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?
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{ 22 comments… read them below or add one }
i’m practising method 2 & 3, but for the method 1, i was bonded for the first 5 yrs of my financing period…i agreed that the package for financing nowadays is really much more atrractive then what i can get 3 yrs ago…
I just refinanced mine last year. This year my home loan rate will BLR + 0%, which is pretty high. It still save me money if I refinance now and pay the penalty of early settlement. It even increases my cash flow.
Very good post here. KC, i can see you use some very pretty photo post, what software did you use? I’m looking for an easy screen save and auto touch up software.
By the way, the google page ranking will be update very soon. Your blog is really getting better and better everyday, it’s should rank higher:)
Ken, I’ve been learning a lot from you at hoobin.com
The softwares I use:
1. Faststone capture v.5.3 (for version above 5.3, it had turned into a shareware cost about US$20. So make sure you use v5.3 which is a freeware) I use this software to capture on screen images
2. Polaroize at rails2u.com - which made your photo tilted a bit and looks like a real photo. It is a free online ware.
Have fun!
this is what i”m looking for, faststone. I check it out, thanks.
This is what i”m looking for. I check it out, thanks KC.
dear kc, i am very impressed with your website. i would like to get your opinion on reducing of housing loan using the EPF fund. is it advisable since we have paid mrta for the loan tenure. don’t you think that it would effect savings for our beneficiary in case of earlier death?
@Ros,
Thanks! Actually, it depends on your personal value & purpose, whether you should withdraw EPF fund to reduce home loan.
In your elaboration, it doesn’t really affect the assets that will be inherited by your beneficiaries. It is because the MRTA still pays the compensation according to the insurance schedule (which is reducing over time). MRTA compensation is not tied to the outstanding home loan at that time. For instance, a person who only owe the bank RM60k, while the MRTA claimable upon death at that time is RM100k, the excess of RM40k will be given to the client’s beneficiaries according to his/her Will.
It is advisable to use EPF money to reduce home loan when the home loan interest rate is higher than the dividend rate of EPF. At present, homeloan rate is about 4.5-7%, depends on your package and loan amount. Normally, home loan rate will be slightly higher than EPF dividend.
Personally, I would use EPF money to reduce home loan. It lets me have more “control” over the money I withdraw from EPF. (note: I don’t have an EPF account, my wife does).
KC, do you know why OCBC offers both Advance Payment (AP) and Capital Repayment (CR), since almost all the benefits (i.e.,except withdrawal) of CR are also offered by AP, and it’s more flexible with AP ? What’s the use of having CR then ?
One more question: is there a maximum amount one can pay as AP and/or CR either per year or the entire tenure ?
I think it is just feature wise that they want to give more control and options for customers.
Personally, I prefer those linked account where your home loan is linked to a current account. It allows me to withdraw and transfer anytime.
I don’t need more options. I just need flexibility.
KC,
Do you know if there is any maximum limit one can pay as AP and/or CR either per year or the entire tenure ?
hey kc… impressive site.. need your advice. am earning less than rm 4000 a month and seeking a home loan which offer the best interest rate inclusive of MRTA and legal fees. What are the lawyer charges from the banks and do i have to have my own lawyer? appreciate the help…
Hi Timothy,
Personally, I would choose the zero moving cost package, where the bank will absorb all legal fees. That saves a lot of trouble and require lower upfront fees.
Normally, bank will charge slightly higher interest rate.
There are some simple strategies you can apply to get a better package:
1. Apply home loan from at least 3 banks - my personal favourite : HSBC, Public Bank, OCBC
2. If all offer about the same, choose the oversea bank (better service and more efficient process)
Look at this forum thread to see the latest competitive package:
http://forum.kclau.com/home-loan-or-mortgage-f17/what-s-the-home-loan-package-available-now-t54.html
Hey KC….. need a professional advise. This is my situation: I want to purchase a completed Condo, freehold property in KL rm 190K and do not know where to start as to getting housing loan. Am 39 years old. Earning rm 3500. Hoping to take either 15 or 20 years loan. I might have extra $$$ in future, so can pay extra into my loan payment. Really appreciate the help…
HI Laprug,
You should meet at least 3 bankers from different bank before making up your mind.
Learn about their bank’s offers.
Here is a post to guide you:
http://kclau.com/wealth-management/question-you-should-ask-before-you-sign-the-home-loan-offer-letter/
You can also check relevant info on this page under “Mortgage” category
Hi,
Need an advice. Let say I’m refinancing my house loan with another bank. Will I get back some MRTA premium that I’ve paid for my current loan. I’ve been servicing my loan for 4 years plus.
Hello, I am glad you brought up this topic. From what I gather, we have to careful when dealing with the banks. We have to specifically write down what we want them (the banks) to do with the lump sum monies that we deposit. Most banks will put it under AP, which is useless in terms of mortgage reduction.
We should look toward capital repayment.. some call it prepayments? The terminology is confusing. Perhaps KCLau can enlighten us here. Thanks.
There is another variation to Option 2 but it is only useful if your loan is a flexi type with linked account and daily rest calculation. Best time to use this strategy is when the loan interest is higher than EPF dividend
The strategy is do a housing loan monthly instalment withdrawal from EPF Account 2 and instructs EPF to deposit the monthly withdrawal into the linked account.
It helps to reduce the loan outstanding amount and interest, as well as shorten the loan tenure. Best of all you can “keep” your EPF money for your future investment in the linked account. Linked account allows you to withdraw anytime but it will defeat the original purpose if you do it before the loan is completely settled.
Some may argue that the money should be used to invest in investment vehicle that generates higher return than the loan interest. I agree with that argument provided that the return is guaranteed. Let me know if you can find any investment that gurantee the return.
Just my 2 cents idea. Thanks.
@ JC,
Thanks for your insights.
Only if a person knows what he/she is doing with the money that can generate better return than settling debt, it will be a good form of leverage.
@ Rob,
As you said, different banks has different terminology.
Talk to the banker to be certain.
And thanks for bringing this up.
@ Hilal,
Some banks will automatically cancel the MRTA policy assignment and let you nominate or use it for the other bank.
Some let you surrender the policy and get back the surrender value (of course not much).