Are Malaysians paying too much interest for their loans?
Many younger and inexperienced home buyers, driven by the desire to maintain their current lifestyle, often succumb to the allure of extending their loan tenures. At first glance, this approach may appear practical, offering a seemingly immediate solution to alleviate short-term financial strain. However, a closer examination reveals that this decision can lead to substantial financial losses over the entire lifespan of the loan.
The motivation behind opting for an extended loan tenure often stems from a desire to manage monthly mortgage payments more comfortably. In the face of the escalating costs of living, especially in urban areas, homebuyers may find it challenging to strike a balance between homeownership and maintaining their preferred lifestyle. As a result, the decision to extend the loan tenure might be seen as a pragmatic compromise, providing temporary relief to strained finances.
While extending the loan tenure might offer an initial respite, it is crucial to acknowledge the potential long-term consequences. One of the primary drawbacks lies in the increased total interest paid over the extended period. By stretching the repayment timeline, borrowers inadvertently subject themselves to a higher cumulative interest amount, significantly elevating the overall cost of homeownership.
Ahyat Ishak, a seasoned expert in the real estate industry, emphasises the need for a paradigm shift in the approach to loan tenures. The property speaker, investor and author cautioned against the misconception that saving a few hundred ringgit monthly justifies the extended loan duration.
This penny-wise pound-foolish approach, where buyers are overly concerned with saving small amounts of money (the pennies) but overlooks or neglects larger, more significant expenses (the pounds), is not very cost-effective especially for big-ticket items like homes. While there is a necessity to limit one’s spending, the current savings of a couple of hundreds of ringgit could cost ten of thousands of ringgit in the future.
Instead, Ahyat encourages potential buyers to leverage online loan calculators, providing a comprehensive understanding of the financial dynamics associated with various loan tenures.
To underscore this point, consider this hypothetical scenario. Consider a buyer taking a RM400,000 loan with a 30-year tenure at an interest rate of 4.45%. The monthly instalment, based on a 90% loan amount of RM360,000, is RM1,813.39. Over the 30-year period, the buyer pays a total of RM652,820.40, with an astonishing RM292,820.40 attributed to interest.
Now, let's explore an alternative scenario where the same buyer opts for a 25-year loan tenure with the same interest rate and loan amount. While the monthly instalment increases to RM1,990.79, the total amount paid at the end of the tenure significantly reduces to RM597,237, with RM237,237 allocated to interest. This represents a notable difference of RM55,583.40 compared to the 30-year tenure.
Understanding the nuances
While the monthly instalment difference may appear modest, the amount lost to interest is substantial. Furthermore, an extended loan tenure may prolong the time it takes for homeowners to build equity in their property. Equity, a crucial financial asset, represents the difference between the property's market value and the outstanding loan amount. The delayed accumulation of equity can hinder homeowners from fully leveraging their property for future financial endeavours, such as securing additional loans or funding major life events.
Another aspect to consider is the impact on overall financial goals and retirement plans. An extended loan tenure may extend well into the years when individuals are planning for or already in retirement. Prolonged financial commitments can impede the ability to channel resources towards other essential financial goals, diminishing the flexibility and freedom that homeowners might otherwise enjoy in their golden years.
While many banks have in recent years introduced many versions of flexible loans, borrowers should take the extra time to read the fine lines, even if the banks allow for additional payments to reduce the principal loan. But evolving banking regulations often introduce complexities to this process.
Financial planners echo this sentiment, cautioning that while some banks permit flexibility in depositing extra funds into linked current accounts, automatic reduction of the principal sum borrowed may not occur unless explicitly instructed by the borrower. This regulatory nuance adds an additional layer of consideration for buyers.
Such insights serve as a wake-up call for property buyers to meticulously evaluate the trade-offs between short-term financial ease and long-term financial gains. Understanding the nuances of different loan structures and staying abreast of evolving banking regulations are crucial steps toward making informed and financially sound decisions in the ever-evolving real estate market.
As the industry continues to shift, prospective buyers are encouraged to approach their financial decisions with a strategic mindset, ensuring they navigate the complexities of real estate with confidence and foresight. And making informed decisions about loan tenures is essential for achieving a balanced and sustainable approach to homeownership, ensuring that financial goals are met without compromising future financial well-being.
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