Making larger or lump sum loan repayments is encouraged

Success Concepts Life Planners chief executive officer Joyce Chuah.

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.

Foo adds that if one gets a fixed rate loan, then there could also be
conditions on early repayment.

“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.

“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.”