Recently, I had a client, Mrs Jane and her husband who wanted to invest a lump sum of RM200K. From the investment returns, they planned to pay down their housing loan. I asked them: “Do you want to know how to pay off your house loan 10 years earlier?”
But before we get into the how, you must first understand the loan structure. Whether you already have an existing housing loan or are planning to get your first property, it is important that you first understand the types of housing loan financing options available in the market.
First, it’s important to understand some of the basic factors of a loan. Your total monthly mortgage repayments consist of two portions: the interest rate and principal amount. In the beginning, the monthly repayments will be used to pay down the interest part and after each monthly payment, the principal amount will decrease.
There are two types of interest rates:
Fixed interest rate: An interest rate that remains constant and will not change throughout the duration of your loan.
Variable interest rate: An interest rate that depends on the Base Rate (BR) determined by Bank Negara Malaysia (BNM). Banks will offer an interest rate by assigning either a positive (+) or negative (-) value against the BR. Recently, the Base Rate was replaced with the Standardised Base Rate.
Next, the housing loan interest rates depend on a few other factors, including:
In this article, we will look in detail at the three types of home loans.
1. Term Loan (Non-Flexi)
A term loan is a loan with a fixed repayment schedule where the interest rate does not change throughout the duration of the loan. This means that when BNM increases the Base Rate, there will be no effect on your loan as the interest rate is fixed for the entire duration of the loan.
The cons of this loan are that it is not easy for you to make additional payments to your loans. If you wish to do so, you have to write to the bank to request such an arrangement. Besides, any additional money paid to these term loan accounts will not be considered as payment to the loan. The additional funds you paid will be brought over to future months as a prepayment and will not be used to reduce your loan interest.
Semi-Flexi is the default loan offered by most banks in Malaysia which offers more freedom than the basic term loan. Unlike a term loan, a semi-flexi loan does not have a fixed repayment schedule. The word flexi suggests that you are allowed to make your loan payments in advance.
This means you have the option to pay an additional amount on top of your monthly mortgage, as well as withdraw additional sums paid over and above the defined payment schedule. The downside is, that you need to notify the bank prior to your withdrawal.
Like semi-flexi loans, full-flexi terms allow you to make additional payments and withdraw but without any lengthy approval process and notifying the bank.
The loan will be tied directly to your current bank account so payments and withdrawals will occur there. The more additional money is in your current account, the more your interest rate will reduce.
The downside to this freedom is that banks will often charge a monthly fee of RM10.60 (RM10 + SST 6%) to maintain the current account whether you use the account or not. Interest rates may also be higher and not all financial institutions offer this type of loan.
Both the semi-flexi and full-flexi loan uses the daily-rest method to calculate the interest. Due to this calculation method, we could actually pay off the house loan faster than the stipulated duration.
Even Though both the semi-flexi and full-flexi loans have similar features, which is a better loan then?
As usual, it depends. If you are self-employed, a commission earner or a business owner with variable monthly income or cash flow, it will be better to opt for the full-flexi loan as it serves as a temporary place to save your money, thus lowering your interest.
If you are employed with a fixed monthly salary, opt for the semi-flexi as you can save on the RM10.60 monthly banking fee and use any additional bonus or allowance to pay down your housing loan.
Now you have learned about the different housing loans, interest types and daily-rest interest, check your loan document and see what type of loan you are having.
In part 2 of this series, we will see how I helped Mrs June and her husband to come up with a plan to pay off their house loan 10 years earlier.