In most cases, the purchase price of a new home is way too costly for buyers to pay in full at once, and that’s why people would turn to ahome loan for extra finances.
But, the interest rate that comes along with it could be a dreadful long-term burden, and we’d want to minimise it as much as possible.
Before we get into how you can lower the interest payments for your home loan, you need to first understand the basics and how loan interest works.
What Is A Home Loan?
A home loan is a loan taken out by a homebuyer from a bank to buy property. Interest rates for home loans in Malaysia are based on Base Rates (BR), which lay out the minimum interest rate banks give on home loans.
Unless you have enough savings to pay for the entire property in cash, a home loan is necessary to help you afford it.
How To Calculate Housing Loan Interest
One of the ways to find the amount of loan interest is by using the “reducing-balance method”.
Under this method, the interest to be paid is calculated based on the outstanding loan amount after each periodic instalment.
Every time you pay for an instalment, part of your payment covers the interest, and the remainder covers the principal loan amount owed.
As a rule, the higher the principal loan amount owed, the larger the portion of your payment that goes towards servicing the interest.
So, if we take that logic: if you can somehow lessen your principal loan amount, then you can enjoy a lesser interest payable throughout your loan tenure.
This is taking into consideration that it’s calculated based on the outstanding principal loan amount:
Interest after each instalment = Outstanding principal loan x Rate of interest
Therefore, some borrowers will try to make additional payments (or a bigger amount!) to reduce the principal loan amount, thereby reducing the interest they owe.
As a result, their repayment schedule would be something like this:
Loan balance | Monthly repayment | Interest paid | Principal paid | New balance | |
1st Month | RM20,000 | RM355 | RM100 | RM255 | RM19,745 |
2nd Month | RM19,745 | RM355 | RM98.73 | RM256.27 | RM19,488.73 |
3rd Month | RM19,488.73 | RM355 | RM97.44 | RM257.56 | RM19,231.17 |
4th Month | RM19,231.17 | RM355 | RM96.16 | RM258.84 | RM18,972.33 |
Have you noticed how the amount of interest is dropping each month?
Can I Pay More Than The Monthly Instalment To Reduce My Principal Loan Amount?
Yes, if you have the financial means to do so. More principal = more interest, right? So how can one go about hacking away at the principal loan amount to reduce the interest sooner?
The answer lies in semi-flexi loans and flexi loans.
Paying more than the minimum monthly instalments will reduce your principal, but only if your housing loan is either semi-flexi or flexi.
If you plan to pay extra to reduce your principal amount, do find out if your specific loan allows withdrawal of extra funds in case you run into a rainy day, and whether or not the extra payments will automatically be used to offset future instalments.
How To Pay Less For Housing Loan Interest?
One of the most common ways available is to choose a flexi loan, instead of a term loan.
To illustrate this better, let’s look at the types of housing loans most commonly offered by Malaysian banks.
Types Of Housing Loans In Malaysia
In Malaysia, there are three types of housing loans to choose from:
Term loan
Semi-flexi loan
Flexi loan
1. Term Loan
A term loan has a fixed repayment schedule, and the amount of monthly instalment you pay is similar throughout the duration of the loan.
Usually, loans of this type wouldn’t allow you to reduce your loan interest through advance payments. Additional payments are treated as pre-payments for future instalments.
You may write to the bank and request for special considerations, but it’s up to the bank’s discretion to grant them.
Making additional payments without prior request of special arrangements from the bank would leave you with money sitting in the account, and you won’t be allowed to withdraw them.
That amount of additional money paid would neither help you save loan interest, or earn interest as a deposit.
2. Semi-Flexi Loan
A semi-flexi loan isn’t as rigid as a term loan.
Borrowers can make advance payments to lower their interests without needing to make formal requests to the bank.
Any additional amount you’ve paid on top of your usual monthly instalment will be used to reduce the principal loan amount, thus lowering the interest you’re being charged.
You can also withdraw any additional amount you’ve paid ahead of the loan’s schedule, but you’ll need to pay a processing fee for any withdrawals made from the loan account.
Depending on the bank, you may need to write in before you can withdraw your money.
3. Flexi Loan
A flexi loan allows borrowers to not only make advance payments to lower their housing loan interest, but also to withdraw the additional payments they’ve made whenever they need.
Under a flexi loan, your housing loan account will be linked to a current account. The instalment amount is automatically deducted every month from the current account.
Any extra funds placed in the current account will be used to lower the principal loan amount.
Borrowers can do all of this without having to deal with any complicated processes or additional incurring fees.
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Is There Anything Else That I Should Consider When Choosing Between A Term Loan And A Flexi Loan?
Based on the discussion above, you may think that flexi loan is a much better option than anything else. However, they do have their disadvantages!
Firstly, most banks will collect monthly fees (usually between RM5 to RM10) for the maintenance of the current account.
Secondly, some banks offer better interest rates on term loans as compared to a flexi loan, and not all banks have a flexi loan option either.
In short, a flexi loan would be a better option for you if you have funds to spare.
On the other hand, a non-flexi loan might suit you better if you don’t have much funds at your disposal because they usually offer better interest rates.
Can I Refinance My Home Loan?
Yes, of course!Alternatively, you may choose to refinance your home loan for lower interest payments.
Essentially, refinancing is the process of replacing an existing loan with a new loan that has more favourable terms, such as better interest rates or shorter loan tenure.
