If you’re like most house owners out there, your home is probably being propped up by a hefty mortgage. Banks are clever people and they have built a system where additional payments every month will not help to reduce your loan and interest payments. So, what’s the best way to reduce your mortgage and interest payments?

By prepaying down your mortgage. Read on to understand how it helps you reduce your home loan.

How Prepayments Can Save Mortgage Interest

Prepayments are essentially a lump sum of money that is paid directly into your loan account above the normal monthly installments to offset the principal. When you prepay, your principal amount is reduced and hence, the interest should be reduced correspondingly. Depending on your financial loan terms, you have the option of opting for reduced monthly installments or a reduced tenure as a result of the principal reduction.

Check The Terms Of Your Loan Agreement

However, before you decide to prepay your mortgage, do check your loan agreement to see if there is a clause which prohibits you from making a mortgage prepayment. Most loans will not allow prepayments to be made in the first 5 years of the loan when the interest portion is highest. In some cases, certain loans may not even allow prepayments to be made which works very much against your favor as you have no means of reducing your loan principal amount.

How To Do A Mortgage Prepayment

Before you prepay your loan, ensure that you contact the bank to inform them that you are planning to do a prepayment. Some banks may require at least two to three months notice before the prepayment is made. Be sure to specify that you want the lump sum to be deducted from your loan principal. Without specific instructions, some banks may craftily bank in that amount into your Advanced Payment account instead and you would not have benefitted from the prepayment at all.

Is it wise to prepay your mortgage? Well, it is basically a question of delayed or instant gratification and your personal view on loans. If you believe that the excess money you have now might earn you a better interest than what your mortgage interest rates are, then consider investing it. Otherwise, dumping it into your mortgage will help you be debt-free earlier!

Home loans and mortgages are never easy to understand. Even the monthly statements provided are terribly complicated, however, you should always take some time to understand and analyse your monthly statements to know how your loan is being managed by the bank. Read on to understand more about advanced payments and why they do not help in reducing your principal amounts.

Mortgage Advanced Payments Do Not Reduce Loan Principal or Interest

I always thought that additional payments directly to your loan account, above the amount set by the bank, will automatically go towards reducing your principal and interest payments. However, I recently discovered that the additional payments I was making was actually going towards a “suspense account” held by the bank which they use as a buffer for any late payments.

My principal and interest were not getting reduced at all!

The banks will often tell you that it will reduce your loan tenure over time. However, your loan will only be reduced towards the end of its tenure with the excess money you had paid over the years from the “suspense account”. Unfortunately, the end of the tenure is when the interest is lowest and hence, you would not have saved anything at all.

So, do be careful of advanced payments to your loan account and do not make the mistake of thinking that your principal and interest payments will be reduced.

In yet another move to help the public, the Government has called upon the Association of Banks to cut installment payments for their mortgage owners.

With the reduction, the association said all commercial banks had agreed to cut loan repayment amounts across the board and maintain the original repayment period. However, it said borrowers also had the option of maintaining their monthly instalment amounts and have a shorter repayment period. (source)

It sounds almost too good to be true so should you opt for reducing your loan repayments? Find out below.

Should You Reduce Your Loan Repayments?

This move to reduce housing loan repayments has been made possible only because of the reduction in the Overnight Policy Rate by Bank Negara on Tuesday. However, what will happen when the rate increases in the next few years and you have been making reduced payments on your loan? Your mortgage will naturally increase again with the rise of interest rates resulting in heftier monthly repayments or possibly a prolonged loan period. This is definitely not something you will want to experience as you should be looking at increasing your retirement funds as you move down your career path instead of increasing your liabilities.

Take Advantage of Reduced Interest Rates

If you can still afford it, do check with your bank or mortgage financier how you can maintain your monthly repayments. It works to your advantage as well if you have spare cash as putting in higher monthly repayments when interest rates are low will reduce your principal mortgage faster. Putting in large sums of savings into your loan account will also offset portions of your principal sum to reduce your future interest payments and shortern your loan tenure.

