR would be passed on through changes in the base lending rate (BLR).

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz was reported as saying that signs of financial imbalances would also factor into policy decisions, because a prolonged period of accommodation could encourage investors to misprice risk and misallocate resources.

“Higher interest rates should help to ensure a positive real rate of return for deposit savings and deter households from turning to riskier investments,” says CIMB Research.

The low interest rate environment has resulted in rising household debt level, which reached a record of 86.8% of gross domestic product at the end of last year.

“Although the increase in the OPR will likely have some impact on consumer spending and business activities, it will help to moderate the increase in prices,” says RHB Research Institute.

It expects inflation to moderate but to remain high, hovering above 3%.

Most economists are expecting OPR to remain unchanged at 3.25% for the rest of the year, although price pressures are likely to remain.

They say Bank Negara may resume its interest rate normalisation only next year.

“The price pressure is likely to remain, in view of further subsidy rationalisation (another round of fuel-price hike this year),” CIMB Research says.

Muted impact

“Another 25bps hike will crimp domestic demand,” Manokaran opines, adding that there are other measures that may be taken if household debt continues to grow at a worrying pace.

Malaysia is the first country in the South-East Asia to increase its benchmark rate on the back of improve confidence in exports growth and robust investment activity.

According to CIMB Research, Malaysia’s equity market has already priced in an interest rate hike following the May MPC meeting.

The research house says while the is negative for equities, the impact on the stock market should be muted as the increase is minimal.

“Rate hikes are negative for cyclical sectors such as property and auto, as well as consumer stocks due to lower disposable income,” it says.

In the property sector, rising interest rates would increase mortgage payment and reduce affordability.

However, CIMB opines that the impact of a gradual rise in interest rates will be mitigated as the key drivers of property demand are the overall economy and the stock market.

“But the overall impact should be muted as net gearing for corporate Malaysia is less than 10%,” it adds.

CIMB notes that the banking sector will benefit from the rate hike due to a positive re-pricing gap between lending and deposit rates.

“We estimate that a 25bps rise in OPR could enhance banks’ earnings by 1% to 2%.

“This would outweigh any slowdown in loan growth in an environment of higher interest rates, while asset quality is expected to be unaffected,” it says.

Contributed by Intan Farhana Zainul/The Star/Asia News Network

No justification for interest rate hike: Kenanga

Investment bank research head cites expectations of softer economic growth in H2

 
Adib Rawi Yahya/theSun

KUALA LUMPUR: Kenanga Investment Bank Bhd has taken the contrarian view and believes that an interest rate hike is unlikely to materialise today, saying that it would be unjustified given jittery economic fundamentals that would not be able to take such a hike.

Most analysts opine that Bank Negara is likely to raise the overnight policy rate (OPR) for the first time since May 2011 today, even though they tend to differ on the quantum of increase, between 25 basis points (bps) and 50 bps. The OPR currently stands at 3%.

Bank Negara is scheduled to hold its latest monetary policy committee (MPC) meeting this evening.

Kenanga Investment Bank deputy head of research Wan Suhaimie Saidie (pix) opined that this is not the right time to raise interest rate as economic growth is expected to trend lower in the second half compared with the first half of the year.

"Due to softer external demand and slow down in other parts of the world, I don't think Bank Negara will raise interest rate, unless they revise the gross domestic product (GDP) higher," he told a media briefing here yesterday.

Wan Suhaimie said as Malaysia is an open economy, the interest rate outlook will be externally dependent, whereby it has been observed that Bank Negara would shift towards tightening mode when the global manufacturing PMI breaches 54.0.

"However, it may take at least another three to six months before the index breaches 54.0," he said, adding that there is little reason for Bank Negara to raise the OPR for the rest of the year.

Wan Suhaimie believes with the implementation of the goods and services tax (GST) next year, the local economy may even slow down for at least two quarters, making the case for an interest hike far from compelling.

Kenanga expects GDP in the first half to be close to 6%, while second half is projected to average by 5.2%, with a full year growth rate of 5.5%.

Wan Suhaimie said instead of raising the interest rate, Bank Negara could take additional macroprudential measures to address imbalances in the financial system, such as reducing the loan-to-value ratio and debt-to-income ratio.

