A Good Home Loan Repayment Strategy Can Save You Thousands In Interest
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Owning a home is one of the major life goals of most people. However, reaching that goal is often difficult and unrealistic if only relying on one’s salary. This is why most will choose to apply for a home loan to help pay for their home.
If you delve deep into the specifics, a home loan can be quite complex and difficult to understand. However, the most important thing to know is that you will be paying your lender a monthly fee plus interest for quite a long while.
Considering how long these repayment terms tend to be, you will likely be racking up thousands of Ringgit worth of interest. Wouldn’t it be nice if you did not have to pay up all that extra cash?
Understanding your home loan interest charges
Fortunately, there is a way to do so. Though admittedly, it is not an easy path to tread. However, if you have the will and the funds, a well thought out repayment plan will help you pay off your home loan early, thus saving you from all that extra interest costs.
Calculating your home loan interest rate
The first step is to understand the amount of interest you are paying for your home loan. Let’s take the following as an example:
Loan Amount: RM200,000
Interest Rate: 4.2% per year
Loan Period: 30 years
The above is an example of a home loan, its yearly interest rate, and the loan repayment period. The interest on all home loans in Malaysia is calculated monthly. As such, the 4.2% yearly interest rate is equivalent to a monthly interest rate of 0.35% (4.2% divided by 12).
When it comes to making your first month’s loan repayment, applying the monthly rate of 0.35% to the principal loan amount of RM200,000 gives you an interest charge of RM700 for the first month (0.35/100 multiplied by 200,000).
How the monthly home loan repayment amount is calculated
Your monthly repayment amount will generally remain the same. The only time that may change is if there is a change in the base lending rate (BLR), which is a reference interest rate used by banks to decide how much to charge for various products they offer. On the other hand, you will be paying slightly less interest with each subsequent month. For example:
| Loan balance | Monthly repayment | Interest paid | Principal paid | |
|---|---|---|---|---|
| 1st month | 200,000 | 978.03 | 700 | 278.03 |
| 2nd month | 199,721.97 | 978.04 | 699.03 | 279.01 |
| 3rd month | 199,442.96 | 978.03 | 698.05 | 279.98 |
| 4th month | 199,162.97 | 978.03 | 697.07 | 280.96 |
The above table is what banks call an “amortised loan.” It is somewhat beneficial for the borrower as the principal balance decreases with each payment. The interest charged on the remaining balance also reduces. This means that borrowers can save money in the long run compared to loans with flat interest rates or front-loaded interest payments.
Reduce interest charges by paying off loans early
Paying off your home loan early to reduce interest rates is not a good nor bad idea. Depending on your circumstances, it could be either. However, if you have the means to do so, paying off your home loans early can save you quite a bit of cash. Also, you will need to make sure that the loan you currently have does not penalise you for paying your loan early. With that in mind, here are a few ways you can pay off your home loan early:
Refinancing to a shorter-term loan
Refinancing is a method of replacing your current home loan with a new one. When you refinance, you can switch to another home loan with a shorter loan tenure. Shorter loan tenures will also mean substantially less interest, depending on how much shorter it is. The difference between a 25-year tenure and a 30-year tenure can be massive.
However, before you refinance to a shorter loan tenure, make sure that you can handle the increase in monthly payments. Remember, shorter tenures mean less interest, but also less time to repay all your debts.
To illustrate, let’s take the loan amount and interest from the example above:
| Loan period | Loan Amount at 4.2% interest rate | Monthly repayment | Total interest paid |
|---|---|---|---|
| 30 years | RM200,000 | RM978.03 | RM152,092.37 |
| 20 years | RM200,000 | RM1233.14 | RM95,953.95 |
Source: home loan calculator
So, to lower the loan period to 20 years, you would be paying around RM1233.14 monthly instead of RM978.03. But you will save more than RM56,000 in interest payments.
Imagine, if your home loan is over RM500,000, the amount you save in interest payments could reach over RM100,000!
Make small, recurring repayments
What if you take your annual bonus to pay down your mortgage instead of spending or saving it? If you make this small extra payment every year, you will eventually be able to pay off your mortgage earlier than you might expect. Let’s assume that you earn around RM5,000 a year as your bonus. If we take the previous examples we have used, it would be akin to paying off 5 extra months’ worth of debt every year. This can save you thousands in interest.
Make large capital repayments
Similarly, if you have managed to amass a large amount of savings that you want to use to pay off your mortgage, single huge payments can also reduce your interest charges by a large amount.
When to not pay off your home loan early
Although having to pay less interest on your home loan is a compelling prospect, here are a few situations where paying off your loan early may not be the best idea:
- If it depletes your savings – Properties are not liquid. Meaning they cannot be converted into cash easily. Paying off your loan early makes no sense if it leaves you with little to no savings.
- If you have higher interest debts – Mortgage interest rates are relatively low. If you have much higher interest rates on other loans or lines of credit, it is better to pay off those debts first.
- If the bank has penalties for early payments – Certain banks may impose penalties if you pay off your debt before a certain “lock-in” period. If you can’t get these penalties waived, it defeats the purpose of reducing your interest.
- If you want to retain mortgage insurance – If you are covered under mortgage insurance, your loan will be paid off in the event of death, terminal illness or disability. In such situations, you’ll be able to use your extra savings to support yourself or your beneficiaries.
How FIS Advisory can help you save on interest payments
Formulating an effective repayment plan to reduce your home loan interest payments is not an easy task. This is where FIS Advisory comes in. FIS Advisory is a renown professional mortgage loan advisory whose goal is to help debtors make smart decisions about managing your mortgage loan interest.
FIS Advisory helps by developing a personalised financial programme for clients to follow that will help them achieve their goals and financial needs. They have a proven record of helping clients to shorten their repayment tenure by years, saving thousands of Ringgit in interest.
FIS Advisory expert solutions include:
- Loan analysis to evaluate your mortgage loan package and analysing possible hidden risks
- In-depth 1-to-1 consultation and planning
- Mortgage loan optimisation leading to 30% – 75% savings on interest & shortening the tenure with 99% accuracy.
By using the FIS Advisory method, loan borrowers are not required to refinance, pay lump sump, or change any t & c in their Letter of Offer (LO) provided by the financing institution.
At the end of the day, paying off your home loan early is an effective way to reduce the total amount of interest you have to pay to the banks, which can get up to the hundreds of thousands of Ringgit, depending on the amount you borrowed.
With proper planning and a well-designed repayment plan, you can knock off years from your tenure, thus reducing your interest. However, keep in mind that you will be paying more money sooner in order to benefit from this strategy.
For more details on this service, go to www.imoney.my/financial-advisor/fis-advisory
