Should I Opt for 6-month Moratorium Repayment for my Home Loan?

Summary

In general, it is only worthwhile to take up the 6-month Moratorium Repayment if your loan interest rate is lower than inflation rate. (If you are investor, it is to compare the loan interest rate with your rate of return of your investment.)

If we believe the inflation rates of Malaysia have been and will be hovering around 4.5%, where most of the home loan interest rates in the market are lower than this rate, then yes, we should opt for the 6-month moratorium repayment scheme.

Explanation

The impact of the 6-month moratorium is directly on our monthly cash flow. With the moratorium, we have extra cash for the next 6 months. We will pay back these extra cash with interest for the rest of the loan tenure, either by increasing the installment amount or extending the loan tenure or combination of both.

The moratorium changes our monthly cash flow for long term. We have extra cash now, but we will pay back MORE than this amount in later years due to compounding interest. However, we also know value of money get smaller over time due to inflation. For example, RM1,000 cash today can buy double of grocery goods than the same amount could buy 15 years later, based on our inflation rate of 4.5%.

Therefore the tussle of forces are between
a. the interest rate that make the loan amount not paid (due to moratorium) compound to the future, and
b. the inflation rate that makes the purchasing power of the future money smaller

Example

Let us consider a conventional home loan of RM500,000 at interest rate of 4.25% with 30-year repayment tenure and RM2,460 monthly installment. The total deferred cash repayment for the next 6 months would amount to RM14,760.

By keeping the same installment amount and extending the loan tenure, extra total loan repayment (as compare to original repayment schedule) would be about RM39,440.

Many would think, wow, this an extra interest payable of RM39,440 is huge. But we have to remember, we get the cash RM14,760 now. The repayment of RM14,760 plus the extra compounded interest of RM39,440 only happen in 30 years later being the last 22 installments of the loan.

So how much is this RM54,200 of 30 years later worth today?

• at inflation rate of 5.0%, it worth RM12,540 of money today (the repayment cost lower than the extra cash RM14,760 you get from the moratorium)
• at inflation rate of 3.0%, it worth RM22,329 of money today (the repayment cost higher than the extra cash RM14,760 you get from the moratorium)

So the decision depends on the interest rate of the loan and the expected inflation rate of the future.

See the spreadsheet with 6 repayment variations.

Being Investor

The same principle applies for investors.

Is the loan interest rate lower than your expected ROI if you use the extra cash to invest in dividend stocks? If yes, take the moratorium.

You can use the cash saved from 6 months moratorium to buy shares with higher dividend yield at 6% annual yield.

Other Types of Loans

There is a good article at Ringgit Plus  recommending decision for different kinds of loans. While I think their recommendation on home loan may not be entirely correct, the other parts of the article are useful.

Housing Loan Calculator and Planner

This is a powerful housing loan planner that allows you to calculate not just the normal fixed term loan but also to calculate Flexi Housing Loan. Among others, you can see how much interest you save or how much faster the repayment period when you make early repayment.


For normal fixed term home loan, you just need to fill up the grey cells of E5 to E9 in the sheet.

Enter the loan value in the grey cells.

Flexi Home Loan allows you to pay more than your scheduled payments to reduce your loan balance and interest cost. You are allowed to withdraw this extra payments, as long as total withdrawal is within the loan limit, when you need money for something else. The graph (from the Housing Loan Planner) below illustrates just that.

If you are using Flex Home Loan, you can pay extra to reduce loan balance (and save interest) and withdrew the extra amount when you need money for something else. This planner can help you to calculate.

This planner helps you to calculate the total interest expense, number of instalments, total savings of interest expense due to early repayment, schedule payments, etc.

For Flexi Home Loan, beside the above, you can enter your planned early repayment and subsequent withdrawals (if any).

The table below is an example:
The transactions below are reflected in the table below under "Extra Payment" column.

1. Make $20,000 extra payment to reduce the loan in Feb 2019 after receiving year end bonus
2. Skip May 2019 and June 2019's installments
3. Withdraw $10,000 in Oct 2019, from the extra payment made earlier, to pay for deposit to buy a rental property
4. Make $20,000 extra payment to reduce the loan in Feb 2020 after receiving year end bonus

Look at the "Extra Payment" column.

You can download the FPM Housing Loan Planner Excel file here.

Infographic on "A Guide To Home Loan Refinancing"

It took me a while to finally find time to upload this informative infographic.

