One advice by my immediate superior on making known your views in a meeting (our company have regular weekly and monthly meetings between various HODs): Don't voice your opinion when the other party is not ready or receptive to hear it. They, instead of listening, will be thinking of counter arguments to obstruct your suggestion.

Well, any loan officer will say that it is a good move. But is it?

You will have to brew it and think about it a bit further to arrive at a better understanding. It's still closely related to money matters as in my previous posts - spending and savings.

Please keep the comments to yourself as my reply was not directed to you. I have already made a stand not to reply to any posters who have a professional motive on opinions, preferring to engage with anonymous posters.

It will draw me into an endless debate since you have an invested interest to win the debate; while I will feel bad if I win the debate and putting you down in the process.

It's fine when a poster with invested motive on a subject presents the facts and numbers. As for opinions...

That's true... but it is my choice who should I preferred to engage with.

Is there any numbers/figures aside from the size of the loan in my first post? Is taking a longer loan a bad thing to do? Maybe it is, maybe not... what do you think?

I'll make a reply to Adele when I have more time... where the discussion will continue.

BTW Numbers can lie.

I'm glad that you appreciate the 'fairy tale'... but if you still don't get the whole story, then maybe it is because you have put 'ego' or yourself into it to try to make it practical to suit your financial and personal background.

If you read the post again, you should see that there is no words on the 'value or cost of the house', how much down-payment John put in, and what is the salary of John - they are unknown.

Also whether John's wife is working or not - all these were purposely left out.

"… I would have taken a smaller loan <90% or something."

Yes, some will consider it too. Or should consider it, as what was presented in another previous post on the relationship between size of the loan, amount of down-payment, loan tenure, cost of the house, and the amount of monthly installment; and relating all these elements to the total cost of interest charges.

We can play around and adjust the values - be it a cheaper house, shorter or longer tenure, tighten the belt and pay more installment, or delay the purchase to have more savings and hence more down-payment - to see how to lower the total cost of interest.

Of course, when there is no room for alternate options if one is scrapping the barrel - pooling all the savings, liquid investment, and/or EPF withdrawal to meet the minimal 10% down-payment, and there's no alternative except that the desired dream house is a must buy no matter what.

(True example: there are in-laws that will only allow their daughter to marry if and only if the boyfriend has his own house. So, what to do - either buy house or no marriage... )

===============

But that's the previous post. This new 'fairy tale' is on how 2 different types of loan differs and relating it to the total cost of interest.

Again the 'ego' is in the story when you think the story is extreme in the loan tenures of 15 to 35 years.

A 400k, 15-year loan is about 3k monthly installment. (Which is within his means if John is drawing a 5-figure salary of at least 10k/month, and his wife is working too.)

While a 500k, 35-year loan is about 2.2k monthly installment.

(Take note that, as mentioned in the story, John had calculated that he can maintained the same total cost of interest whether the tenure is 20 or 35 years. So using 35-year is a valid and not an extreme example.)

But why should we put 'ego' first when we were trying to put ourselves into John's shoe? John is rich, and it was said that a rich man thinks differently... why step into John's shoe and still think like the 'poorer' self?

Ponder this a bit, and you would have a clearer picture. And you would arrive at what the story is about without reading further... that 2 sentences after the fairy tale should have given you a clue.


===============

... to be continue in next post. (How can John arrive at the same total cost of interest.)

Be patient, Little Grasshopper...

PS. Switch on Celestial Classic while you wait... will be back shortly before the next movie begins.

.... continue from previous post.

Correction: the installment on the 500k loan should be about 23k, not 22k.

================
Cost of Interest

Before continuing how John will get the same total cost of interest, first, allow me to explain why cost of interest is important.

As most of us are salaried employee, whether highly-paid or otherwise, we can more or less extrapolate how much earnings one would made in his/her life - the X amount. How much of this X amount remain is dependent on how much is the expenditure.

If we view money matters as a game plan, then there is 'defensive moves' and 'attacking moves' in managing our money.

Defensive moves would be protecting the wealth we have generated; and it is mostly on ways of spending wisely. Simple logic: spend wisely, saved more ... more X amount remains.

Cost of interest is a cost and expenditure. So less spending on interest and 'defend the wealth' whenever possible.

So, if John incurred a specific amount of interest if he will to take the 1st loan option, we will based and concluded it whether or not it is a better 'defensive' move if he selected the 2nd option.

If the 1st option is the less costly than the 2nd option, then selecting the 2nd option is not a better defensive move.


=================

How would John get the same total cost of interest when he selected the 2nd option?

The interest on a housing loan is calculated on the balance outstanding amount. So the maths logic is pretty straight forward.