According to data compiled by Kenanga, Bank Negara is one of the most conservative central banks in the world, with only 10 rate adjustments made over the past 10 years.

M&A Securities concurred with Kenanga on the unlikelihood of a hike in OPR today albeit for a different reason.

"Policy decisions would need to get the cabinet endorsement first. Being a caring government that would like to avoid political backlash, we think that the government would prefer Bank Negara Malaysia (BNM) to defer that to the September MPC meeting," it said in an economic report yesterday.

It explained that on the back of rising cost of living and the upcoming stress of the goods and services tax, the last thing BNM and hence, the government would want to see is the adjustment be a burden the people.

"As 55% to 60% of Malaysian population, as in the Muslims would be observing the month of Ramadan of which their spending would increase, the government would risk its reputation if it proceeds with a policy hike. There is a small chance that the government would execute this in our opinion," said M&A analyst Rosnani Rasul.

It said impact to the ringgit would also be more conducive if policy rates get adjusted in September and that an adjustment of 25 bps would suffice.

With no hike in the OPR, volatility in the market will continue and is likely to see the ringgit fall back to 3.20 to 3.30, Wan Suhaimie opined.

The ringgit has been rising lately, surging to as high as 3.1860 early this month in anticipation of an interest rate hike.

Contributed by Lee Weng Khuen sunbiz@thesundaily.com 10 July 2014

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Friday, February 7, 2014

Get an Islamic syariah home loans with discount on stamp duties

Boost for syariah home loans, Govt gives 20% stamp duties discount 

KUALA LUMPUR: Islamic home loans in Malaysia may beat last year’s record in 2014, as the Government provides tax incentives to get more people to use syariah-compliant borrowing, according to CIMB Group Holdings Bhd.

Mortgages that comply with the ban on interest climbed 30% in 2013 to an unprecedented RM61.9bil (US$18.7bil), Bank Negara data showed. Conventional home financing grew 10% to RM271bil, the same pace as 2012, even after the Government introduced property curbs to rein in speculation.

The Government is giving a 20% discount on stamp duties for mortgages that comply with religious tenets as it seeks to boost Islamic banking assets to 40% of the total by 2020 from 24%. The Government started holding monthly roadshows last year to create greater awareness of such financing principles, as it strives to enhance the nation’s status as a global syariah hub.

“There’s still strong potential for Islamic financing,” Badlisyah Abdul Ghani, chief executive officer (CEO) at CIMB Islamic Bank Bhd, a unit of CIMB Group, said in a phone interview in Kuala Lumpur on Wednesday. “The roadshows and the incentives are helping syariah mortgage growth.”

Malaysia is also trying to boost such mortgages by offering to waive stamp duties for the refinancing of existing home loans that don’t conform to syariah principles. Syariah-compliant property borrowings had risen an average 31% per annum over the past five years to account for 19% of the total RM333bil market in 2013, central bank data showed.

Syariah home loans differ from their conventional counterparts in that a bank typically buys the property on behalf of the customer and rents it back at a mark-up to avoid interest payments. Some of the more popular options include contracts such as Ijarah, Murabaha and Tawarruq.

The central bank cut the maximum duration on all mortgages to 35 years from 45 years in July to rein in household debt, which had risen an average 12% per annum since 2008. In October, the Government increased property gains taxes and imposed curbs on foreign ownership.

The nation’s Islamic banking assets had more than doubled to RM543bil in the past five years, according to October figures issued by the Treasury. Sales of syariah-compliant bonds, or sukuk, rose 69% in 2014 from the year-earlier period to RM5.9bil, data compiled by Bloomberg showed. Issuance totalled RM49bil last year after reaching a record RM95.8bil in 2012.

The Bloomberg-Aibim Bursa Malaysia Corporate Sukuk Index of ringgit-denominated debt fell 0.9% this year to 104.155 as of Feb 4, almost erasing last quarter’s 1.1% gain.

“Islamic mortgages complement conventional ones,” Syed Abdull Aziz Jailani Syed Kechik, CEO at OCBC Al-Amin Bank Bhd, the Islamic unit of Oversea-Chinese Banking Corp, said in a Feb 4 e-mail interview. “One of the draws can be said to be the efforts by the Government and central bank to boost the market through incentives related to taxes.”

