Paying Off Your Home Loan Early: Yay or Nay?
If you have the financial capability to do so, you can actually save on tens of thousands of Ringgit! Read on to find out how different loan tenures affect the total amount you need to pay at the end of the term.
For most of us, homeownership is one of the biggest dreams. However, those who have gone through the whole process of purchasing residential property will understand it's not as easy as shopping at the mall!
Before you can even start to feel the excitement of buying a house, you have to go through the tiring process of reviewing, researching, and choosing the best housing loan which suits your requirements.
But even that isn't as straightforward as just walking into a bank and filling in some paperwork!
According to Bank Negara Malaysia (BNM), household loan approvals for Q2 2020 has dropped by 56.8%, with a value of RM24.8 billion, compared to RM57.4 billion in Q2 2019.
BNM says that the total applications for housing loans between January and March 2020 was at RM44.8 billion, during which the banks approved RM32 billion of home financing to about 75,000 borrowers. From this, 41% consisted of first-time homebuyers:
The moderation in approval rate is said to be reflecting the continued housing unaffordability issue, arising from the mismatch between supply and demand of properties.
High debt, existing financial obligations, poor credit history, and insufficient documentation are just some of the more common reasons for rejection of housing loan applications.
What If I Have A Home Loan, But Want To Pay It Off Early?
Although you may have been successfully approved for a home loan (congratulations!), there's still more for you to carefully consider.
But what else do I need to worry about? Well, you have to plan your finances on a daily, monthly and yearly basis in order to keep up with your repayments!
Once you've made the decision to take the obligation of a home loan, you have to bear the financial burden for quite a long time, depending on your loan tenure.
The total cost of a home loan is not just the actual value of the home, it also includes the interest you pay on the loan itself.
For example, if you take out a 30-year fixed loan, you'll have to send a repayment amount (which covers BOTH your principal and interest) to your borrower for that amount of time – unless you decide to pay it off earlier.
One of the common questions that property owners have, is whether they should pay off their loan earlier when they have the financial resources to do so.
Ending the home loan early (if you can afford it), could be an advantage for you, especially when you are nearing retirement. Here are just some of the more common reasons for choosing to do so:
- Paying off your home loan early can give you peace of mind, and could free up some cash for travelling, retirement, or other long-term plans.
- Being debt-free, presuming that there are no other loans served, may protect you from losing your home if you run into financial difficulties.
- Depending on the type of tenure, the interest that will be potentially paid for a full-term loan might be about 30% to 50% of the house price that you purchased.
To put it simply: If you have the financial capability to do so, in the long run, you could actually be saving a whole lot of money!
According to Dr Ernest Cheong of PTL Chartered Surveyors, the obvious advantage to pay off your housing loan early is that a borrower can save on the payment of interest.
“Basically, when borrowers pay off their 30-year housing loan, they would have paid a total amount that's triple the purchase price, on the basis of a 90% housing loan and that the instalment has been paid on time every month,” he said.
Cheong went on to elaborate that instead of paying triple the original purchase price, owners may only have to pay double if they choose to pay off within 15 years, instead of 30 years.
Paying off the home loan is a dream for many homeowners. If this goal is within reach for you and your family, it might be a smart move to pay off your loan balance soonest possible.
Not only will it free up extra money every month, but it provides added financial security during a housing crisis, allows you to save more, and may even give you the chance to fulfil other dreams that need extra financial backing.
However, at the end of the day, your financial health and life circumstances will be the main factors that will determine whether paying off your home loan early is beneficial or detrimental for you.
This article was contributed by PropertyGuru.