During 3 years in my financial services industry, one of our major business is in Mortgage/Property loan, one of the important information that we will tell our customer is how the Mortgage Loan repayment schedule work and how is interest being calculated by Bank. Recently my newly joined colleague came to me again regarding a “Advanced Software” that was sold for few thousands Ringgit to help Borrower save their interests. An argument also roused by National House Buyer Association recently regarding interest calculation of Mortgage Loan. I determined to pass this information to as many as possible. Why should we let Bank earn more and why should we let some to take advantage on the lack of information passed to mortgage loan borrower? Two (2) important concept we need to understand about Mortgage Loan in Malaysia:
- Daily Rest
Daily Rest means Interest is calculated daily – a term that sounds simple but how many of us really think seriously about this? It basically means that if you pay your monthly instalment 1 day earlier, will save you 1 day interest of the principal amount. If your loan was RM 500,000-00 at 4.65% a year 1 day interest = 4.65/100 x 500,000-00 x 1/365 = RM 63.70/day. Therefore, if someone show you if you pay one week earlier each month, you will save on your interest, it’s extremely true. But why do you need to pay to being told to do this?
The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.
Quoted from below: Read more: http://www.investopedia.com/terms/a/amortization.asp#ixzz3ZQrVOZOu Follow us: @Investopedia on Twitter
Hence, any extra payment made each instalment will definitely save you interest in long run as more will be paid to principal and will immediately reduce your interest on the next business day.
I’ve done a simple example to explain on how significant extra payment can save you thousands of Ringgit on your mortgage loan.
Scenario: If X is having a mortgage loan of RM 500,000.00 and the repayment period of 30 years. The packaged offered was BR + 0.65% with BR at 4%. We assumed that BR maintained at 4% through out the loan tenure of 30 years. You would have observed that there’s a Extra Payment Box where RM 100 was added every month
We can observe that, we will save RM 38,083.42 and shorten our loan by 2.3 years. Many might doubt about this, but it is really as simple as this. The more you pay extra, the larger the amount you can save.
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