Last year’s curbs failed to prevent Malaysia’s House Price Index from climbing 1.4% to a record 194 in the three months ended September, the 19th straight quarterly advance, according to data from the Finance Ministry.

Mortgage demand might also pick up this year, particularly in the first half, as property investors sought to guard against a potential acceleration in inflation, CIMB’s Badlisyah said.

Consumer prices climbed 3.2% in December from a year earlier, the biggest gain since November 2011, an official report showed on Jan 22. Costs may increase further after Tenaga Nasional Bhd raised electricity tariffs on Jan 1.

“The products that have been put out in the market have been very well-received both by Muslims and non-Muslims,” Baiza Bain, managing director at Amanie Advisors Sdn Bhd, a Kuala Lumpur-based Islamic finance consultancy, said in a phone interview on Wednesday. “Islamic finance is still very nascent compared to conventional finance. It definitely needs incentives to push the assets toward the right level.”

- Bloomberg

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4.Southeast Asia's Boom Is a Bubble-Driven Illusion?

Monday, December 23, 2013

Making Malaysia’s Base Lending Rate more relevant

 New interest rate framework expected to be more linked to funding cost

BANK Negara is moving ahead with the times by replacing the outdated base lending rate (BLR) with a more relevant interest rate benchmark.

“The BLR has become less meaningful as a basis for the pricing of loans, as the retail lending rates on new loans being offered by the industry are at a substantial discount to the BLR,’’ The Star reported, quoting governor Tan Sri Dr Zeti Akhtar Aziz.

For the third quarter this year, the average lending rate (AVL) was 5.4% compared with the BLR of 6.53% and fixed deposit (FD) rate of 3.15% for 12 months.

For the corresponding quarter last yer, the AVL was 5.55% while the BLR was still at 6.53% while the FD rate for 12 months was 3.16%.

The current BLR reflects other costs such as overhead costs.

The new framework will be more related to funding cost, especially marginal funding cost, which is actually how banks are pricing their loans, Zeti said.

While work is underway to come up with a new BLR, the intervention rate under the current BLR framework is expected to nudge upwards, said Nazlee Khalifah, the chief corporate strategist of Affin Bank.

Under the current BLR regime, the intervention rate of 3% is expected to increase 25 basis points by next June, said Nazlee.

The upcoming BLR is being discussed with a concept paper expected next month.

‘“They have to think of how to prevent capital flight as interest rates in the United States may rise and attract capital back to the country,’’ said Nazlee.

Beginning next January, the Fed announced it would start pulling back its bond buying from US$85bil per month to US$75bil.

Instead, it will provide forward guidance on interest rates which are expected to remain low, in view of US unemployment being above 6.5% and inflation kept low.

The US$1 trillion stimulus programme has been a huge success but this is the journey back to fundamentals.

The world economy is being weaned of easy money and every player has to play his part in ensuring recovery and sustainability.

It is not enough for just the regulators to be keeping an eagle eye on miscreants but the participants themselves have to know their limits.

The Hong Kong Securities and Futures Commission is cracking down on insider trading.

In a landmark ruling, a Hong Kong court has ordered Du Jun to pay 297 investors almost HK$24mil for the money he earned from his illegal dealing in 2007, said the South China Morning Post (SCMP).

Last year, 7,700 investors who bought shares of Hontex International were paid back after a court ordered the sport fabric maker to pay HK$1.03bil to small shareholders for allegedly misleading information in its listing prospectus, said the SCMP.

There have been many instances of insider trading but the punishment has become more severe in view of the trend towards investor protection and reimbursement worldwide.

Contributed by Columnist Yap Leng Kuen applauds the tapering off of the era of easy money.

Saturday, August 25, 2012

How to avoid future complications when buying a house?

Points to consider when buying a house to avoid future complications


CAN you afford a house now?

Assuming you can afford a house, how much can you afford to pay? These are important questions that many people do not research. This oversight can lead many people to bad debt and even bankruptcy.

Your monthly expenditures will be more than just the housing loan. There will also be insurance, electricity, water, telephone bills, contributions to maintenance fund, medical bills, groceries, unexpected household/auto repairs, lunch money and many other obligations.

They must all be accounted for in your budget spreadsheet. For many of us the purchase of a house or property is the largest financial commitment we will ever make. This makes arranging the most suitable housing loan just as important.

