Reduce debt or invest?

We’re in the midst of deciding how much to borrow for a housing loan. On one hand, we want to be debt-free as soon as possible, on the other hand, the economics shows that the cash would be better off being tucked away elsewhere.

Let’s say I need 300k, and I have 100k cash (all figures are examples only!) then the range of loan could be minimum 200k and maximum 300k, bearing in mind that the bank charges different interest rates for different financing margin as well as different loan tenure (but for simplification I’ll use 6% in the illustration below).

100k (which is the difference between min and max) at 6% for 20 years gives monthly installments of RM717, meaning the total payout at the end of the tenure is 717*12*20=RM172,080, meaning the interest alone is 72k.
Note: I use Bank Rakyat calculator

Let’s say I put in this 100k in a modest (low risk, low gain) investment gaining 5% per annum (compounded), never taking anything out, I will get a neat sum of RM271,264 at the end of 20 years, meaning the returns alone is 171k.

But:
300k at 6% for 20 years means monthly installments of RM2,150 (total payout 516k) – note: this will be understated, since interest rate will definitely be higher than 6% for 100% financing at 20 years
200k at 6% for 10 years means monthly installments of RM2,221 (total payout 266.5k)

Reducing the loan amount by one third reduces the loan tenure by half! It’s so tempting. I think if I were to ask a financial consultant, s/he would say use the cash to invest, I think it’s called capitalizing on the equity (which is the property) or something since a property loan is a so-called ‘good debt’, but I also believe that financial freedom means to be debt-free.

But wait. What if, the 2.2k per month are invested Y10 onwards for 10 years? The total return is RM341,621! Wah, this does change the picture.

Let’s look at the total picture:
Option 1: Loan 300k + invest 100k now = 300 – 516 + 271 = net 55 at the end of 20 years.
Option 2: Loan 200k + invest 2.2k/mth after Y10 = 200 – 266.5 + 341.5 = net 275 at the end of 20 years.

Seems like a no-brainer!

This is, of course, assuming that the 2.2k/month freed after the loan tenure is still available, and not needed for other things like children university fees and such, and will be religiously tucked away month after month (discipline needed!).

Of course, Option 1 and 2 are on the extreme side, for illustration purposes. Perhaps choosing something in between could mean a better balance. Afterall, investing early is recommended to make full use of the time compounding effect.

What’s your take on this?