WITH Bank Negara recently limiting property loans to a maximum of 35 years from 45 years previously, settling your home mortgage payments as soon as possible is now the order of the day.
Given that buying a house will likely be the biggest investment in a person’s life, and due to the magnitude and risk involved in such an endeavour, one would first need to be certain that a 35-year loan is a responsibility that’s worth shouldering.
Here are some preliminaries to consider before taking on a home loan:
Check interest rate and loan repayment flexibility
“This could either be fixed or tied to the base lending rate (BLR). What you prefer depends on how you prefer to manage your cashflow,” says Success Concepts Life Planners chief executive officer Joyce Chuah.
“As for flexibility in repaying the loan, check if there are restrictions to pay, as in whether the payment needs to be within the month or as and when. Also if there are processing charges for each repayment, find out how much they charge.”
Mortgage-reducing term assurance (MRTA)
A potential buyer would need to find out if the MRTA could be replaced with the assignment of a personal insurance policy (that the loan applicant already has) or prefers to have instead of the MRTA.
“An MRTA may be cheaper but it does not ‘follow’ the loan, should the loan be fully repaid earlier,” says Chuah.
Penalty for early loan settlement?
Chuah cautions that if there is a penalty for early loan settlement, one would need to find out within how many years it will be imposed and the total amount of the penalty percentage.
“Is the percentage based on the outstanding loan amount or the full loan sum? There are no more lock-in periods but banks still do charge a certain amount to recover some costs due to early loan settlement.
“Also, check the efficiency of the loan officer as it may affect the processing time of the loan.”
Once you’ve decided to buy a house and take on a home loan, then the following are some possible options on how to repay your home loan quickly:
MyFP Services Sdn Bhd managing director Robert Foo says making larger or lump sum payments is definitely encouraged.
“But you must give notice to your banker. Most of the time about three months prior notice, otherwise they will treat this as advance payment of instalments and effectively you are not reducing the interest at all.
“Here, one has to read the loan agreement carefully on whether there are any conditions to paying earlier because if the conditions are not fulfilled, you do not actually benefit by paying earlier. There may also be penalties if your pay or settle earlier as most of these loans come with a lock-in period.
“One should check out the terms of early repayment or early settlement”.
Standard Financial Planner Sdn Bhd’s Jeremy Tan also believes that making large settlements is a good option when large funds are available for pre-payment.
“Ensure home loan pre-payment features reduces the principal amount. With principal reduction, less interest to be paid and repayment tenure will be shortened effectively.
“Frequent payments on a scheduled payment, such as fortnightly, benefits the borrower in terms of less interest payment over the tenure and shorter tenure to repay the amount borrowed, compared with conventional monthly payments,” he says.
Tan adds that making lump sum payments is a preferred option only if the borrower has no other liabilities other than the home loan.
“The order of priority for the repayment of liabilities will be those with higher interest charged, followed by those with lower interest regime. Examples of this are credit card liabilities, personal loan, hire purchase, overdraft and then home loan.”
Chuah also concurs that making larger payments are better – as long as they are regular.
“By paying regular large payments, the effect of reducing the loan tenure is compounded,” she says, adding that making frequent payments can be cumbersome unless one has an automatic repayment mechanism that would deduct the money from his or her savings account.
“It is better to make larger repayments and keep it to once a month.”
Other factors to consider
Chuah advises that a person should continuously keep tabs on his fixed deposit (FD) account during the loan-repayment period.
“There are many holes in our pockets that we don’t realise. Check your FD account. Are those for short-term emergency use (less than three years) or you simply prefer to park the excess money in the account even if it is for the long-term just because you like the security that it gives you?
“If it is the latter, redirect all or part of the money in your account and repay the loan. The simple fact is fixed deposit rates are lower than the current loan rates of BLR. Keeping money which is not meant as emergency money in the FD for long term and have a loan which costs you higher than your returns is not prudent and does not make sense.”
Chuah says one should also take note of whether there are unnecessary payments that can be eliminated.
“Maybe there are subscriptions we don’t need, expenses we can cut down or perhaps some luxuries which aren’t that necessary. If so, cancel the subscriptions, cut down on the unnecessary expenses and use the savings from these to repay your loan and bring down the loan tenure.
“If you own a dividend-yielding portfolio of stocks and or unit trust funds, redirect the dividends to repay your loan, unless the portfolio is meant for some other purpose like your retirement.”