Do you know that a 0.2% lower rate means interest saving circa RM 42,000 for a 1/2 mil, 4.45%, 30 y duration mortgage, assuming no early settlement or additional principal repayment, other than maintaining the original monthly repayment amount?
That’s quite a mouthful, so let me explain.
This is my mortgage, it was 4.45%, now it is 4.25% yay!
If you are paying RM 2,518, make sure you maintain this monthly repayment even though with a lower interest rate (RM 2,459 under 4.25% rate). The “extra” RM 59 you are paying now should* go towards reducing your principal portion.
Sikit-sikit lama lama jadi bukit.
That ‘bukit’ is the RM 42k I mentioned earlier.
The loan calculators you obtained online (like iMoney or Loanstreet) will tell you the difference in total interest paid comes to about RM 22k instead of RM 42k.
That is because the tools don’t have a feature to factor in the extra RM 59/month principal repayment.
As independent financial advisers, we have to cater for practical scenarios like this. That is the difference between DIY financial planning vs adviser-assisted financial planning.
The fact is – it is not easy to look at this objectively because:
1) You are too busy at work/business
2) You are using a fully flexi account therefore all transactions jumbled up
3) You have random principal reduction payments into the loan account
FYI, for clients under our retainer advisory, we dissect their loan statements and give them advice on this aspect when BNM changes interest rate. This is the money optimization concept we should all care about.
Question is – how much interest can you save, going forward? If you have a few properties, total interest savings can be up to hundreds of thousands…no kidding
*I mentioned ‘should’ because some banks are cunning. Why? When interest rate is down, you might be happy needing pay less monthly, but don’t be happy because banks aren’t the losing one here. Because you end up NOT saving the interest you should be able to save. RM 59 is a small amount, but RM 42k is a huge amount. If bank can earn RM 42k from 1 customer, just imagine how much they can earn doing nothing from 100,000 customers. And you think financial advisory fees are expensive, just think about the RM 42k you are losing slowly but surely.
On the contrary, if interest rate is up, banks don’t ask you to pay more, so you are happy – but you are the fool, because you end up paying the loan longer, which still means more interest paid to bank.