How to pay your loan off faster

How to pay your loan off faster http://www.mortgagebroker.com.my/12ways.asp 1. Make extra repayments Making extra repayments would reduce the time to pay off the loan and you pay less in interest. The simple logic is that the sooner you pay off your loan, the more money you save in interest payments. The more you pay, the more you save. Time is money! For example, if you take up a loan of RM100,000 at 6.75% for 25 years, your monthly instalments will be about be about RM691. This equates to a total repayment of RM 207,203 over the term of your loan. If you pay the loan out over 15 years rather than 25, your monthly payment will be RM885 per month. But the total amount you will repay over the term of the loan will be only RM159,247 - saving you a whopping RM 47,956! Another way to get ahead of your loan commitments is to make your repayments as if you have a higher rate of interest. Get a loan at the lowest interest rate you can and add 1% or 2% to your repayment amount. So if you have a loan at about 7% and pay it off at 8% or 9%, you'll be paying off your loan quicker and thereby reducing your interest payments. Extra lump sums or regular additional repayments will help you cut many years off the term of your loan. 2. Make more frequent repayments Most banks allow you to repay your loan monthly fortnightly or weekly. By paying your loan fortnightly or weekly (rather than monthly), you get to reduce the term and cost of your loan. How does it work? Split your monthly payment in two and pay every fortnight. You'll hardly feel the difference in terms of your income, but it could save you thousands of ringgit over the term of your loan. The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. And this can make a big difference! Using our example from above, by paying monthly instalments, you will need to repay RM207,203 over the term of your loan. By paying fortnightly, you will save RM 22,602 in interest and 4.4 years off the loan. 3. Start repayments early During the first few years of your loan, it may seem that you are only paying interest and the principal isn't reducing at all. This is one of the unfortunate effects of compound interest. So to avoid this phenomena, you need to get some of the principal repaid early. One of the ways is to commence repayment of the monthly instalments (which include the principal) before they become due. For example, most loans financing an under-construction property require the borrowers to pay interest only during the construction of the property and to commence the monthly instalments upon the completion of the property. This means you only start repayment of the principal only upon the full release of the loan upon the completion of the property. If you start repayment of the monthly instalments (which include the principal) early, you get to reduce the principal early. Indeed for an Islamic loan, if you commence the repayment of the monthly instalments during the construction stage of the property, the bank will waive the “grace period profit” or the interest payable during the construction stage. Another way of starting repayments early is to ask your bank to base your repayments on the “thereafter” interest rates, rather than the introductory or “honeymoon” rates. Most standard variable housing loans provide for a lower repayment during the initial years when the attractive “honeymoon” interest rates are applicable. Ask your bank or mortgage consultant for a flat repayment scheme. 4. Pay all your mortgage costs upfront Some loan packages finance all your mortgage fees and expenses, ie, legal fees, stamp duty, disbursements, valuation fee and Mortgage Reducing Term Assurance. Don’t kid yourself. Such benefits are all added into the loan package concerned, either directly by adding to the amount of the loan or indirectly by charging you higher interest rates or a penalty fee if you do prepay your loan within 5 years. You are better off coming up with cash for your upfront costs. While this can seem a blessing, try to avoid doing this. Consider the following example: Borrower A borrows RM100,000 over 25 years at 6.75%. His upfront costs are RM5,000 but he has enough cash to make sure he can cover these. His total repayment over 25 years will be RM 207,203. Borrower B takes out the same loan but doesn't have enough cash to cover the upfront costs. So he borrows RM105,000, at the same rate. His total repayment over 25 years will be RM217,638. 5. Consolidate your debts One of the best ways of ensuring you pay off your loans quickly is to consolidate all your debts. Determine which of your debts carry higher interest rates and consolidate all of such debts under one housing loan. You take up a new or additional housing loan to settle and pay off your credit cards and personal loans. By doing so, you will cease to be charged interest at 18% or 12% on your credit cards or personal loans respectively. Instead you will be paying interest at the relatively lower housing loan rates. 6. Structure your loans If you have more than one mortgage – one on a residential property and another on a commercial/industrial property, it may make sense for you to take maximum loan on your former property and reduces the loan amount on the latter property. It is a known fact that banks prefer and favour housing loans and therefore offer very low and attractive interest rates for residential properties, as compared with that offered for commercial or industrial properties. Kindly seek your tax consultant’s advice on the tax implications of such a move. 7. Tax planning When you purchase a property for investment, you will want to take a loan which monthly instalments (together with the outgoings of such property, ie service charges, sinking fund, quit rent, assessment, taxes, etc) match the income (ie rentals) of such investment property. From an investor’s point of view, the property is self-financing and over the years, the property will pay off by itself and be free from any debts. As an investor of property, you may want to do some tax planning. All investors will have to pay tax on the “profit” of your investment, ie the surplus of the income over the expenses of the investment, ie, the outgoings of the property and