1. The lesser loan amount and shorter tenure is less costly. So option A is less costly.

2. To have the same total cost of interest on the flexi loan of 500k, 35-year tenure as the 400k, 15-year tenure, John would have to emulate the amount of outstanding balance as in the 400k loan.

(Remember that interest is on monthly rest basis.)

The easiest way to have the same outstanding balance as in the 400k loan is:
a) put in 100k into the flexi loan, and reducing the 500k to 400k.
b) pay the same monthly installment (about 3k) as in the 400k, 15-year tenure.
c) pay the same monthly installment (about 3k), every month in the first 15 years.

Other variations of paying the various amount of installment, like less installment this month, and then more next month can give the same result. But above same monthly amount is the easiest steps to emulate.

As interest is on monthly rest basis, interest once it is incurred is already set.

Any lesser amount paid in the beginning of the loan, a much higher amount will be needed to reduce the monthly interest, such that the total cost of interest can be capped and be the same as in the 400k loan.

=================

The half-empty, half-full glass perspective

So, as explained above, to have the same cost of interest on both loans, John would have to do the same whether it is option A or option B.

But in option B, John has an extra 100k at his disposal. Is this good or bad, an advantage or disadvantage? It depends... how John views it.

Will it change his monthly spending? Will he be enticed to withdraw part of the 100k for another purpose?

It can be safely said that John will incurred more interest with option B... unless he will be very strict in his monthly budget and follow strictly to the 400k loan payment schedule.

In your previous reply, you asked whether it is a smart move.

I would hate to use the word "smart", as it implies that any other option is "foolish".

There is never a definite way to spend, and save (and invest) that one must follow.

There is no set formula on how to spend money that we can conclude that it is right or wrong.

If one were to spend his money on this thing or that thing, how much or how little, that's his/her choice.

The 'fairy tale' is just a cautionary tale on "interest'. Just be aware of interest charges, in order not to fritter away some hard-earned income on unnecessary interest charges that can be avoided.

This same awareness on interest charges is equally applicable to another big-ticket purchase - car. A car loan do always have to be 7 or 9 years. It can be less than 30 months if you want to lower the cost of interest.

This post has been edited by j.passing.by: Dec 1 2014, 10:26 PM

What ground-breaking revelation were you expecting?

P.S. Fairy tale on John was more or less developed based on your situation - 100k in a flexi loan.

LOL Obviously I'm not as successful as you; I'm not the one with excess money in flexi.

sorry to keep you waiting... but don't blame me, as I had given a clue how the story will conclude.

yeah, was bored reading the usual stuff... so on a lazy Sunday, wrote the fairy tale.

Another possible scenario is that John, a determined man who can sized up any situation quickly (he's in an executive position with 5-figure pay), had already known what he want, and his plans.

He will stick to his plan, and take a 400k, 15-year loan. Whether it is flexi or not. He will just ask for the best discount on the BLR. If it is a flexi with the best discount, it is fine with him.

Time is precious to him, no ideal chit-chat in the bank telling people how much other savings he have. Just signed the loan and off he goes.

He may have slowly accumulate it over many years... and now in a dilemma - weighing every investment decision against the higher interest that he will forgo in the flexi account.

I have to read back, and checked what I wrote.


"Customer John has extra money above his normal savings. He can put in an extra 100k towards a new house for himself and his family, and take a lesser loan of 400k. And with his monthly salary, John can finish paying the loan in 15 years."

That's why he can afford to take the 500k option, and at the same time put the 100k into the flexi as excess payment from day 1.

1. "The well to do pays less because they reduced their cost of interest."

This is not always true. The richer man may buy a more costly house, and pay 10% downpayment. It will be the same as another man who buy a less costly house, and also put in 10%. So in terms of percentage, the cost of interest would be the same to both.

What should be looked at is still the savings.

Basic living expenditure is more or less the same across the board. So "discretionary income" (that is income above this threshold of basic living expenditure) plays an important role. The man who is earning more, would have more discretionary income.

Now, how he spends the discretionary income will finally determine how much of the salary will remains as savings.

Poverty level (not textbook definition, but my own definition) is when the salary just meets the basic living expenditure, with hardly any left as discretionary income. No savings at the end of the month.

Now, a man drawing a much higher income can have no savings at the end of the month too, if he spends all his discretionary income. (This person is also kais pagi, makan pagi... in poverty level but thinks he is 'rich'.)

So, we can safely conclude the above statement is not always true; since the man who pays lesser interest is the one with more savings, thus higher downpayment and a lower loan.

2. "Unless one needs the funds for aggressive leveraging, then shorter term loan will reduced interest incurred for normal people."

