1. Refinancing
Refinancing is a good idea if interest rates are dropping. There are packages offering lower rates to new customers and it could be worthwhile paying the early settlement penalty.
But before you do, seek professional advice to work out how much you would actually be saving.
2. Lump sum payments using EPF funds
The Employees Provident Fund (EPF) allows withdrawals to pay for housing.
If you are not worried about reducing the amount you will receive upon retirement, it might be a wise move to make a withdrawal to reduce debt.
3. Paying extra
Extra payment means you pay more than the required instalments. There are two kinds of extra payments as defined by OCBC Bank.
Assume the mortgage instalment is RM1,000 per month. If you have extra money and you pay RM1,500 for that particular month, this is considered advance payment (AP) and it will be used to reduce the principal outstanding loan amount.
You will immediately save the interest charged due to the daily rest interest calculation.
Let’s say you did this for three consecutive months, paying RM1,500 in total. But on the next payment due date, you have suddenly run out of money because of some emergency.
OCBC Bank will deduct RM1,000 from the extra payment and treat it as your regular instalment. So, your record remains clean. Nothing will be submitted to the credit rating agencies. But you cannot withdraw that extra RM1,500 for emergency use.
The features of advance payment include:
- An automatic offset of instalment if it is not paid on time.
- No withdrawal facility.
- An extra payment of less than RM1,000 is automatically treated as an advance payment.
What happens if you pay more than RM1,000, say RM3,000 in a month? The extra RM2,000 will be treated as capital repayment (CR) instead. But bear in mind that you can opt for advance payment if you wish.
As explained above, when an extra payment is more than RM1,000, it will be treated by default as capital repayment unless you opt for the advance payment option.
CR is similar to AP, they both reduce the principle of your outstanding loan. But the features are the opposite:
- If you are unable to pay an instalment in the future, CR will not be used to offset the instalment.
- In case of an emergency, you have the flexibility to withdraw the CR. The process is simple, and a small fee will be charged.
- Extra payments must be more than RM1,000 to be treated as a capital repayment.
A mortgage is still the cheapest loan in terms of the lowest interest charges to the borrower.
This article first appeared in kclau.com
KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.