Dream home or dead hole 
If you want to find out how to reduce your mortgage interest effectively at a shorter time. Read on.
Sometimes, we pay more than we should. Are we throwing away thousands of our money unknowingly?
Good news! You don’t have to sacrifice too much, putting back thousands of cash back to your pocket. For instance, refinancing is one of the many strategies applied to lessen burden. You may be paying lower monthly cost but it will actually take you a longer period to get rid of your mortgage debt and this will result in more interest being paid eventually.
The key to doing things right in dealing with your mortgage debt is to apply the right strategy at the right time. First, you must know the utmost importance of the co-relation factors involving four major key components – Principal, Interest, Tenure and Repayment.
Any changes in either the principal, interest or tenure will affect the repayment amount. When you pay less than the required repayment amount, the tenure will prolong. It happens because less of the payment goes to the principal. The question to ask yourself is, ” Do you save any interest or shorten the payment period if you pay extra, more than the required amount from your hard-earned salary? ” . Remember this guiding principle – nothing will change if none of the four components remain unchanged.
101 ON REPAYMENT
Repayment is made up of two parts : principal and interest. The paid principal will reduce the amount borrowed while interest is paid for the use of the money. Financial institutions may charge interest either on daily rest or monthly rest depending on the package offered.
At the early stage of the amortization schedule, the payment made mostly goes to the interest potion while principal amount less reduced. Over a period of time, the payable amount to the principal is gradually increased while interest decreases. This is the reason why financial institution locks you up for the first 5 years.
Term loan is a common type being offered locally. A facility comes with regular monthly installments. Repayment is fixed for a specific period of time. It consists of the loan amount plus the interest.
What happens to your extra payment depends on which loan package you have committed. The loan agreement is the only legal document that could work for you or against you. Understandably, you can make a choice to which you can exercise your rights.
The following are the different packages as how the lenders manage your extra payment.
EXCESS PAYMENT
FLEXI-LOAN
The concept of flexi-loan is easy in, easy out at any one time. Since the loan is calculated on daily rest, it reduces the interest chargeable overnight. The advantage of flexi-loan is that you are allowed to withdraw the excess payment anytime you need. The truth is that the extra payment is being allocated in your account. You will be given a cheque book or ATM card for your convenience. There are charges applied for the current account. The excess payment in the current account will not reduce any of the interest chargeable unless the borrower used the total amount to make a full statement or to contra off the outstanding balance towards the end of the term.
ADVANCE PAYMENT
You may have paid one lump sum including some extras irregularly on top of your repayment amount, believing that it could reduce the mortgage interest and tenure. But those extra amounts of the payment are allocated in a separate account, called suspense account. It has no relationship with the pre-determined amortization schedule in the banking system. The money in the suspense account will be used to pay the installment in the event that you overlook or are unable to pay. There’s no effect over the original interest and the principal payable ratio. Hence, there is no saving of interest.
PRINCIPAL REDUCTION
Sounds familiar? Quite a popular choice, majority believe it is logical that when we make an effort paying an extra lump sum o our principal amount, the interest will be reduced accordingly. It makes sense. Principal amount has been reduced as said. But the tenure remains the same. Hence, the repayment amount is less. But, if you continue paying the same amount originally despite the repayment amount being reduced, all surplus money will be diverted to suspense account. It can be used to pay for future repayment or off set the outstanding towards the end of the maturity, as stated in the loan agreement.
PARTIAL PREPAYMENT
You can shorten the loan tenure and save on the mortgage interest substancially if partial prepayment is made during early years.Nevertheless, some financial institutions may imposed restriction to the prepay amount or a penalty. The more prominent question is how would you know that your prepayment amount does not end up in suspense account, current account or principal reduction schedule?
