Home loan repayment options in Malaysia
When you repay your loan installments, you are not only paying for the amount that you borrowed but also the interest on the borrowed amount. So it is essential that you know how the bank decides how much interest you owe them.
Interest is calculated in one two ways:
Daily Rest – where interest is calculated on daily basis.
Monthly Rest – where interest is calculated on monthly basis.
The method chosen by the bank depends on the loan package you’ve chosen. The principal sum will be reduced immediately each time the loan installment is made.
However, you can discuss with the financial institution about ways to make your loan payments more flexible, such as:
Graduated payment scheme
Graduated payment schemes are loan repayments that are low at the beginning of the loan tenure (usually 3 years), and gradually increases over time.
This method will allow home buyers to reduce the burden of payment at an early stage so that more money can be used for other purposes. Over time, when the buyer’s income increases, he/she will be able to make bigger repayments. This scheme is useful if you plan to use the fund for other purposes first.
Prepayment simply means making payment earlier than than due date. Some banking institutions offer the flexibility of making prepayments or extra payments. This helps save considerable interest charges on condition that you make prompt monthly repayments.
Partial prepayment of the outstanding loan (principal)
You can shorten the loan tenure by making partial prepayments on the principal of the loan, with surplus funds -savings, annual bonus etc. This effectively reduces interest charges if prepayments are made during the early years of the loan tenure.
However, you need to check whether your loan package allows you to make partial principal repayments and what are the procedures involved. You may want to confirm with your banking institution regarding this.
If your lender does allow it, they usually impose a penalty fee. This is because it would disrupt the banking institution’s cash flow planning. Banks makes money by earning interest on the money they loan to you. The longer they “keep” you, the more money they get. Reducing the tenure is bad for (their) business.
To get the best option in repaying your home loan, all you have to do is ask the person in charge. Tell him/her your situation and ask him to advise you. Don’t be intimidated. You are not asking for the bank’s money, it is actually the other way around.