Dream – The first step towards achieving financial abundance

(This is a follow up article of “Money.. Money.. Money..” , make sure read it first before you continue. :))

Imagine when you wake up in the morning, you are greeted by a butler with a Hacienda la Esmeralda Geisha coffee in his hand. You walk towards the balcony while sipping the wonderful aromatic specially brewed coffee. From the balcony, you could feel the morning breeze softly touch your skin. You could see a beautiful garden filled with vibrant colourful flowers. Beautiful butterflies playing chasing each others between those flowers. At the horizon, the sun starts to shower you with rays of gold between the twin peaks of marvelous mountain range. Imagine you could have such life. Imagine such possibilities.

Everything happens or happened because of somebody dreamed of it. The car, the plane, and the laptop you are using to read this article: everything you have come across was dreamed by someone. The same thing is true when it comes to financial abundance.
You got to dream of the wealth you want. Dream of what you want to achieve.

Dream can be divided into 3 categories: the dream you dream while you are sleeping, day dreaming and the dream which you wish you had or the one you want to achieve. The dream I’m talking about is of course, the dream you want to achieve or wish you have. The dream not necessary only about materialistic stuff, it can be about sending your child to study in top notch university or building a free private hospital to treat the poor. It can be anything.

When you dream, set every single detail within it. If it’s a car, set the model, the colour, special accessories and so on. Set when your dream takes place. Is it 1 year from now? 2 years? 10 years? Next month? Next week? Just make sure you give ample of time. Try to be more realistic. But don’t delay your dream too long. Be daring to dream.

Other sources would have used the word goal, visualization or imagination, but I choose to use word dream because dream is something which you would enjoy of doing. In fact a concrete dream with details is equivalent to visualization with a goal. Do bear in mind, the dream I’m talking about is not day dreaming or dream while you are sleeping.

Dreaming is an easy thing to do. But, there are some people who are actually afraid to dream. They are afraid that they would disappoint themselves when they realize they couldn’t achieve them. So, they stop dreaming big. Dreaming is the only thing in the world where no body can interfere and set limit to it. Even the sky is not the limit. Don’t ever give up on dreaming. Even if you fail, keep on dreaming, as it could bring you closer to make it a reality.

Many of you would be questioning the power of dream. Many of you are being skeptical of what I’m saying. Many would say that their dream didn’t come true at all. The first reason why your dreams never work out is because you were day dreaming instead of dreaming with details and sense of time horizon fixed to it. You weren’t dreaming with consistency. One day you might dream of driving a Merz, the next day you dream of driving a BMW. You mind is not focused on what you dream of. You are not sure of what you really want. It’s all just seems like another routine of day dreaming.

Dream is just the first step towards financial abundance. In fact dreaming is also the first step towards abundance of everything. There are 2 more steps or requirement need to be accompanied with your dreams, or else your dream will remain a dream forever. They are desire and positive mental attitude. Just as I mentioned in my previous article, “Money.. Money.. Money..”


These 3 steps will open the world of opportunities. Of course it must be followed with your action. If no action, then there won’t be any results. In the next follow up article, we shall look at ‘Desire’ which is an important factor to reach a life of abundance. Until then, dare to dream and dream big. Remember, even the sky is not the limit.

Maximize Your Money 2: Mortgage Loan (Tips and strategy on managing and reducing your mortgage)

Welcome to the second ‘Maximizing Your Money’ section. I hope you all learned and utilize something from the 1st article of "Maximize Your Money:Hire Purchase Loan". and apply them to your real life. This time around we are going to look at mortgage or home loan. Before you continue, make sure read the “Back 2 Basic: Mortgage Loan” to get some understanding on how it works.

The method to maximize your money in mortgage is different compared to hire purchase loan. How different? Put on your thinking cap and start to digest the tips below.

1. Make additional payment.
This is the most commonly talked about method. The more you pay and the more frequent you pay, you’ll definitely reduce the period of payment and reduce the overall interest.