This infographic, from iMoney, (with their permission to display) provides a complete and concise information on Refinancing Home Loan:

• Benefits and reasons of refinancing your home loan
• Key considerations before you make a choice
• How to go about to refinance your home loan

As I wrote in my previous post "Reduce Your Home Loan Interest Rate", there is definitely a chance for big saving if your current housing loan was obtained earlier than 2009. Many people are still stuck with pre-2009 high interest rate housing loan. Read this for strategy to reduce your interest rate.

However, once you have decided to go ahead with refinancing, this infographic is useful. What are the outcomes you want in refinancing your home loan?

• Lower installment amount?
• Shorter repayment period?
• Free up cash by increasing your loan amount as the value of the property had increased?

The infographic illustrates how you can reduce your loan installment amount and save interest expenses. There are some good advises in the section "How do you go about in refinancing your home loan?" on pitfalls to avoid and steps to be taken. You may find the original inforgraphic on refinancing home loan here.

Courtesy of: iMoney.my

More resources:

• Housing loans comparison websites
• Download a home loan planner
• Reduce your existing home loan's interest rate
• Should we repay home loan (and not property loan for rental property) quickly?

Compare and calculate home loan offers

If you are looking for a website that provides comparison of home loans offered by different banks, you may find these two websites useful.

iMoney.my 

This Islamic home loan comparison and sourcing web tool is simple, just
1. Enter the amount you want to borrow, and
2. Enter the tenure of the loan (year)

And you will be able to see a list of banks with essential features of the loans offered, i.e. interest rate, calculated monthly repayment, total interest (profit) paid for the entire tenure of loan and lock-in period. You can click on "Apply Now" button and fill up a simple application form through the website for someone to contact you on your selected home loan.

I like its simplicity. Many users will find that it is easy to use.

Beside home loan comparison (currently focus on Islamic loan only), iMoney has many good financial articles and comparison tools of various financial products, i.e. fixed deposits, credit card, etc.

Loanstreet.com.my

Loanstreet is a website focuses on property loan. Its property loan comparison and sourcing web tool requires users to provide a bit more details, but it also provides more information. Not only you can choose the type of property up front, you can refine the search result with type of rates, i.e. fixed rate or floating rate,  flexi or non-flexi loan, etc.

This is how its loan comparison and sourcing tool works,
1. Enter the type of property, value of property, financing margin and tenure of loan.
2. Refine the result by choosing more options, i.e. type of rates, type of repayment, Islamic or Conventional, Completed or under construction.

The outcome is that you can see a list of bank loans offered by various banks with essential features, i.e. rates, tenure, lock in period, full flexi, etc. You can select offers and click on "Apply Selected Packages" button and fill up a simple application form through the website for someone to contact you on your selected home loan.

I like this tool because it is more delicate in terms of functionality. However, a small group of users with little interest in financial terminology may find it complicated.

It also has many good guides on property loan.

Both websites above are impressive and useful.

Negotiate With Banks

One thing I realised about getting a property loan is that interest rate offered by bank is always negotiable. When you use such comparison tool, you should not feel intimidated by rates listed in the comparison list. You need to contact them to find out more and negotiate if you are interested.

The rate that the bank offers to you usually determined by a few factors:

• Type and locations of property and/ or specific project
• Your credit records kept by Bank Negara Malaysia's Central Credit Reference Information System. (Read more about CCRIS here.)
• Your income level
• Whether there is Mortgage Reducing Term Assurance, MRTA (Read more about MRTA here.)

A good credit history record, high income and a good piece of property that the bank feels comfortable with can help you to reduce your rate by 0.1% - 0.3%.

Other Sources of Home Loan

There are other financial institution that offer home loan, i.e. insurance companies, Malaysia Building Society Berhad (MBSB), KWSP (EPF), Koperasi Loan (a type of personal loan with interest rate lower than housing loan), etc.

As far as I know, home loan offered by insurance companies can be really cheap but with fixed tenure and fixed interest rate. They may not be as flexible (in term of early repayment, advance payment and withdrawal of advance payment) as we need them to be.

Lastly, there is one good article here on avoiding common home loan mistakes.

Other resources:

• Download a home loan planner
• Reduce your existing home loan's interest rate
• Should we repay home loan (and not property loan for rental property) quickly?

