Mortgage Loan: Bi-Weekly Payment REALLY Save Your Money?

One of the hot topic last month concerning a lot of mortgage loan borrower when there was an article (by other) circulated describing how two (2) simple move could save you a lot of interest. As usual, approached by colleagues, friends, relatives, Facebook friends & etc. “How could this possible?”, “Is this true?”. As I’ve verbally explained to some and this article was meant for all. Sorry for the delay.

BiWeekly

It depends! If you are changing to Bi-Weekly mode if there’s this option (with Malaysia’s Bank), and you are making the payment according to the instalment calculated based on bi-weekly payment, you saved “peanuts”.

In order for what mentioned in the previous article to work, you need to do as what the article suggested, you pay Bi-Weekly by dividing your monthly instalment into half and pay every 2 weeks. This sounds true as one month consists of 4 weeks, but one year consist of 52 weeks which will be equivalent to 13 months. Logically this will definitely shorten your loan in term of years as you make extra payment each year. After 12 years, you have made payment for a year extra. As describe in my just previous post, understand the meaning of Daily Rest, each early or extra payment you make will definitely save you interest.

Link to my previous post : https://ethanetteh.wordpress.com/2015/05/07/understand-your-mortgage-loan-save-thousands-of-ringgit/

Secondly, you should do the bi-weekly payment correctly. If your instalment due in 1st of July and the instalment amount is RM 1,500.00, Please do not divide the instalment into half and make the payment on RM 750.00 with the balance being paid on 15th of July. If you are doing this, not only Bi-Weekly won’t save you interest but will in fact increase the amount of interest you are paying. The article actually requested you to pay your RM 750 on 15th of June.

For me, just take note of three important points here. First, most of us make instalment every month because the income basically also coming in every month, be it salary or even rental. It makes more sense to manage your instalment that way as well.

Secondly, I agree with the extra payment made each instalment in order to save on interest as this really works. (kindly refer to example in the previous post).

Thirdly, kindly utilise the Flexi-Loan and Semi-Flexi Loan account that you have applied for. Many insisted on Full Flexi-Loan but later to be found out never utilising it but paying the monthly maintenance fee. Whatever extra money placed in this Flexi-Loan account has indeed assisted to save on interest.

Any doubts? Email to ask@ethanteh.com

We have a working MS Excel Spreadsheet that could simulate effect of extra payment. Kindly drop me email if you are interested.

For convenience of all, MS Excel file is attached. : Amortization Complete Worksheet V2

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Understand YOUR Mortgage Loan & Save thousands of Ringgit !

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. 2015-05 Amortization 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:

  1. 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?

2.  Amortization

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. Summary TableYou would have observed that there’s a Extra Payment Box where RM 100 was added every month

Extra Payment

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.

Feel free to contact us at : ask@ethanteh.com