1. Make a larger down payment.Whether it’s a landed or a high-rise unit, many people will opt for the minimum deposit rate of 10%. If you have extra cash, why not put a bigger deposit amount instead i.e 20% to 30% of the house price? You’ll be borrowing less which results in paying less in interest costs overall.
For example, the house price is RM300k. We made a comparison of how much you’ll be paying in total if you were to pay 20% and 10% down payment using Loanstreet’s Home Loan & Stamp Duty Calculator.
From the above images, you can see that you’ll be paying less in total because the interest cost is lower.
2. Opt for a Flexi house loan
Point 1 is great, but what if you don’t have that extra cash, especially during this economic downturn? Well, fret not. There’s a solution for you. We suggest you opt for a Flexi house loan - even if you take loan margin of finance up to 90%. This is because it gives you the flexibility to pay more when you have excess cash AND also withdraw that excess cash for emergencies, whenever you want.
Besides offsetting your home loan principal, you’ll get to reduce your loan interest and tenure too without the need for complicated procedures, or additional charges.
One thing to note is that most Flexi loans do come with a fixed monthly fee to maintain the current account which is ranging from RM5 to RM10 a month. Having said that, the amount of maintenance fee you pay is still considered low as compared to the amount you’ll be saving.
READ: Flexi vs Non-Flexi Property Loan Options
3. Pay extra using your EPF monies.If you don’t have extra cash because of the financial constraints and still want to pay extra, you can consider using your EPF money. To be clear, this is great if you don’t care about reducing your retirement fund by EPF to reduce your house loan. If you already have an existing loan, you could either choose to settle your payment lump sum or go for the monthly repayment service. Take note that you’re only allowed to withdraw from your Account 2.
For lump-sum payment, the amount you can withdraw depends on your Account 2 balance or the total balance of your loan, whichever is lower, and convert it into advance payment. Meanwhile, for monthly repayment, you’ll need to first calculate how many payments you can make based on the available balance and fill in the form provided. EPF will then block the amount and make the payments automatically.
Although we did suggest EPF as one of the options you can go for to finance outstanding housing loans, we’d like to highlight one thing about using EPF monies to pay extra to loan repayments - it may not necessarily be the best move, especially with the current global pandemic and the slow economy.
Plus, most financial gurus have pointed out that generally, if the mortgage interest rate exceeded the EPF dividend return, then it is advisable to apply for EPF withdrawal because the savings you’ll make from the interest will be more.
BUT, looking at the data above, we can see that the EPF dividend rate is higher than the mortgage interest rate (which is below 5%) for years now. Fast forward to today, the mortgage interest rate is at 3.40%, which is lower than the EPF dividend rate (5.45%) return. So, it’s best to think of the return before making any decisions.
Here’s the breakdown. Let’s say you have RM50,000 in your EPF account and the dividend rate is at 5.45%. Your total EPF after dividend would be RM52,725. Then, you have RM50,000 of the outstanding loan and the interest rate is at 3.40%, you’ll be saving RM1,700. But, between the RM2,725 dividend gain and saving RM1,700 interest rate, which one is more profitable? It seems better to keep those EPF monies.
READ: Can Your EPF Money Be utilised for Your Housing Loan?
4. Refinance your home loan.Keep your eyes on the banks’ Effective Lending Rates (ELR) for better rates if you want to refinance to save from paying more interest, which also means lower monthly instalments. As an example, say your home loan has a fixed interest rate of 5% p.a., and the current refinance interest rate is 3.4% p.a.; you’ll be paying 1.6% less interest every year for the rest of your loan period if you go with refinancing.
HOWEVER, we don’t encourage you to refinance your loan if the original loan has a remaining tenure of fewer than 10 years or the difference between the interest rates is minor. Also, don’t overlook the cost of refinancing such as bank processing fees, stamp duty, valuation fees and legal fees.
READ: Refinancing Basics and Tips Used by Experts
5. Choose a home loan package that helps you save on interest.Whether this is your first time taking a home loan or you just refinance, choosing the housing loan to pay for the home is just as important. We’d suggest you look for a home loan package that will help you save on interest.
For example, Bank of China Malaysia (BOCM) has a product called Flexi Housing Loan that’ll help you to save on interest by combining the Current Account with Home Loan. Just deposit more money into your Current Account at any time you wish and it’ll reduce the loan balance while subsequently reducing the loan interest too.
This is achieved by linking a Current Account to the loan. Every month, the instalment amount is deducted from the Current Account as scheduled. But, any additional money parked inside the current account will go towards reducing the principal amount owed.
So, if a customer has taken a full Flexi property loan of RM500k with a bank and the customer has RM400k in cash parked inside the linked current account, interest calculations will only be based on the net loan balance, which is RM100k. This saves the borrower RM400k in interest.
The best part is that you’re able to make unlimited withdrawals from your current account whenever you need it. Not to mention, BOCM is also running a good promotion rate of 3.10% p.a. for the first 2 years, subsequent years is 3.25% p.a.
For more info about BOCM Flexi Housing Loan, call their Sales Team at 03-23878232/03-23878815 or visit any of their branches nationwide!
6. Use your Fixed Deposits (FD) fundThis is a great option if you have excess money. So, instead of reinvesting your FD money, you can place the funds into your property loan account. This will not only lower your home loan interest rate and reduce your total owing capital and interest charged by the bank.
For example, Ali recently came into RM100k windfall. He wants to know which is better:
- put the money into FD which yields 2.15% p.a.
- put it into his Housing Loan which costs 3.4% p.a.
If Ali decides to put RM100k into FD at 2.15% p.a., he’ll collect RM2150 a year in interest. Meanwhile, if he chose to put RM100k into his housing loan which charges 3.4% p.a., he’ll pay RM3400 LESS a year in interest payable. What we can conclude here is that by putting his cash into his housing loan, Ali would save more than RM1000 more compared to putting it in FD.
You might think, compared to FDs, it might be more troublesome to withdraw any extra cash you might have put into your housing loan when you need it. This is the principle of liquidity – How easy is it to access your money when you need it?
That said, many mortgage products today (such as Flexi Housing Loan by BOCM) makes it easy for a person to withdraw any extra cash they might have paid into their housing loans. Some could even be more convenient than taking money out from FD even.
In short, it’s always better to put excess cash into offsetting a loan if the loan interest rate is higher than the FD yield.
But, before you decide to reduce your home loan, ask yourself these questions:
- Are you struggling to cover 3 to 6 mths living cost?
- Do you have any other debts with higher interest rates?
- Will your bank impose a prepayment penalty?
If all of your answers are NO, then go forth and pick the best options for you to lower your mortgage loan. Ensure that any overpayment you make goes to reduce the debt (so shortening the term) rather than just to reduce your monthly payments. If not, you’ll need to reevaluate your finances so that you won’t feel a burden later just because you want to reduce your mortgage balance.
That aside, to those who are still scouting for a home loan, don’t forget to research your options by using Loanstreet’s home loan comparison page from over 18 banks in Malaysia!