Make sure you know the costs of entering into the loan for the purchase of the property. They include conveyancing, application fees, valuation and legal fees, mortgage insurance (if necessary) and sometimes, extra life insurance premiums.

Some lenders will tell you the advantages of whatever housing loans they are trying to squeeze you into, but rarely will they tell you the disadvantages.

According to an article in a business magazine, the banking system is flush with RM180bil liquidity. This explains the increasingly aggressive sales promotions undertaken by financial institutions for the housing industry.

Always look at the total deal, not some dangling carrots in front of you. Compare the entire housing loan cost of different lenders to determine which is best for you.

I would like to discuss some of the lenders' offers that may not be as attractive as they appear. I will start with the special low interest offered for the first year. Such an offer is usually given during a sale campaign and it usually carries a fixed calendar period with a run-out date. Thus, even if a house buyer commenced his application process immediately upon the launch of the campaign, by the time the loan is approved and disbursement commences, the period remaining to enjoy this special low interest rate will certainly be less than one year.

If he were to start the application process a few months after the campaign, it is likely that he will enjoy the special low rate for only a very short period.

Due to our unique system of progressive payments to the developers, the mean average of the amount disbursed by the banks during the “first year low interest offer,” is really lower than the loan amount. Thus, any saving on interests is really much less than it seems. And these have all been figured out already by those marketing experts in the banks.

A more sincere approach would be to offer the special low interest rate to apply during the progressive payment period and to continue to run for one year after the date when the loan is fully disbursed. Only then can such offers bear some element of sincerity. I believe that anything short of that makes the offer a sales marketing gimmick.

There are other clauses that put house buyers in a disadvantaged situation. Some lenders include clauses in the loan agreements that give them the absolute rights to alter both the Base Lending Rates and/or the margin of interests.

Doesn't this in effect nullify their typical attractive offer of “BLR plus X% for following years?”

One cannot make a special low interest offer in the sales campaign and then contractually (through the loan agreement) creates a clause to allow that special offer interest rate to be invalidated. Make sure you know all the costs of early discharge of the loan.

One other clause to look out for is the redemption of the loan. A house buyer may wish to sell the house and wished to fully-settle the loan.

This is where the conditions for full-settlement differ from one financial institution to another. Think long term.

When one takes a loan, one spends a much longer period servicing the loan beyond the first year or even the second and the third year. So do not be taken in by the very attractive offers during the honeymoon year/s of the tenure of your loan. Remember, the remaining of the 25 years is more important. Do not go for short-term gains only to lose out heavily on the long remaining years.

I would advise house buyers to look beyond the first year of so-called low interest when shopping for housing loans. With the stiff competition among the various lenders today, one should seriously shop around and scrutinise each and every offer before commencing the application process. Talk to your bankers, lawyer friends or seek advice from the National House Buyers Association.

One really has to scrutinise the fine print before making a decision as to which financial institution to go to for a loan. It is about time to standardisde the terms and conditions in the loan agreement so that there will be orderliness in the banking industry.

No more “embedded” clauses within the voluminous stakes of papers one has to initial giving the impression that one has truly read and understood them. It is obviously impossible to read and understand those 40 over pages of legal language that comes with appendixes.

BUYERS BEWARE
By CHANG KIM LOONG 

Chang Kim Loong is the honorary secretary-general of The National House Buyers Association, a non-profit, non-governmental, non-political organisation manned by volunteers. For more information, check www.hba.org.my or e-mail info@hba.org.my

Monday, November 14, 2011

Banks offering more attractive home loans to boost market share


Rising competition prompts banks offering more attractive home loans

By DALJIT DHESI daljit@thestar.com.my

PETALING JAYA: With razor thin margins due to rising competition in the home loans market, banks are now aggressively value-adding their home loans to stay competitive and boost their market share.

OCBC Bank (M) Bhd head of secured lending Thoo Mee Ling said banks must value-add to their generic home loan offerings in order to not just survive but thrive, especially in this competitive climate.

“What separates those who thrive from the others today is how much they have moved from price to innovation. It is heartening to see a greater emphasis today on enhancements to loans products, rather than mere reliance on price cutting previously.