2. Always take the longest tenure.
“What are you crazy?” some readers are in shock. They couldn’t believe the above statement. Yes, my friend. Take the longest tenure you can take, but make your monthly payment as if you are paying for a shorter tenure.
Example:
Lyndia are planning to take $100,000 mortgage loan with 20 years tenure and 5% interest. Your monthly payment would be $657.22. She takes the maximum allowed tenure for 5%. Her monthly payment would be $480.20. But when it comes to payment, she still pays $657.22 instead of the $480.20. Overall, she will still settle her loan 20years.
Why doing such tedious thing? The reason is for your cash flow protection. Let’s say something unfortunate happens such as pay cut due to bad economy. Now, Lyndia’s budget is much tighter. So, instead of paying $657.22, now she could pay as low as $480.20. If she had taken a 20 years loan, she might have defaulted on her payment or cut down many of her other expenses.

By the way, if you are not good in managing your money, you might backfire yourself by increasing your other expenses and could only afford to pay the minimum.

3. Don’t wait until the end of grace period/due date.
The bank is calculating your interest on daily basis. So don’t wait until the due date to make your payment. Instead, the moment you get your salary, pay your installment immediate. You’ll be surprise that you would able to reduce your total loan periods by months and your interest.

4. Opt for fortnightly payment instead of monthly payments.
Fortnightly payment means that, you’ll be paying every 2 weeks slightly higher than half of your monthly payment. You have to check with your bank whether they offer it or not. By making fortnightly payment you would be saving interest as well reducing your loan period by years.

5. Refinance your mortgage
That’s right; you could save on interest by refinancing your mortgage with a lower interest rate. If your loan already out of lock in period, you should shop around for a lower mortgage interest. Lock in period is the initial period which if you settle your entire loan, you’ll be charged with penalty of about 2% on your entire loan borrowed amount. It’s usually 5 years.

I still remember by the end of 2005, all the banks started to offer BLR Minus packages. Before that, banks offered BLR Plus packages up to BLR+2%. Thanks to CIMB bank which first sparked the fire, offered the BLR-0.1% package. Currently, you can even find BLR-2%. BLR (Base Lending Rate) will change according to Overnight Policy Rate (OPR) set by Bank Negara. The current BLR is 6.5%. This means, if your mortgage is BLR-1%, then your interest rate would be 5.5%.

So, if your loan is a BLR+1% compared to a BLR-1%, you are losing 2% in interest. By refinancing your loan, you could save the 2% interest and lower your overall interest paid.

Note: When you refinance your loan, your monthly payment will be lower if you maintain the balance tenure. When you make payment, pay as if you are paying your previous higher interest loan. It could reduce your loan payment time as well for your cash flow protection. Also, don’t forget to apply tips No.2, if you have a good money management.

6. Instead of saving in FD, save them in your mortgage account.
Most banks allow you to make principal pre-payment. And some banks allow you to withdraw this pre-payment anytime. Usually they will have charge a minimum amount of fee around $10 to withdraw and will only allow withdrawal in multiples of $1,000 or so on. To find out whether your bank allows you to do that, check out your loan agreement. Now, let’s see how you’ll benefit from making capital pre-payment. Let’s think in percentage. Your fixed deposit (FD) interest rate will be always lower than you loan interest rate. This means if you have a FD and a mortgage at the same time, you’ll be losing out your money in interest.

Example:
Lyndia has a fixed deposit of $10,000 as emergency fund along with her mortgage with balance of $20000. Her fixed deposit interest rate is 3% and her mortgage’s is 5%. She’ll be gaining returns of $300 from fixed deposit and losing $1000 in interest due to mortgage. Overall she’s losing $700 in interest.


If she made principal pre-payment using her FD, she’ll be reducing her interest from mortgage to $500. That’s an additional savings of $200 in mortgage interest.


If Lyndia need the money for any emergency, she just has to go to bank and fill up the request form to make withdrawal. But, of course it would take several days before you get the money. (Note: Make sure your loan agreement states that you can withdraw them.)

