Imagine that years ago, you bought an apartment for investment. It cost RM150,000, and you took out a mortgage of RM135,000. You thereafter earned RM700 a month in rental income, which covers your mortgage interest and other related expenses.

Today, the apartment is worth RM300,000, and you have an outstanding mortgage of RM100,000. Your rental income is RM1,000 a month. In essence, from day one until now, you’ve broken even every month, with a net rental income of RM0.

Now let’s assume you currently have RM100,000 in excess cash. So, would it be financially sound to settle your mortgage in advance? Here are three considerations.

1. Personal income tax bracket

Are you still actively earning income as a salaried worker or businessperson? How much do you make in active income each year?

If it is above RM100,000 a year, your personal tax bracket is at least 25% for any amount you earn in excess of RM100,000. Hence, to lower your final tax payment, you need to utilise reliefs made available to you by the government.

If you are a retiree who lives off investment income such as dividends and interest from fixed deposits, you may be paying little or no income tax at the moment.

In any case, you’d want to minimise your tax payable from rental income. This can be done by factoring in deductible expenses – among which is interest from your mortgage.

With the above example, assuming an annual interest rate of 4%, you would pay around RM3,500-RM4,000 in interest over 12 months. So, by using your excess cash to settle the balance of your mortgage, you would save up to RM4,000 in interest costs.

Of course, this means you would have fewer deductible expenses – meaning your net rental income effectively goes up by RM3,500-RM4,000. If your personal income tax bracket is 25%, you might end up paying RM875-RM1,000 in tax.

In the end, by paying off your outstanding mortgage in advance, your net savings over the next 12 months would be RM2,625-RM3,000 – or a return of about 2.6-3%. Does that sound impressive to you?

2. Unlocking your cash

Once you’ve paid off your mortgage, congratulations! You own the property debt-free. But consider this: what if you were to need some cash in the future? Can you “withdraw” RM100,000 from your apartment?

Technically, you COULD: it would be called “refinancing”. Of course, this comes with charges such as legal fees to draw up a new loan agreement, stamp duty, and a new property valuation report.

These may cost you a few thousand ringgit, depending on the property’s market value.

In short, it’s easy to pay off your mortgage – but it’s not as easy to unlock the equity within.

3. Opportunity costs

The RM100,000 might seem like idle money, but it could serve you both financially and emotionally. It enables you to take on more meaningful work, go on a short break or vacation, pay for emergency bills, and so on.

In other words, RM100,000 could provide you with more freedom and serve as a buffer in times of unexpected challenges.

Sure, RM100,000 today might not be “as much” as it used to be – but it’s a big enough sum for many of us to enjoy some good things in life.

In the meantime, you can park it in fixed deposits, ASB accounts or cash platforms to earn interest or dividends annually. If you’re a savvy investor, it could serve as capital to pursue opportunities as they arise.

Ask yourself: is it worth paying off your mortgage in advance, which would yield you 2.6-3% a year, when you could invest for 10-20% in returns a year?

The bottom line

There are a dozen ways to better utilise excess cash than to reduce your mortgage balance, as long as you are comfortable with debt.

Even if you are not financially savvy, cash in hand is a valuable resource that offers you liquidity.

Of course, you’d ideally want to take advantage of opportunities to maximise the potential of your capital safely and securely. That’s the power of financial education.

This article first appeared in KCLau.com.

Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.