“This is where banks are getting even more creative by adding in the necessary finer details to a product that otherwise appears bland. Home loans with features and benefits that are tailored specifically to complement customers' lifestyles often serve to compel them to look beyond price and into a more holistic perspective,'' she told StarBiz.
File picture shows a housing are in Shah Alam - Starpic by BRIAN MOH
 
Thoo said customers were nowlooking for more than just a home loan as purchasing a house was simply the beginning.

Banks would also need to cater to their immediate follow-on needs like renovations and furnishing, for example, and this was where additional financing that came with the home loan would be helpful, she reckoned.

At OCBC Bank, she said there were bespoke home loans that were tied in with study loans, renovation loans and even overseas property financing schemes, adding that each of these took into consideration things that went beyond mere property purchase.



She said it was undeniable that investing in a product to bring in customers and then introduce them to other products remained a good strategy for growing the business, but banks would still need to strengthen their range of offerings to become a one-stop shop for their customers.

Outstanding home loans, valued at RM261bil, accounted for about 27% of the total banking system's loans as at end-September 2011. Although there has been strong expansion in home loans in the last couple of years, the proportion of home loans has been hovering at 27% in the past five years.

,B>Thoo: ‘What separates those who thrive from the others today is how much they have moved from price to innovation.’
Commenting on home loans, RAM Ratings' head of financial institution ratings Wong Yin Ching said competition among banks in the home loan market had been rife, resulting in razor thin margins in recent years.

This stemmed from the homogeneity of the home loan products, whereby any innovation in product features and price competition (by lowering rates) were quickly replicated and matched by market players, she said.

Wong added: “While some banks have instilled more discipline in its risk-reward pricing, aggressive pricing is still seen in the market and this is unhealthy and unsustainable in the long run.

“Going forward, we think that personalised services and quicker turnaround times by banks would be key to stay relevant in the home loan market.”

Alliance Bank Malaysia Bhd executive vice president and head of consumer banking Ronnie Lim said competitive pricing aside, Malaysian banks were now re-inventing the mortgage landscape by extending superior customer experience at every customer touch point.

For the bank, he said having mortgage specialists, who also acted as advisory consultants, among others, had enabled Alliance Bank to become one of the key mortgage players in the market.

He said the bank has been growing its mortgage specialists force extensively to not only engage customers effectively but also deepen its relationship with developers, lawyers and real estate agents.

Lim added the bank was also able to provide fast “approval in principle” service to assist customers looking for home financing solutions to make informed decisions before committing to their choice property.


For mortgage players, he said one of the key challenges was about overcoming margin compression and the bank was able to achieve this by introducing new systems and processes to help staff increase their productivity.

This had since yielded results: “For the year under review, sales productivity has increased threefold compared to a year ago,” he said.

Thursday, September 29, 2011

Think Twice About Paying Off Your Mortgage, Retirees!





Retirees: Think Twice About Paying Off Your Mortgage


NEW YORK (CNBC) -- The countdown to retirement is on for millions of baby boomers and, thanks to a lifetime of diligent saving, some have amassed enough wealth to pay off their mortgages and live debt free. 


Conventional wisdom says it's best to pay off your mortgage before retirement, but given the low-interest rate environment, and the need to preserve cash in an unstable economy, that strategy is no longer absolute.

"Paying off your house is one goal, but having a zero-mortgage liability is not the answer for everyone," says Jennie Fierstein, a certified financial planner (CFP) in Westborough, Mass. "If you don't have a stream of resources to replenish it, you might do yourself a disservice by taking money out of the bank to pay off your mortgage."

Retirees themselves, it seems, are equally torn as to the most prudent course of action.

According to the Center for Retirement Research at Boston College, 41% of U.S. households aged 60 to 69 in 2007 maintained a mortgage. Of these, 51% had sufficient assets to repay their loans.

When it pays to borrow
 
While most financial planners agree that owning your home free and clear during retirement is a worthy goal, Elaine Bedel, with Bedel Financial Consulting in Indianapolis, says there are times when it makes more financial sense to keep your money in the market and use the earnings to pay off your loan.

That's particularly true, she says, if you need to invest (however conservatively) for growth.

"There are a few of my clients who feel like if they don't take the risk to get the growth, they're not going to be able to meet their retirement objectives and live the lifestyle they want," says Bedel. "If you take a big chunk out of your nest egg and the income it was generating was being used to meet your mortgage payments, as well as additional living expenses, that may not be the right thing to do."

