Managing your mortgage well

Part of managing the investment that is your home is managing the mortgage that comes with it. Here are ways to maximise cost savings when getting your home loan.

A good mortgage package is integral when investing in a home for the long term as you would want to hold down the lowest interest rates to maximise savings.

Adrian Un: Fixed rates allow you to hedge against future interest-rate hikes

Just as with buying property, shop around for the best rates. Although the first offer may look good, with mortgage packages as competitive as they are today, you may be able to get a better deal. Compare the quotations given by financial institutions and talk to the officers in charge about a counter-offer if their competitors are able to provide better rates. Adrian Un, director of Mortgage Broker Sdn Bhd, says banks would usually consider giving a more attractive deal if the applicants have a good record. "If they come from a good background (for example, working for a multinational company) and have a good credit rating, the banks would usually provide better rates."

What sort of mortgage package should you get? Un and Martin Chow, head of sales and business development at Fiscal Wise Sdn Bhd, give some tips.

Refinance, but be cautious
Since banks are becoming more competitive, refinancing an old home loan may be a smart move. If you had bought your home five years ago, your loan could be as high as BLR + 1%. Today, banks are offering rates as low as BLR ­- 1.6%. Imagine that you had borrowed RM250,000 over 25 years at a rate of 7%. That translates into RM1,770 per month. Say you have whittled down your outstanding loan to RM230,000 after five years. Refinance now at a fixed rate of 6% for the remaining 20 years and this lowers the monthly instalments to RM1,650.

Watch out, though. There is always a potential to get deeper into debt when you refinance. Banks now offer 30-year mortgages even though the borrower may already be 35 years of age. Refinancing a 20-year mortgage to a 30-year one can be tempting because it effectively reduces your monthly payments. But on the whole, you may be worse off, especially if you spend the savings.

Foo: Consider your overall cash flow and risk profile

"A leverage itself is not bad but needs to be managed depending on a person's situation," says financial planner Robert Foo, financial planner and principal consultant of MyFP Services Sdn Bhd. By the time you retire, you should be debt-free, note financial planners.

"A 30-year loan would normally mean that you will still be repaying it when you're retired," says Foo.

Making prepayments
One good way to pay off your mortgage faster is to make payments on the principal. This effectively lowers the total interest amount. You can achieve this by paying extra amounts each month or dumping in a lump sum, such as your year-end bonus.

In a 25-year, RM250,000 loan at an interest rate of 6%, making an extra payment of RM5,000 a year would result in the loan being paid off eight years earlier.

Sure, it sounds good. If the interest rate is at 6%, paying down your loan effectively gives you a 6% return on the funds, fuss-free.

But again, consider your overall cash flow and risk profile, says Foo. "There could be better uses for your money."

By The EDGE MALAYSIA (By Tho Li Ming)