{"id":63208,"date":"2024-05-07T15:24:44","date_gmt":"2024-05-07T07:24:44","guid":{"rendered":"https:\/\/www.imoney.my\/articles\/?p=63208"},"modified":"2026-03-17T18:32:10","modified_gmt":"2026-03-17T10:32:10","slug":"pay-home-loan-early-save-interest","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/pay-home-loan-early-save-interest","title":{"rendered":"A Good Home Loan Repayment Strategy Can Save You Thousands In Interest"},"content":{"rendered":"

Owning a home is one of the major life goals of most people. However, reaching that goal is often difficult and unrealistic if only relying on one’s salary. This is why most will choose to apply for a home loan to help pay for their home.\u00a0<\/span><\/p>\n

If you delve deep into the specifics, a home loan can be quite complex and difficult to understand. However, the most important thing to know is that you will be paying your lender a monthly fee plus interest for quite a long while. <\/span><\/p>\n

Considering how long these repayment terms tend to be, you will likely be racking up thousands of Ringgit worth of interest. Wouldn\u2019t it be nice if you did not have to pay up all that extra cash?<\/span><\/p>\n

<\/span>Understanding your home loan interest charges<\/span><\/h2>\n

Fortunately, there is a way to do so. Though admittedly, it is not an easy path to tread. However, if you have the will and the funds, a well thought out repayment plan will help you pay off your home loan early, thus saving you from all that extra interest costs.<\/span><\/p>\n

Calculating your home loan interest rate<\/h3>\n

The first step is to understand the amount of interest you are paying for your home loan. Let’s take the following as an example:<\/span><\/p>\n

Loan Amount:<\/b> RM200,000<\/span>
\nInterest Rate:<\/b> 4.2% per year<\/span>
\nLoan Period:<\/b> 30 years<\/span><\/p>\n

The above is an example of a home loan, its yearly interest rate, and the loan repayment period. The interest on all home loans in Malaysia is calculated monthly. As such, the 4.2% yearly interest rate is equivalent to a monthly interest rate of 0.35% (4.2% divided by 12).<\/span><\/p>\n

When it comes to making your first month\u2019s loan repayment, applying the monthly rate of 0.35% to the principal loan amount of RM200,000 gives you an interest charge of RM700 for the first month (0.35\/100 multiplied by 200,000).<\/span><\/p>\n

How the monthly home loan repayment amount is calculated<\/h3>\n

Your monthly repayment amount will generally remain the same. The only time that may change is if there is a change in the base lending rate (BLR), which is a reference interest rate used by banks to decide how much to charge for various products they offer. On the other hand, you will be paying slightly less interest with each subsequent month. For example:<\/span><\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t
<\/td>Loan balance<\/strong><\/th>Monthly repayment<\/strong><\/th>Interest paid<\/strong><\/th>Principal paid<\/strong><\/th>\n<\/tr>\n<\/thead>\n
1st month<\/strong><\/td>200,000<\/td>978.03<\/td>700<\/td>278.03<\/td>\n<\/tr>\n
2nd month<\/strong><\/td>199,721.97<\/td>978.04<\/td>699.03<\/td>279.01<\/td>\n<\/tr>\n
3rd month<\/strong><\/td>199,442.96<\/td>978.03<\/td>698.05<\/td>279.98<\/td>\n<\/tr>\n
4th month<\/strong><\/td>199,162.97<\/td>978.03<\/td>697.07<\/td>280.96<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

The above table is what banks call an \u201camortised loan.\u201d It is somewhat beneficial for the borrower as the principal balance decreases with each payment. The interest charged on the remaining balance also reduces. This means that borrowers can save money in the long run compared to loans with flat interest rates or front-loaded interest payments.<\/span><\/p>\n

<\/span>Reduce interest charges by paying off loans early<\/span><\/h2>\n

Paying off your home loan early to reduce interest rates is not a good nor bad idea. Depending on your circumstances, it could be either. However, if you have the means to do so, paying off your home loans early can save you quite a bit of cash. Also, you will need to make sure that the loan you currently have does not penalise you for paying your loan early. With that in mind, here are a few ways you can pay off your home loan early:<\/span><\/p>\n

Refinancing to a shorter-term loan<\/h3>\n

Refinancing is a method of replacing your current home loan with a new one. When you refinance, you can switch to another home loan with a shorter loan tenure. Shorter loan tenures will also mean substantially less interest, depending on how much shorter it is. The difference between a 25-year tenure and a 30-year tenure can be massive.\u00a0<\/span><\/p>\n

However, before you refinance to a shorter loan tenure, make sure that you can handle the increase in monthly payments. Remember, shorter tenures mean less interest, but also less time to repay all your debts.\u00a0<\/span><\/p>\n

To illustrate, let\u2019s take the loan amount and interest from the example above:<\/span><\/p>\n

\n\n\n\n\t\n\n\t\n\t
Loan period<\/strong><\/th>Loan Amount at 4.2% interest rate<\/strong><\/th>Monthly repayment<\/strong><\/th>Total interest paid<\/strong><\/th>\n<\/tr>\n<\/thead>\n
30 years<\/td>RM200,000<\/td>RM978.03<\/td>RM152,092.37<\/td>\n<\/tr>\n
20 years<\/td>RM200,000<\/td>RM1233.14<\/td>RM95,953.95<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
\nSource<\/strong>: <\/span>home loan calculator<\/span><\/a><\/p>\n

So, to lower the loan period to 20 years, you would be paying around RM1233.14 monthly instead of RM978.03. But you will save more than RM56,000 in interest payments.\u00a0<\/span><\/p>\n

Imagine, if your home loan is over RM500,000, the amount you save in interest payments could reach over RM100,000!<\/span><\/p>\n

Make small, recurring repayments<\/h3>\n

What if you take your annual bonus to pay down your mortgage instead of spending or saving it? If you make this small extra payment every year, you will eventually be able to pay off your mortgage earlier than you might expect. Let\u2019s assume that you earn around RM5,000 a year as your bonus. If we take the previous examples we have used, it would be akin to paying off 5 extra months\u2019 worth of debt every year. This can save you thousands in interest.<\/span><\/p>\n

Make large capital repayments<\/h3>\n

Similarly, if you have managed to amass a large amount of savings that you want to use to pay off your mortgage, single huge payments can also reduce your interest charges by a large amount.<\/span><\/p>\n

<\/span>When to not pay off your home loan early<\/span><\/h2>\n

Although having to pay less interest on your home loan is a compelling prospect, here are a few situations where paying off your loan early may not be the best idea:<\/span><\/p>\n