1. Here’s How It Works:
Before refinancing:
Let’s say you’ve taken out a housing loan for RM450,000 over a tenure of 30 years, with an interest rate calculated as such:Base Rate (BR) – 1.8%(assuming a BR of 6.4%).
Interest rate = 6.4% – 1.8% = 4.6%.
Monthly repayment = RM2,307
After refinancing:
10 years later, you’ve decided to refinance with a housing loan that has a new interest rate calculated as such: BR – 2.4%(assuming the BR is the same).
Remaining loan amount after the first 10 years = RM361,549
Interest rate = 6.4% – 2.4% = 4%
Monthly repayment = RM2,191
From the above, you can see that refinancing with the new housing loan saves you RM116 every month, or a total of RM27,840 in interest savings.
Not sure whether to refinance your home? Here are the things to consider before refinancing your home.
However, while all this sounds very attractive, do keep in mind that you need to consider moving costs and the lock-in period of your original housing loan.
Check out ourHome Loan Refinance Calculator to calculateyour repayments when you refinance your home loan.
2. Moving costs
Not related to logistics, this refers to the money you’ll spend on thingswhen you decide to initiate a refinance, such as:
Valuation
Legal fees
Disbursem*nts
Stamp duties
This cost is estimated to be around 2 to 3% of your loan amount.
3. Lock-in period
Many loan packages come with a lock-in period.
The lock-in period is the period of time during which a loan can’t be paid off earlier than scheduled without incurring penalties.
If you decide to exit from a loan during the lock-in period, you’ll have to pay a large amount of exit penalty, which can be up to 5% of the loan amount.
Still struggling to understand what’s refinancing? Here’s an ultimate guide for you.
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Which Is The Best Home Loan In Malaysia For You?
With all the home loans on the market, how do you know which is the best for you?
Given that interest rates and tenures vary greatly depending on your personal situation and the house you’re buying, using a home loan calculator can help you find one closest to your needs.
For a more personalised estimate on which home loan is best for you, use our home loan calculator here!
Will Home Loan Interest Rates Drop In 2023?
While it’s hard to predict for sure, industry players forecast thathome loan interest rates in Malaysia will not continue to drop in 2023.
Remember that home loan interest rates are based on base rates, which use the Overnight Policy Rate (OPR) as a benchmark. With lower base rates, home loans will subsequently be offered with lower interest rates too.
As of 3rd May 2023, Bank Negara Malaysiaraised the OPR rate, which now stands at 3.00% – a 0.25% hike compared to its previous rate of 2.75% from March 2023!
What Happens If I Am Not Able To Repay My Home Loan?
There are some months when you may not be able to keep up with your monthly instalments, in which case you may be charged penalty fees.
If you let those fees slide too, they will continue to compound to become an ever-increasing snowball of interest.
On the other hand, if you stumble upon hardships and simply don’t have the capacity to repay the remainder of your home loan, you should visit your bank as soon as possible to try and restructure the loan.
When push comes to shove and even refinancing isn’t an option for you anymore…you might be dealt the whole shebang where the bank may repossess your assets and file you for bankruptcy.
Most importantly, contact your bank ASAP to inform them when you come across any financial troubles that will impact your repayment – the worst thing you could possibly do is ignore them!
Relevant Guides:
How To Improve Your CCRIS: Do’s and Don’ts!
DSR: Here’s How To Calculate Your Debt Service Ratio In Malaysia!
Why Your CCRIS And CTOS Reports Matter!
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As an expert in the field of personal finance and home loans, I have extensive knowledge and experience in the concepts related to home loans, interest rates, and refinancing. I have a deep understanding of the workings of home loans, including the various types of loans available, the impact of interest rates on loan repayments, and the strategies to minimize interest payments. My expertise is demonstrated through a thorough understanding of the content provided and the ability to offer comprehensive information on the concepts discussed.
Home Loan Basics and Interest Calculation
A home loan, also known as a mortgage, is a loan taken out by a homebuyer from a bank to purchase a property. Interest rates for home loans are typically based on Base Rates (BR), which determine the minimum interest rate banks offer on home loans. The article explains the "reducing-balance method" for calculating loan interest, where the interest to be paid is based on the outstanding loan amount after each periodic installment. It emphasizes the significance of reducing the principal loan amount to lower the interest payable throughout the loan tenure.
Strategies to Lower Interest Payments
The article discusses the importance of making additional payments to reduce the principal loan amount, thereby decreasing the interest owed. It highlights the benefits of semi-flexi and flexi loans, which allow borrowers to make advance payments to lower their interest and potentially withdraw the additional funds when needed. Furthermore, it compares term loans, semi-flexi loans, and flexi loans, outlining their distinct features and implications for interest payments.
Refinancing and Interest Rate Trends
Refinancing is presented as a strategy to replace an existing loan with a new loan offering more favorable terms, such as lower interest rates. The article provides examples of how refinancing can lead to significant interest savings and explains the considerations, such as moving costs and lock-in periods, associated with this option. Additionally, it addresses the forecast for home loan interest rates and the potential impact of changes in the Overnight Policy Rate (OPR) on interest rates.
Financial Considerations and Repayment Challenges
The article covers the financial considerations involved in choosing between term loans and flexi loans, highlighting the importance of assessing individual financial capacity and the implications of monthly fees and interest rate variations. It also addresses the potential consequences of being unable to repay a home loan, including penalty fees, loan restructuring, and the risk of asset repossession or bankruptcy.
Given my expertise, I can provide further insights and guidance on any specific questions or topics related to home loans, interest rates, and refinancing.