the interest payable for the loan taken to acquire the property. Repayment of principal will not be considered as an expense. During the earlier years of a loan, much of the repayment is toward interest. Accordingly the “higher” interest payments reduce the profit of the investment and therefore the tax payable is lower. However after several years of repayments, as the loan is slowly paid down, more of the repayments will go towards the principal, as opposed to interest. When that happens, the expenses will reduce and the profit of your investment in the property will increase, and so will your taxes. In such an event it may be a good idea to increase the loan (by an additional loan or refinancing) and increase the interest payments and therefore reduces the taxes payable. Another tax saving that you may consider is if you have an investment property which has a loan on it and also a loan on the home you are staying in. You may want to reduce the latter loan and increase the former loan. The simple logic is you are paying tax on the investment property and not on the home you are staying in and therefore by increasing the interest repayment on the loan taken on the investment property would reduce the profit thereof and accordingly taxes payable for the same. 8. Get an all-in-one account An all-in-one account allows you to use your mortgage as your key financial product. This means you have one account into which you can pay all of your income and from which you pay your living expenses as well as making your mortgage repayments. An all-in-one account can make a huge difference to the speed at which you pay off your loan. Because the whole of your income is paid into the account, you are reducing the principal on which interest is charged. Of course every time you withdraw from the account for living expenses, the principal (and therefore interest liability) will increase but careful use of the all-in-one account can save you interest payments and cut short the term of your loan. For example if your loan balance is RM100,000, interest would be charged on a daily basis and charged on that full amount each month. If you have an all-in-one account, you remit all your income and savings, that moneys will off set and reduce the loan balance, upon which interest is charged. Rather than earn interest at the “low” saving or fixed deposit rates (3.2%), that moneys effectively reduce the loan balance and interest payments, thereby “earn” interest at the higher rate applicable to the loan (6.75%). An all-in-one account is also useful when you are able to make additional payments towards the loan. If you are only able to make the equivalent of the minimum repayment on your loan (and not put in any extra) you may be better off with a standard conventional loan, where the interest rate is lower. However, it's not unusual for borrowers using an all-in-one account to cut the term of the loan from 25 years to less than 15. 9. Use your credit cards Credit cards allow you to postpone the payment of your bills free from any interest if payment is made before the due date. You can charge all your bills to your credit cards and keep your money in an all-in-one account longer. Every day that your moneys is in the all-in-one account is another day that interest is calculated on a lower loan balance. As soon as you pay your credit cards’ bills out of your all-in-one account, interest will be charged on the higher loan balance. Take full advantage of the interest free days offered by your credit cards. Don’t forget to pay your credit cards’ bills before the due date thereof. 10. Refinance and save One of the best ways to repay your loan quickly is to refinance your loan to a lower rate but don’t change the amount of repayment. This means you continue to pay as if the interest rate is the higher existing rate. This will allow to pay off more of the principal with each payment and accordingly reduces the time you finish paying off the loan. For example, if you refinance a 25 years loan of RM100,000 from an interest rate of 7.5% (BLR + 0.75%) to 6.75% (BLR +0%) but continue to pay repayment based on the higher rate, you could cut about 3 years 9 months off the term of your loan and as much as RM33,255 in repayments. However make enquiries on what it will cost you to refinance. For example, there may be penalty fees payable on your existing loan and legal fee, stamp duty and valuation fees payable for your new loan. Work it all out and see if it makes financial sense to refinance. 11. Staying Informed Information is your greatest weapon. By staying informed about what is going on in the housing loan market, you might be able to stay a step or two ahead of your lender. And if you can stay one step ahead, you are already on your way to paying of your mortgage faster. With any long term commitment, there is always a tendency to let your loan roll along, pay your monthly instalments as and when they fall due and don’t think about it. This attitude can be a big mistake. Keep yourself abreast of what is developing in the mortgage industry and you might find that there are opportunities to put yourself ahead. Interest rates change and new products may allow you to seize an opportunity or negotiate a better deal. Stay informed and stay ahead of the game. 12. Get the ideal loan to suit your needs Getting the right loan the first time is the biggest consideration when it comes to saving money. You need to ensure that your loan is best suited to your circumstances. Shopping for an ideal loan may be difficult but it may be worth your while to invest some time to do some research. Make sure you speak to the bankers and mortgage consultants and search for information through the internet for the available loan packages in the market. Choosing a loan is about knowing what you want. Make a list of all the features of the loan packages that are important to you and rank them according to importance. And you will be able to filter through the arrays of loan packages and through the process of elimination, you'll see the one that's right for you. Remember, different loans have different purposes so you need to match a loan to your need. Ditching the features you don't need can reduce the interest rate of your loan.