Reduce your homeloan interest rate

Homeloan Rates Reduced in 2008, 2009 and 2010

In early 2009, Bank Negara Malaysia ("BNM") reduced the bank interest rate significantly (by 40%) and increased the liquidity of banking system to prepare for the anticipated economy downturn of the world.

I remember Malaysia's homeloan interest rates went down significantly though gradually in the year of 2009. (Meanwhile, prices of house went up gradually and significantly in 2009 to 2011.) It went down to as low as 3.5% - 4.0% (BLR less 2.3%) from previous height of approximately 6.0 - 7.0%. It was a very significant reduction. It cut household's homeloan interest cost, one of the largest expenses of middle class households, by 1/3.

Banks would not informed you or reduced your homeloan interest rate

However, if you had a homeloan earlier than 2009 then, there was a catch: your bank would not offer or inform you of the new reduced homeloan rate. They would continue to charge you based on your original homeloan interest rate that probably hovering between 5.0% - 7.0% (BLR plus 2%).

It surprised me to find out recently that, even until today, some of my friends and colleagues are still carrying these pre-2009 homeloans with high interest rate. What they did not know is that they can reduce the interest rate and instalments.

Method To Reduce Your Homeloan Interest

• Check with other banks their homeloan offer. Get two banks' offers.
• Call your bank to reduce their rate, or else you would switch your homeloan to another bank.
• At this point, your bank would most likely agree to reduce your homeloan interest rate and in return would want to tie you down for at least 3 years.
• You can agree and the rest is just paperwork
• If your bank refuse to reduce your interest rate, then switch to another bank. Some banks even offer free legal fee for switching of loan. Here is an useful infographic on refinancing your housing loan.

Why didn't I write about this earlier?

I used to think such thing is just so straight forward, like "Bank Negara had reduced the interest rate, the banks had a lower homeloan interest rates... and come, let's talk to the bank officer to reduce our rates!!" And sooner or later most people would know and ask their banks to reduce their homeloan rates...and so I thought.

Apparently it is not the case. Many people do not know this even after 4 years since 2009. So I write now. Hope it helps. If you still have an old homeloan, check your interest rate and talk to your bank to reduce it. The saving can be huge.

FPM Home Loan Planner

FPM Home Loan Planner contains a home loan calculator and a home loan repayment planner. (It is an Excel file. DOWNLOAD to your computer to use it. You cannot use the browser version.)

Home Loan Calculator

There are four variables in calculating home loan, i.e. loan amount, interest rate, monthly instalment and loan tenure. The usual home loan calculators found in the internet calculate only the monthly instalment in which users enter loan amount, interest rate and loan tenure. Under certain circumstances, i.e. exploring alternative loan tenure by changing instalment amount, such home loan calculators are cumbersome for use.

In FPM's Home Loan Calculator, users can decide what to calculate by providing data of any three variables.

Home Loan Reapayment Planner

The repayment planner contains amortization schedule and provides flexibility of calculation for staggered release of loan (housing project under development) and early repayment of home loan.

Some banks offer lower interest at the begining of the loan. Interest rate can be changed through out the period of the home loan.



Note 1: You can enter early repayment amount and interest rate in the respective columns.

Download FPM's Home Loan Planner here.

Repaying home loan early?

Among various types of financing, home loan is the cheapest. Why would we want to repay it early? It is cheap financing! The "saving" from the lower monthly installments could be used, for example, for business, renovations, investing, etc.

This is the logic that most people use to convince themselves not to pay down their home loan. "Well, personal loan is more expensive then home loan..." This is the argument.

In fact they are right...only if their assumption of continuous income stands. In other words, the argument is logical only if there is no risk of losing your job!

After the 1997 Asia financial crisis, the financial institution that I worked for went through several major and minor corporate restructurings. I was lucky enough to be one of the survivors. However, going through the process of restructuring was not emotionally easy. I was constantly guessing whether I was in the next list to go and constantly counting my financial commitments, i.e. home loan. No matter how cheap a home loan is, when you have no income to make your repayment you are risking the shelter of your family.

Seeing your colleagues being retrenched at their late thirty or forty was depressing.

Today, after the announcement of merger of the company I am currently working for, I could almost see the looming of business process rationalization. It is still not easy. But this round, I know my family will have roof above our heads.

It is clever to think that home loan is cheap financing for many other activities in life...too clever to realise sometime tomorrow is not totally in our control. The best risk management practice is to pay off your home loan as early as possible.