There money saving tips will help you towards your debt free target faster and within a shorter period! Someone once said that banks are always the first to remove the umbrella in times of heavy rain and hence, one should be careful of the umbrella offer in the first place.

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Should you pay off your mortgage loans or invest your money for your retirement? This is a question many often grapple with. Strict financial prudence advises that you should not carry any debt and your personal balance sheet should have minimal liabilities. However, no debt is not necessarily the best situation as you may not be using your available leverage effectively.

So, which should you do the next time you have some available funds? Read below for some suggestions.

Create Emergency Funds

The first thing you should do, if you don’t already have one, is to create an emergency fund. Start with a level that is comfortable for you and you can start small. Just ensure that you continue to keep it growing every month. If you already have one, top it up because you never know when you might needs funds for a rainy day.

Take Advantage of Cheap Debt

The falling interest rates worldwide and the recent downward revision of the Malaysian overnight policy rate to 2% by Bank Negara (source) will likely mean another drop in the Base Lending Rate and cheaper debt. With cheaper debt, interest payments cost less and you might want to leverage on it by investing in property. Otherwise, pay off part of your mortgage but take advantage of this situation to also invest your money instead in higher yielding investments.

Identify High Yield Investments

There are not many good investments at the moment in the current state of economy. However, there are many potential gold nuggets lying around if you can discern them. Undervalued properties or equity are a good buy as they will definitely earn you returns many times over when the market recovers in the next few years.

So in summary, should you pay off your housing loan or invest? Ultimately, it depends on your comfort levels. Those who are uncomfortable with holding debt should pay it off fast, regardless of the investment opportunities out there. However, depending on your age and number of working years, now could be a good time to top up your emergency funds, manage your debt with the cheaper debt available and still ensure you have some cash to build your retirement funds with.

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What a year 2008 has been!

Exactly a year ago, whoever would have thought 2008 could bring with it so much financial turmoil?

Whoever would have thought we would all be ending the year with a quiet pessimistic whimper as the worst financial crisis since the Great Depression in the 1930s continues to pull down the world economies?

Read more for My Smart Money Tip’s 2008 financial wrap-up.

2008 started off relatively well with hints of trouble starting to show towards mid-2008. In Malaysia, inflation started to soar to a 26 year high as oil prices peaked to US$147 a barrel in July and petrol prices shot to RM2.70 a litre. Even the Ringgit was not spared against major currencies and the KLSE took a tumble which made it a ripe time for bargain-hunting investors.

The announcement of the Malaysian 2009 Budget in August brought little cheer to nervous urbans Malaysians who started to notice the first signs of trouble brewing in the US as the sub-prime bubble threatened to burst.

And burst it did in October when the entire US financial system collapsed. The US Government’s massive US$700 billion bailout was originally rejected, causing the US Dow Jones to plunge and investors lost over US$1.2 trillion. The bailout finally went through in time to save the nation’s mortgage giants, Fannie Mae and Freddie Mac; but it was sadly too late for Lehman Brothers, one of the world’s oldest banks, that went absolutely bankrupt in a move that sent shockwaves throughout the world’s financial systems and stock markets as each market came tumbling down like nine pins. The US debt has surpassed US$10.2 trillion and the numbers just keep growing as US and the world battle this crisis which is not only bringing banks to its knees but even 100 year-old retailers such as Woolworths which has been forced to shut down forever after its debts soared.

On the local front, Malaysians seem a little luckier as the full impact of the recession has still not hit with major job cuts. Nevertheless, Malaysians have started cutting back on expenditure while others contemplate reducing their EPF contributions from 11% to 8% under a Government stimulus package for the economy. As the retail sector starts to slow, retailers and restaurants are offering huge discoungs from 65% and 75% food discounts, hypermarket price reductions, freebies and travel promotions.

So what lies ahead for 2009?

Many are anticipating a tough year ahead and have even scaled back on Christmas celebrations and eating out. In these coming pessimistic and uncertain times, look out here for more smart money tips, clever ways to save and to spend wisely. Ultimately, it isn’t about how much you earn but how much you can save in the coming rainy days.

