How to shorten and save on home loan interest and tenure? This is the golden question that all homeowners ask.
This is because the longer the home tenure is, the higher is the compound interest that the bank gets from you.
Thus many homeowners have gone through the extra mile to cut short their tenure period in an attempt to reduce spending on compounded interest.
What is Compound Interest and How It Affects Home Loan
So before we go into reducing loan tenure, let’s go into compound interest to help you get a better understanding of the situation how it impacts your home loan.
What does it mean by compound interest? It is a type of interest that is calculated by multiplying the initial loan balance or principal with the accumulated interest from previous periods.
To make it easier to digest, many people have called it ‘interest on interest’ which is more self-explanatory than compound interest.
So how do you calculate compound interest? Below we have the formula for you!
= [P (1 + i)n] – P
= P [(1 + i)n – 1]
P = principal
i = nominal annual interest rate in percentage terms
n = number of compounding periods
For elaboration let’s say a 4-year loan of RM15,000 with an interest rate of 5% that compounds annually. How much would the interest be? Here is how you calculate them:
=RM15,000 [(1 + 0.05)4 – 1]
= RM10,000 [1.21550625 – 1]
Bear in mind that the amount will not be the same each year. The longer the compounding period, the greater the amount of compound interest. If you’re not sure how to calculate, then go to this compound interest calculator.
With this, the compound interest will continue to grow and be accrued. This is why many home loan borrowers try to cut short their loan tenure.
Is Paying Lump Sum Effective in Reducing Home Loan Interest?
The next question is can you reduce the loan tenure? Well if you’re wondering this then the answer is yes! You can reduce loan tenure!
To put it frankly, there are many ways for you to reduce loan tenure and most people would think the best way would be paying a lump sum.
However, what many people don’t know is that paying a lump sum may not be as cost-effective as they thought.
Every month there are different days in total for instance some months may have 28 days and some months may have 31 days, so when you pay a lump sum, you will pay extra in compound interest as they will calculate based on 31 days.
Thus when you pay a lump sum, you will inevitably pay more than when you pay accurately every month.
Although this may mean only RM100 to RM200 extra, in the long run, this adds up to a big amount.
Can Loan Refinancing Reduce Your Home Loan Interest?
Apart from paying a lump sum, another method that seems to be popular amongst homeowners is loan refinancing in an attempt to get a loan with better terms since the BR has been introduced.
What is BR (Base Rate) and BLR (Base Lending Rate)? Respectively, BR is the interest rate which is determined by the bank’s benchmark cost of funds and Statutory Reserve Requirement (SRR).
It also includes other components such as borrower credit risk, liquidity risk premium, operating costs, profit margin and more.
BLR on the other hand is the previous system used before BR was introduced in 2015. The change occurs to allow banks to determine their own base rate without the intervention of BNM (Bank Negara Malaysia).
Thus enabling banks to offer more competitive and transparent loan packages to their consumers as they can now determine their own interest rates.
How do the BR fluctuations affect you? BR is affected by BNM’s Overnight Policy Rate (OPR) however the difference as compared to BLR is that banks can alter their BR even if there are no changes to the OPR.
So if the OPR is reduced, the base rate will be reduced so as a loan borrower, you will get a lower loan interest rate.
However, that is not always the case. As mentioned above, banks can alter their base rate even if there are no changes to the OPR.
Generally, this means your BR can increase and decrease and it entirely depends on the bank’s BR practice therefore your loan interest will not only be affected by OPR changes but also by the bank’s excess clauses on BR.
The Effective Way Reduce and Shorten Home Loan
So now that you’re here, what’s the most effective way to reduce and shorten your home loan? The best way is to match the bank’s calculation ledger and pay accurately.
By paying accurately every month, you will not only prevent your long loan tenure to be extended but will also prevent yourself from paying excessively in interest rates.
Not sure how to do this on your own? Believe it or not, there is a loan mortgage advisor that is fully equipped with the expertise to help analyse your mortgage and help you overcome burdening interest rates.
If you’re looking for a loan mortgage advisor then FIS Management is your answer. FIS Management comprises a team of professional mortgage consultants that aims to help property owners strategically tackle their mortgages.
Their role is to advise and guide property owners on how they can reduce their loans by paying accurately without having to change their bank or apply for refinancing.
Through FIS Management, you also get to save up to 75% of your money spent on a loan repayment interest as they will be providing you with the house repayment ledger which you can easily follow for optimal saving and repayment.
As their solutions are highly customised to your needs, book a consultation with them first to understand what solutions you require and to analyse your mortgage status.