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.