Do have a Happy New Year and count your little blessings as there are still many to be had

Finance companies are in the midst of restructuring car loan repayments to help their customers with heavy financial commitments. So far, 3 banks have been working on this and are set to announce their hire-purchase loan restructuring packages soon. There has been no indication which banks these are or whether the other banks are embarking on a similar exercise but considering the competitive environment the banks operate in, it might be likely that other banks will have no other choice but to do the same.

It will be interesting to see how the restructuring plans will be carried out as we all know that banks aren’t exactly kind and philanthropic. If it involves the stretching out of the loan over a longer period, I’m not sure if that will really help their customers, as it will simply mean paying a higher interest overall.

Watch this space to find out more over the next few days! In the meantime, read the article from The Star after the jump:

PETALING JAYA: Finance companies are resorting to restructuring car loan repayments to help ease the burden of customers with heavy financial commitments.

At least three major banks will announce their hire-purchase loan restructuring plans soon.

A senior manager of a prominent local bank with a substantial volume of hire-purchase customers said that given the current economic scenario, where prices of fuel and food had increased, many customers would be burdened by the high repayment plans that they had signed previously.

Finance companies could not rule out that some customers might find it difficult to service their monthly instalments, he said.

“We expect that for next year there will be more repossession orders given, but it won’t be a drastic increase,” he said, adding that his company issued a monthly average of 2,500 repossession orders.

Most banks and finance companies will try to assist any customer whom they feel could fail to meet their monthly instalments.

The move is expected to bring cheer to thousands of hire-purchase customers, especially those paying high monthly instalments for their car loans.

A Perodua Kelisa owner, Jen Neoh, 29, welcomes an option to restructure her car loan, as it would ease her financial burden.

“I think it’s better to be in debt with a bank, rather than borrowing from friends, family or even loan sharks,” she said.

Neoh, who now pays almost RM400 for her monthly instalments, said she would be comfortable paying about RM200 instead.

A public relations manager in a large bank here said her bank was now very selective with new approvals for hire-purchase loans.

“And we have also started calling customers to help restructure their hire-purchase agreements to help them make ends meet,” she said.

Loan restructuring is commonly done by extending the account holder’s repayment period to lower the monthly instalment that needs to be paid.

“Many factors affect how much the refinancing would affect the new monthly repayment amount,” said a head of retail collection in Kuala Lumpur.

He said they included how much loan was taken in the first place and the customer’s financial status.

“But if they can’t pay, reduction is not a solution. They can always surrender their cars. But we will try to help them so that they won’t have to,” he said.

Federation of Consumer Associations adviser Datuk Hamdan Adnan said Bank Negara must step in and help consumers who have been threatened with having their vehicles repossessed.

“Banks always claim they are customer-friendly. But in reality, they exploit some customers,” he said.

Bank Negara has decided not to increase its overnight policy rates after its monetary policy meeting last Friday. I was waiting to see the outcome of this meeeting with bated breath as it would be a likely indicator for the Base Lending Rate (BRL).

It appears that Bank Negara is taking a different approach by keeping its interest rates unchanged despite inflationary pressures. Earlier, economists on Bloomberg had predicted a minimum 25-basis-point interest rate hike to counter inflation.

This definitely gives home owners and loan holders some breathing space and helps them stretch their monthly salaries that little bit longer.

Read the article by The Star after the jump:

PETALING JAYA: Bank Negara kept the overnight policy rate unchanged yesterday despite the pressure to rein in rising prices, as policymakers placed priority on sustaining economic growth.

“While both the risks to higher inflation and the risks to slower growth have increased, the immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment,” the central bank said in a statement issued after a scheduled monetary policy meeting.

Bank Negara was originally expected to announce the meeting’s outcome at 6pm yesterday, but the announcement was delayed by nearly two hours.

Earlier, the market was split almost evenly on how they expected the central bank would deal with rising inflation in the country. The interest rate in Malaysia has remained at 3.5% since April 2006, and is among the lowest in Asia together with those in Hong Kong and Thailand.