CFP Fierstein agrees, noting most retirees are advised to withdraw no more than 4% from their nest egg each year to ensure they won't outlive their income.

Thus, if you take $200,000 out of a $500,000 portfolio to pay off your house, your income based on that 4% drawdown rate would drop to $12,000 from $20,000 per year. (The $20,000, of course, would have had to help pay for your mortgage.)

"It's very dangerous to tie up all your money in your house, because your house is not going to generate
income," says Fierstein. "It's nice security, but you lose flexibility and depending on how conservatively you invest your remaining portfolio you may not have enough income to live on."



What's your rate?

When determining whether to pay off or keep your mortgage, you should also consider your interest rate.

If the average after-tax return on your investments is greater than the after-tax cost of your mortgage, it may make sense to keep your money invested, says Fierstein.

Don't forget to factor in the effect of the mortgage-interest tax deduction.

If you're in the 30% tax bracket and you're able to claim the full deduction, a 5% loan is really only costing you roughly 3.5%.

Thus, you'd only have to earn 4% on your investments to make it worth your while. (Given the low interest-rate environment, however it's nearly impossible to achieve that rate of return on more conservative, fixed-income products such as bonds and certificates of deposit.)

"It's hard to find comparable risk-free investments, so you have to be able to stomach a loss if you want to go that route," says Jean Setzfand, AARP's vice president of financial security. "You can't get a plain vanilla CD anymore, because those rates are too low."

Getting close
 
If you're nearing retirement but haven't yet quit, the case for keeping your mortgage and continuing to invest is more clear -- at least until you part ways with the boss.

According to a 2007 study by the Federal Reserve, directing extra money towards your low-interest mortgage loan at the expense of continued contribution to your 401(k) is a costly mistake.

Organization of the Federal Reserve SystemImage via Wikipedia
Some 38% of the U.S. households that are accelerating their mortgage payments instead of saving in a tax-deferred account, such as a 401(k) or traditional IRA, are making the "wrong choice," it concluded.

For those households, reallocating their savings towards a tax-deferred account instead would yield a mean benefit of 11 cents to 17 cents per dollar, depending on the choice of investment assets in the account. In all, the study notes, "those misallocated savings are costing U.S. households as much as $1.5 billion per year."

When to pay it off

Despite the limited scenarios in which keeping a mortgage during retirement might make sense, AARP's Setzfand and financial planners Bedel and Fierstein agree that most retirees would be better off eliminating debt (however low the interest rate) for the peace of mind it affords.

Money, after all, isn't just about the math.

"I think for the general population our guidance is still the old adage of paying off your mortgage before you retire," says Setzfand of AARP. "There isn't anything as safe as being rid of that mortgage and that burden before you hit a period of your life where you're not bringing in a paycheck."

Indeed, mortgages consume 20% to 30% of the typical household's fixed expenses.

While some maintain that using savings to pay off one's mortgage is unwise, as it leaves you less cash on hand for unexpected expenses, such as medical costs and home repairs, Anthony Webb, the research economist who authored the Center for Retirement Research study, believes that argument lacks validity.

Households "need to consider what they would do if the bad event actually happened," he writes. To wit, how they "would maintain their mortgage payments once their financial assets had been spent."

Remember, too, says Bedel, you can always take out a home equity line of credit on your paid off home, which can satisfy the need for cash reserves.

If you can't pay off your mortgage in full without depleting your nest egg, says Fierstein, at least shoot for a more manageable monthly payment.

"I strongly advocate trying to pay down your mortgage, so when you reach retirement you're not faced with a standard of living crisis," she says. "There is some wisdom to paying off a portion of your mortgage so you have minimal payments and some left over in an emergency fund."

A generation ago, retirement planners often started with the premise of a paid off home, using Social Security, company pensions, and other income sources to help their clients cover living expenses.

Today, however, with interest rates at historic lows and many retirees chasing returns to offset losses incurred during the market meltdown, a mortgage-free retirement is not necessarily the long-term goal.

Deciding what makes sense for you depends on your financial profile, interest rate, and your ability to stomach risk.

-- Written by Shelly K. Schwartz, special to CNBC

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