15 Jul 2007 | Comments | Wealth Management | Comments feed

How to Settle Your Loans Earlier

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I was attending training at Lion Team Advisors on the topic of loan mortgage outsourcing the last Thursday. There is a young beautiful trainer from OCBC bank flew all the way from Kuala Lumpur to give us mortgage training at LTA head quarter. There are some points I got during the training that worth sharing here. There are some ways to actually settle our home loans earlier than the original tenure. I am sure that you are practicing some of them. However, I am going to share with you more in depth here. Basically there are three ways to settle your loan earlier:

1. Refinancing

I covered refinancing in my earlier post. Now is actually a good time to refinance because this is what happened in the recent years:

You will find that the loan packages offered nowadays are better than ever. With the lower interest rate offered for new customer, it might be worth it still if you refinance your existing home loan by paying the early settlement penalty. But before you do so, please seek professional advice to calculate how much you can actually save. If you won’t feel bad bothering me, I always welcome your email asking for help or analysis.

2. Lump sum payments using EPF funds

EPF allows you to withdraw your money from Account II to reduce your housing loan. If you don’t care about reducing your retirement fund receivable from EPF in the future, it might be a wise move to withdraw it to settle some debt.

3. Paying extra

Extra payment means you pay more than the required installment. From the training, I got to know that there are actually two kinds of extra payment acceptable if you are servicing home loan at OCBC bank.

Advance Payment (AP)

Let’s assume your installment is RM1000 per month. If you have extra money, maybe from your mid year bonus or other savings, you pay RM1500 on that particular month. The extra RM500 will be treated as advance payment. It will be used to reduce the principle outstanding loan amount. You will immediately save the interest charged due to the daily rest interest calculation. Let’s say you did this 3 times consecutively so you actually made an extra payment of RM1500 in total. On the next payment due date, you suddenly run out of money because of some emergency. OCBC bank will deduct RM1000 from your extra payment and treat it as your regular installment. So your record is clean. Nothing will be submitted to CCRIS or CTOS. But if you need to withdraw that RM1500 extra for emergency use, that is not allowable.

So I conclude the feature of advance payment as:

• automatically offset due installment if it is not paid on time
• no withdraw facility
• for extra payment of less than RM1000, it will be automatically treated as advance payment

Oh … then what happens if you pay extra more than RM1000. In this case, let’s say you pay RM3000 that month, the extra RM2000 will be treated as Capital Repayment instead. This lead us to the next form of extra payment: Capital Repayment.

Bear in mind that you can actually opt for advance payment instead for the extra RM2000.

Capital Repayment (CR)

As explained above, when extra payment is more than RM1000, 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 part of your outstanding loan. But the features is opposite:

• when you are unable to pay installment in the future, CR won’t be used to offset the installment, unlike the AP
• in case of emergency, you have the flexibility to withdraw the CR. The process is simple, just call OCBC’s customer service center and they will prepare the check or bank in to your account in OCBC. Processing fees is RM10 per withdrawal.
• extra payment must be more than RM1000 to be treated as capital repayment.

Mortgage is still the cheapest loan I know up to date. It is the cheapest in the sense of lowest interest charges to the borrower. What do you think?

« Financial Freedom, is it a dream? | Beware of the Lock-in Period of your Home Loan Offer Letter »

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