The consumer price index (CPI) jumped to a 26-year high of 7.7% in June – or twice as high as 3.8% in May – as transport costs soared after the Government raised petrol and diesel prices at local pumps by 41% and 63% respectively.

Bank Negara said it expected inflation to remain “elevated in the second half of the year and into early next year before moderating towards the middle of 2009.”

“The average inflation for 2008 is projected to be in the range of 5.5% to 6%,” it said. That is higher than the bank’s earlier forecast of around 4% made at the start the year.

Before the meeting, a slight majority of economists polled by Bloomberg yesterday had targeted a minimum 25-basis-point hike in the interest rate to counter rising prices.

“Some would argue that Bank Negara is behind the curve to tame inflationary expectation, but the circumstance of different countries rule out ‘one-size-fits-all’ policy response,” CIMB Research head of economics Lee Heng Guie said in a e-mailed response to StarBiz yesterday.

He expects slowing economic growth to moderate inflationary pressures going forward.

Lower crude oil prices in recent days also provided some respite for central bankers around the world to consider their response to counter the growing twin threat of high inflation and economic slowdown.

“Year-to-date inflation is only 3.7%. Therefore, Bank Negara must have considered that there is no urgent need to move the rate and put pressure to the economy,” Associations of Banks in Malaysia president Datuk Seri Abdul Hamidy Abdul Hafiz told StarBiz yesterday after the announcement.

“It is a confidence booster for the business community,” he said.

Bank Islam Malaysia Bhd senior economist Azrul Azwar Ahmad Tajudin noted that the high inflation in the country was not demand-driven but rather due to price adjustments in fuel and electricity prices.

But due to the relatively strong domestic economy, “Bank Negara still has the luxury of time to assess the impact and delay any rate hike plans,” he said.

IJM Corp Bhd deputy chief executive officer and deputy managing director Teh Kean Ming said the decision to keep the interest rate unchanged was “good news” under the current economic and political environment.

“This will help the already-dampened property market and businesses at large. The financial market can now have a breather,” he said.

Several banks have already hinted at this by offering high fixed deposit rates. Increasing interest rates have always been used in the past to control inflation. So, do be prepared.

Now might be a good time to look into refinancing into a fixed interest rate!

Read the article by The Star after the jump.

KUALA LUMPUR: The Government expects the inflation rate to be 7% this month, due to the recent hike in fuel price and higher commodity prices, says Second Finance Minister Tan Sri Nor Mohamed Yakcop.

“We predict the inflation rate would be the same as last month at around 7% but it won’t exceed 5% for the year,” he said at Perwaja Holdings Bhd’s prospectus launch yesterday.

Nor Mohamed said although the figure might appear to be high on a month-on-month basis, this would be a “one-off inflation because fuel and food prices have gone up.”

He said the inflation was driven by cost-push rather than demand pressures, while capacity expansion and productivity increases would contribute towards containing the inflationary pressures.

On July 9, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said the consumer price index in June was expected to exceed 6% because of adjustments to the petrol and diesel prices by 40.6% and 63.3% respectively.

The central bank will hold its monetary policy meeting on July 25, which will decide its overnight policy rate.

Nor Mohamed also said the country’s gross domestic product (GDP) was slated to grow 5% this year.

Despite a weaker external environment, he said the Malaysian economy was continuing to maintain its steady growth momentum. In the first quarter, the economy expanded by 7.1% driven by the robust domestic demand.

“For this year as a whole, given the sustained performance of our domestic economy as well as our strong economic fundamentals, we are confident that Malaysia will be able to achieve a respectable rate of GDP growth,” he said.

He added that the Government would continue to step up efforts to ensure the pass-through of global prices into domestic prices would be mitigated.

Later, when asked if the Government would impose a windfall tax on steel millers, similar to that of the independent power producers and plantation companies, he said there was no such plan.

He also said the Government did not have plans for a steel stockpile which was requested by the construction industry.