Investors with 30 to 35 years mortgages feel like they will never be without the burden of debt.
Fortunately, there are some good ways to clear your mortgage early and save more on interest payments.
Even better, not all methods require spending a lot of extra money.
But before that, consider your options carefully. If you have extra cash to spend on your mortgage, it may generate more value elsewhere.
Here’s what you should know.
Why Pay Off Your Mortgage Early?
Few people keep a 30 or 35 years loan for its full term. In fact, investors stay put for just 13 years on average — and their loans might have an even shorter lifespan if they refinance at some point.
Investors who plan to sell their properties or refinance soon usually aren’t concerned about paying off their mortgage early.
But what about investors who stay put for the long haul? Those 30 or 35 years of interest payments can start to feel like a burden, especially if there’s no tenant renting the space.
You may find yourself wondering how to pay your mortgage off faster so you can live debt-free and have full ownership of your properties.
Here are four strategies you can use to meet those goals.
4 Ways To Pay Off Your Mortgage Early
1. Refinance to a shorter term
The 30 or 35 years loan is most popular, but lenders offer shorter loan terms too. A 15-year loan is a common alternative, and many lenders also offer 10-, 20-, and 25-year loans.
What is the benefit of refinance? Repayment periods are shorter and have less interest over the life of the loan, but higher monthly payments.
Let’s compare a 20-year term to a 30-year term.
For instance, let’s say you are financing a RM 250,000 loan on a 30-year term at 3.75%. Your principal and interest payments would be about RM 1,150 per month
Using the same loan amount (RM 250,000), but with a 20-year term at 3.625%, your monthly payment would be RM 1,450.
You need to pay RM 300 more per month, but you would be mortgage-free a decade sooner. You see the difference? And the best part? The savings in interest on that 20-year mortgage would be over RM 65,000 if you kept the loan until it was paid off.
2. Make extra payments
Secondly, to pay off your home loan faster is to simply pay extra when you are able.
Some types of mortgages (semi-flexi or full-flexi loans) allow you to pay extra (more than your stated monthly installment), where you can reduce the principal amount at a faster rate.
3. Make extra payments towards principal
You can pay extra money or make a larger, lump sum payment (e.g. RM 50,000) on your principal each year — but you need to understand the penalty period.
Most of the investors may pay extra on their loan’s principal when they get an income tax refund. Extra principal payments can have a big impact.
Paying off your mortgage early lets you use the money you would have paid each month for other purposes, like investing.
4) EPF withdrawal (only applied to residential properties)
You can withdraw from your Employees Provident Fund (EPF) Account 2 to reduce or clear your loan’s balance. Some of the requirements include:
Below 55 years old
You have at least RM500 in EPF Account 2
Bought or built first or second residential home*
*Residential home according to EPF – bungalow, terrace house, semi-detached, apartment, condominium, studio apartment, service apartment, townhouse, SOHO, or a shop lot with a residential unit in Malaysia.
Think First Before Paying Off Your Property Mortgage
1) Does paying more every month exhaust your savings?
Before you make the move, make sure you have funds for unexpected expenses, unemployment, medical emergencies, or challenging periods such as the recent pandemic. This emergency fund should be able to cover at least 3 to 6 months of living expenses.
2) Do you have other high-interest debts?
If you have debts with higher interest rates, such as credit cards or other loans, you could look into paying off those first as this will save you more money.
3) Is there a lock-in period?
Please read and check the terms and conditions of the loan agreement carefully, and if you have any questions or doubt, engage with the bank for this. There’s usually a lock-in period, where you would have to pay a penalty for settling loans.
There could also be penalties for clearing your loan even if it has passed the lock-in period.
Non-zero moving cost/finance moving cost package: Lock-in period is usually 3 years
Zero moving cost package: Lock-in is usually 5 years
Find out more and learn everything you should know about Invest Real Estate Malaysia website. If you have inquiries, please do not hesitate to chat with us, click the button below to reach us!
Comments