So, this method will save you on interest as well reduce your payment period.

7. Consolidate mortgage accounts.
Consolidated mortgage account also known as offset account is an account which consolidate mortgage account with a saving account. It is also possible to consolidate current account and credit card account as well. How it reduce your mortgage? When your salary deposited into the account, it will act as if a capital pre-payment was done. Since your mortgage interest is calculated on daily basis, it will start to reduce your interest charged. Of course, you can withdraw your salary anytime you want to; just make sure you make the monthly payment as usual.
This method will definitely reduce your interest and mortgage repayment time by many years. Below is an illustration taken from HSBC website.

(Note: The above image is copyright by HSBC Bank Malaysia Berhad)

8. Make a pre-payment before bank disburse the loan.
If you have just taken a mortgage loan and the money is not disburse yet (or partially disburse); take your FD and dump it into your mortgage account. You would gain same benefit as mentioned in tips No.6.

There are another 2 benefits. Here’s the first one. Banks usually give special rates if you take higher mortgage loan. Let’s say you are going to buy a house for $250,000 and planning to pay $100,000 as a down payment, and only planning to take $150,000 mortgage. But the bank offer a better interest rate if you take loan more than $200,000. So, what you can do is, take a $200,000 loan. Once your application is approved and you signed the loan agreement, dump your balance $50,000 into your mortgage account. So now you can enjoy special interest rate and achieved your goal of just taking $150,000 mortgage.

The second other benefit is by using time value of money; however, it’s a bit complicated and risky. Even if you don’t get special interest rate, just by delaying your down payment by a month or two, you would be enjoying interest on your money. Here’s how it work.
Let’s say you are going to buy a house for $150,000 and planning to take $100,000 of mortgage loan. You pay the minimum10% of the total price, which is $15,000. You keep your $35,000 into FD for 1 or 2 months tenure. Then, you apply loan for $135,000. Once your loan application is approved, make some delay before you sign the offer. Make sure you don’t delay until the loan offer expire or by the time the bank disburse the money to the seller, your S&P (Sales and Purchase) agreement exceeds 3 months or terminated. Just before the bank disburse the money, pay the $35,000 balance plus additional money earned through FD.

How about the legal fee paid for loan agreement? Well, for this method to really work take the zero entry cost packages.

(Note: Before you use this method, check your loan agreement and banks, whether pre-payment before disbursement allowed or not.)

That’s it, 8 tips to maximize your mortgage loan. If everything is followed well, you’d be surprised how fast and efficiently you have reduced the repayment by almost half. I hope you all will benefit and make full use of it.

Have a wonderful day and enjoy managing your money to the max.

Back 2 Basic: Mortgage

Mortgage loan or home loan is the money which you borrow from bank to buy your house. It is the process transfer of interest in a property as a security to the lender. The word mortgage came from Old French word, which means death pledge. The death is actually referring to the end of pledge when the property obligation is fulfilled or is taken away for foreclosure.

Compared to ‘Hire Purchase’ loan, mortgage or housing loan is easier to understand. But to calculate the monthly payment, it would require a complicated formula. Don’t worry I won’t be touching all lot on it. I’ll teach you on how mortgage works and some simple calculations. Let’s start with an example.

Miss Florina bought a house for $125,000. She paid 10% down payment and took mortgage from bank for the balance, $112,500. The bank charges a fixed interest of 7% per annum calculated on monthly basis. Her tenure is for 30 years.

(Monthly basis is also known as monthly rest)

How to calculate the monthly installment? To calculate the monthly installment we have to use the following formula.


Yup, I know the formula look complicated. Even I didn’t use this formula to calculate. Instead I just used a financial calculator.

By using my financial calculator, the monthly installment computed is $744.13.

Now it’s time to look at how the interest is calculated. Instead of using any complicated mathematical formula, I’ll just show you through simple calculation.


Why we divide by 12? This is because the interest is calculated on monthly basis. A year has 12 months. In reality, majority of the banks’ interest is calculated on daily basis.


