I think most of you will agree with me that your mortgage is by far the single larges commitment in your life. Over the life of your loan, you have paid or will be paying tens and thousands in interest to the bank alone. As a general rule of thumb you will be paying twice the amount of your loan if you finish your Home Loan in 30 years.
Are you aware that you will only reduce 7% of the principal after 5 years in repaying your loan to the bank if you were to take a 30 year loan? At the 20th year you still pay less than half of your principal. It is time you take charge of your loan, and finish paying off your loan early to save tens and thousands in interest to the bank.
Gone are the old days during 60’s to the 90’s when home buyers were to take up a Home Loan let say for 30 years tenure they will pay the installment until the tenure ends. Today , there are already many tools in the market place where borrowers will be able to use to knock off the loan tenure. Banks today are also more flexible as compare to 10 years ago.
The sooner you pay off your home loan the sooner you will be able to retire and be debt free. There are many ways that you can use to pay off your loan early, but not all of them may work for you. You must do your own research and carefully choose the one that best suits your needs.
Here are some ways you might find useful:-
1. Making Extra Payment
If you want to see magic, get yourself a mortgage calculator (available free in the internet) and see how by paying a little extra every month will save you interest and help you to finish your home loan early. The more you pay towards the principal, the less interest you will have to pay and the faster you will finish your loan.
When you make an extra payment, make sure the extra is applied to principal reduction instead of paying for your installment for next month. Today with technology enhancement, you just need to go to the bank and make a request by signing a service request form available at the Banks counter. 10 years ago when I was with the Bank borrowers need to give 3 months notice before being along to make any extra payment. Before you make any extra payment read your Home Loan contract and make sure you will not be charge prepayment penalties.
Remember, “even small monthly savings can add up to a huge sum”.
2. Bi-Weekly Payment
If you were to set up a bi-weekly payment for your home loan which means breaking your monthly installment into every 14 days, I twill save you at least 4 years tenure if you were to take a 30 years loan.
So what is the catch, you may ask? If you were to pay half your regular installment every other week, instead of making a full payment you will have made 26 installments which is equivalent to 13 monthly installments in a year. Every year you will have paid an extra 1 month installment.
(Please take note that Malaysia’s Banks have stop this package)
With the reduction of interest rate as compare to few years back it will be worthwhile to refinance. Use a mortgage calculator to determine whether you will save a lot of interest if you refinance. Please take note that there are also other considerations such as penalties, legal fees and valuation fees that you will have to pay.
4. Ask for interest rate reduction
If you were to take a property loan many years back, the interest may be higher than what your current bank is offering. What you can do is to go back to your bank and write in requesting the bank to lower your interest rate. The bank will not match the current interest rate they are offering but still is much cheaper than what you are paying, This will also help you to finish your loan earlier.
When your interest rate reduces, you can opt to maintain your current installment and this in turn will reduce your payment years. Please read your new offer letter terms and condition before signing.
5. Use Flexi Mortgage
Since the introduction of Flexi Mortgage ( some countries called Money Merge Account) in Malaysia many years back there are many borrowers who took up this Home Loan package. The number of borrowers applying for this package is growing every day.
How this account works is that you can deposit any amount of money into the account without any need to give prior notice and as long as your money is in the account you save on the interest. Whenever you take out the money interest will be calculated. In Flexi Account, you are supposed to consolidate all you accounts into one account. I would say this type of facility is a combination between the Conventional Term Loan and Overdraft.
In flexi mortgage interest is calculated on daily basis instead of monthly. You will still need to make your minimum installment payment every month but any extra payment goes towards the reduction of principal. When principal is reduced your loan tenure will also reduce.
One of the biggest downside on this flexi account is that it requires discipline and also proper planning and money management in order to reap the full benefits.
6. Base Lending Rate or Base Rate Adjustments
I once had a customer who came and happily told me that his bank make a mistake on his home loan installment. The Base Lending Rate (BLR) rose but his monthly installment still maintains.
What actually happens is that, when interest rate raises the banks computer system will automatically increase the number of payments and maintain the monthly installment.
When BLR rise you will have 2 choices. Either you maintain your monthly installment and increase your repayment years or increase your monthly installment and maintain your repayment year.
If you can afford to pay the extra installment go to the bank and request to increase the monthly installment. Normally banks will not send a letter to the borrowers and offer the 2 choices whenever BLR is adjusted.
Likewise, if BLR came down opt to maintain the installment and reduce the repayment years.
7. EPF Withdrawal
Using your EPF Account II is one of the easiest and fastest way to reduce your principal and to knock off your repayment years. This can even be done on monthly basis now.
8. Lump Sum Payment
If you have extra money, rather than putting in fixed deposit you can opt to used it to prepay your loan. Fixed Deposit interest is around 3% but your paying more for the loan. Normally banks can accept in multiple RM1000 payment. You can withdraw any extra payment by informing the bank. There will be a small fee charge.
If you would like to update or upgrde your loan package you just have to go to the banks and sign a form. Is that easy only. You do not have to be a rocket scientist. Whenever you want to pay extra or want to reduce your prepayment you just have to go to the bank to sign new documents. Remember this, the banks don’t cheat people they are running a business too. Choose the package that can help you to save . Rather than let the banks dictates, do your research and choose the packages that’s right for you. There are other ways that you can also use to save interest charge by the bank. Most importantly do your financial planning.
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