In my last post I talked about ASB loans vs. periodic savings, so here I’ll delve a little further into calculating returns.

One of the main concerns raised is that the loan is only beneficial for as long as your returns exceed the interest rates charged by the banks. For example, if the bank charges an interest rate of 5.5% per annum, you’re only better off if the ASB fund declares annual dividends above that rate.

But is this true? I decided to plug in some numbers to find out if that is the case.

To begin, I made the following assumptions:

1) Loan amount: RM200,000

2) Interest rate: 5.45% per year (taken from a bank website)

3) Loan tenure: 30 years

4) Average annual ASB dividends: 6.5% per year

5) Leave all dividends untouched and reinvested for the entire 30 years

Using these assumptions, I wanted to try and find two things, which are:

1) How much I would have in my ASB account after 30 years

2) How much I have had to pay the bank (interest + principal) over the 30 years

3) What my returns are (amount I made against amount I paid the bank)

And here’s what I got:

Loan amount | RM200,000.00 |

Interest | 5.45% |

Tenure | 30 |

Dividend | 6.50% |

Monthly Instalment | RM1,124.21 |

Amount at End | RM1,322,873.23 |

Total paid | RM404,714.18 |

Returns | 227% |

At the end of the loan period I would have paid the bank almost RM390k but in return I would have a balance of RM1.3m in my ASB account. Considering the amount I paid and what I have earned in my account, my total returns would be about 227%, which is pretty amazing if you ask me (all thanks to the power of compounding returns!).

Great! If dividends are above interest rates charged, we’d be rolling in money, ready for retirement. Now, what happens if dividends fall below interest rates?

Let’s revisit my earlier assumptions:

- Loan amount: RM200,000
- Interest rate: 5.45% per year (taken from a bank website)
- Loan tenure: 30 years
- Average annual ASB dividends: 4.5% per year
- Leave all dividends untouched and reinvested for the entire 30 years

Here’s my results:

Loan amount | RM200,000.00 |

Interest | 5.45% |

Tenure | 30 |

Dividend | 4.50% |

Monthly Instalment | RM1,124.21 |

Amount at End | RM749,063.63 |

Total paid | RM404,714.18 |

Returns | 85% |

As it turns out, with annual dividends at 4.5% for over 30 years, consistently lower than the interest rate charged by the bank, I would still look to make over 85% returns on my investment. Still pretty decent!

Fiddling around, I found that dividend rates would need to average at about 2.37% per year for over thirty years for me to not be able to make any gains on my ASB loan:

Loan amount | RM200,000.00 |

Interest | 5.45% |

Tenure | 30 |

Dividend | 2.37% |

Monthly Instalment | RM1,124.21 |

Amount at End | RM403,841.64 |

Total paid | RM404,714.18 |

Returns | 0% |

What this means is that, ASB dividends would need to be very low (lower than fixed deposit rates) and for a long time in order for the ASB loan to not be profitable. Whilst it’s very possible that something like this could happen, I’m going to go out on a limb and say that it’s very unlikely.

Bear in mind that, the scenarios illustrated above is based on keeping my dividends reinvested, in order capitalise on compounded returns. If I took out my dividends every year, my profit would look very much different:

Loan amount | RM200,000.00 |

Interest | 5.45% |

Tenure | 30 |

Dividend | 6.50% |

Monthly | RM1,124.21 |

Amount at End | RM200,000.00 |

Total dividends earned | RM390,000.00 |

Total capital + dividends | RM590,000.00 |

Total paid | RM404,714.18 |

Returns | 46% |

In this scenario, I would take out my dividends every year, so over the course of 30 years, I would have earned (and spent) a total of RM390 thousand in dividends (assuming average dividend rates of 6.5%). If I added that to the amount I am left with at the end and compare it with how much I’ve paid the bank, my total profit would be 46%, still good, but a lot, lot less than what I would have ended up with if I had left my dividends alone.

Tweaking the numbers, dividends would need to average at about 3.4% for over thirty years for me not to make any money:

Loan amount | RM200,000.00 |

Interest | 5.45% |

Tenure | 30 |

Dividend | 3.40% |

Monthly | RM1,124.21 |

Amount at End | RM200,000.00 |

Total dividends earned | RM204,000.00 |

Total capital + dividends | RM404,000.00 |

Total paid | RM404,714.18 |

Returns | 0% |

As it turns out, to a certain level below the interest rate, your ASB loan can still be profitable. You’d make a lot more of course, if you let your returns compound, but even if you took a portion of your dividends out each year, there’s still some profits to be made by the end of the loan tenure.

There you have it, as far as I can tell, the ASB loan really does seem like a productive loan. So, if you haven’t already, perhaps you could consider one, as a form of forced savings for your future.

(For the real wonks, these returns are nominal, and I haven’t discounted them to present value).