As you can see, the interest is calculated based on your balance at the end of 1st month. It’s not fixed interest like hire purchase loan. If you make additional payment, your interest will be calculated based on your mortgage balance. Let’s look at the table below for first 6 month of calculation.


Now let say Miss Florina got 2 months bonus from her company. She decided to pay 6 month installment one shot on the first month it self. Let see what has changed.


The first thing you might have noticed is the balance at the end of 6th month is lower by $66.14.

Let’s have a look, if the interest is calculated yearly basis and she paid 6 month installment one shot.


What did you notice? The first difference is the interest is calculated for the entire year at the beginning, unlike monthly basis where you calculate the interest every month.

Some of you might be wondering on how to calculate the total interest for any year without calculating month by month or day by day for daily basis. There are formulas to calculate them, but unfortunately I don’t have them and it is rather complicated. The easiest way is by using a financial calculator.

That’s all for our 2nd back to basic. Hope all of you learn something from it. Get ready to maximize your mortgage in near future. You will learn how to use your mortgage efficiently and maximize your money management. Coming soon…

Happy Learning. ;)

Maximize Your Money: Hire Purchase Loan.

I always love to talk about hire purchase loan more often because it is the most misunderstood loan in the market. I have seen friends and families who have been making the same mistakes over and over again. I’ll open your eye and show you the right way of managing your hire purchase loan. Before you proceed, go through ‘Back 2 Basic: Hire Purchase Loan’. Now, start your engine and ready to roll on.

(Note: All this maximization will work in Islamic loan as well)

Let’s look at some common tips (truth) about hire purchase loan.

1. Always take the shortest tenure

The reason is very simple, the longer your tenure is, the higher your effective interest rate will be. Remember that, hire purchase loan would calculate your interest using the borrowed amount multiply the number of years, which will increase your effective interest rate. Not just that you’ll be paying a very high interest in the first year itself.

2. Take the least amount of loan possible.

I have come across many car dealer advertising ‘0% down payment’ or ‘100% loan’. Some who might have some additional cash to pay for down payment would just take the 0% down payment offer. He might even be proud that he doesn’t have to put any money to buy the car. But, the effect is huge. With the amount of effective interest you’ll be paying, you’ll be losing in interest. If your loan interest is 5%, a $5,000 down payment would save you $1,250 for 5 years tenure and $1,750 for 7 years tenure. So, take the least loan.

3. Do not make additional payment

“What don’t make any additional payment? Are you crazy?” some might start to think I’m crazy. The reason is very simple; your additional payment won’t be reducing your hire purchase loan interest. You will only reducing your payment period, but not the interest at all. The next tip will make understand way making additional payment is a waste and teach a better way of making additional payments.

4. Pay at the end of grace period/due date.

You''ll be usually given 7 days period from billing date or beginning of the month to pay your installment. Many might even pay them on 1st day itself. Some might pay them even before the beginning of the month. By paying earlier, you are not gaining anything, as you are not reducing interest. In fact you are only helping the bank. So, try to pay at the end of grace period around 6th or 7th day. (Just don't exceed your due date)

So far, whatever tips you read might be quite common found everywhere. The next final tip is what will make you different than others. It is how you maximize your hire purchase loan.

"Whatever additional payment, save them instead."

That’s right, if you are going to make additional payment, save that money in savings, fixed deposit or unit trust, whichever you are feeling comfortable with. Save them into something which could give a return with low risk. Then, when your saving amount is equivalent to your balance minus rebate, pay them off one shot. Let’s have a look at illustration below.
Mr. Karipap never made any additional payment, while Mr. Dodol made additional payment all the time.


Now, let’s look at Mr. Cekodok. He maximized his money by saving the money for additional payment in a fixed deposit of 3% p.a interest. The below calculation done based on monthly savings.


Just imagine, how much you could save if you had invested in something which could give 5% return.

All in all, whenever you are going to buy car or getting any other hire purchase or Islamic loan, follow the tips above to maximize your money and towards a better money management.

Good luck and all the best.