I'm not sure what it really means... and whether it is somehow related to "...high debt in Malaysia".

A house loan has 3 parts: a) tenure, b) size of the loan, and c) monthly installment.
And 2 external parts: the down-payment and house price.

House hunting is a continuous process - a continuous adjustment of the last 3 parts:
Installment, down-payment and house price.

To get at a reasonable tenure and loan.

Leveraging, or financing or tenure/loan is the result from adjusting the 3 adjustable variables.

Installment & downpayment is from savings, which is from salary.
House price is from housing policy.
Financing is from banking policy.

So if only can use the highest loan and longest tenure to secure a house, put blame on self first, before cussing government, housing developers and the banks (which is indirectly BNM).

I would still maintain the total cost of interest vs. the total income in one's lifetime concept in viewing the action of the 'enterprising man'.

If he is a trader or sole-proprietor running a business, whether part-time or full-time, he would looking at his income and liability as a whole.

When he took a longer or longest possible tenure he can get in a housing loan, it is not because he will have better use of his available funds. It could be that the interest rate on the housing loan is the least costly compare to other means of finance such a business or personal loan.

He is still applying the 'pay the least cost of interest' concept.

Lastly, I think the phrase "pay off loans as early as possible" is too general.

As in the previous post on house hunting and the adjustable variables, the best loan and tenure has been determined. In the fairy tale of John, John should commit to taking the same loan and installment as he had earlier planned (whether it is a flexi loan or not).

Car service: get to know your car by reading its owner's manual... know things like how to jack up the car to change tyres, refill wiper fluid, when major parts needed to be change (a proper maintenance schedule instead of driving till the parts are worn out), etc... Usual engine oil change is on mileage, either every 5000 or 10,000 km...

Also get to know whether you really need to go to the distributor's service center or an authorised workshop or a normal workshop (like a tyre shop) to do simple service like oil change. They have different labour charges although the cost of the oil and parts may be the same. (In time, you will know where to buy the oil and filters and spark plugs... eliminating the markup by the workshops.)

How to know whether you can afford the car? It depends on whether you can afford the monthly installment (and the 1st down payment). Try to have a loan not more than 5 years for a 1st car. And about 3 years for a 2nd car.

Car insurance: get to know about the NCB (no claim bonus). After owning a car without any claims for 5 years, the discount on the insurance is about 50%. Another reason to start with a cheaper car, before upgrading to one that you really desired.

This post has been edited by j.passing.by: Jan 29 2015, 07:03 PM

The above question from titanic_crash is the same as considering which method is more 'profitable': pay lump sum or take a loan.

Without further thoughts, people will start pulling out their calculators to compute the 'profit' on how much they would make by putting the lump sum into such and such FD or other investments.

And left out one simple fact: one need to pay back the loan. The loan must be paid back in monthly installments. Add this into the equation, the profit margin would be reduced. (As the installment reduces the amount of "clean and interest-free" money that could be put into the investment every month.)

Secondly, another common rational has been blurred; which is as far as possible, try not to invest using borrowed money.

Thirdly, by keeping things simple, we readily knows how rich (or poor) we are. It is much simpler to compute how much we have when there is x amount in the bank account and hardly any debt, than computing a bigger X amount in the bank account and having to keep in mind there are loan a, loan b, and loan c to pay.

The bigger X amount in the bank, plus easy loans will more often than not, tempt one to spend beyond one's means.

Easy loan meaning: bigger loan, and longer tenure; meaning: lower down-payment, and lower monthly installments.

It is so tempting, with the extra money, to go for a German-brand car or a corner-lot house... or go for a more extensive renovation and/or more expensive appliances and furniture.

Why flat rate and effective rate is different.

1. Interest on the flat rate is calculated upfront on the whole loan amount for the whole duration of the loan.
In other words, after each monthly installment were paid, the loan is gradually reduced, which means that we don't really owe the bank the whole loan amount for the whole duration. Yet interest was already calculated on the whole amount for the entire duration (or tenure).

2. Interest on the effective rate is calculated on the remaining balance of the loan. After each installment paid, loan is gradually reduced, and interest is calculated each time (monthly) when the next installment is due. In other words, interest is "effective" on the outstanding balance.

3. Which is better? Well, to compare them, there are online calculators to convert the flat rate to effective rate.

4. Is it misleading for banks to use flat rate? No, as the effective rate is also made known in the documents that people signed; just that most do not read the fine details.

5. Can BNM do anything on flat rate loans? They can restrict and limit the tenure of these loans to max of 7 years or less. Any tenure more than the allowable max number of years, the loans should be an effective rate loan with monthly statements stating the outstanding balance and the monthly interest charged each month.

6. Anything else BNM can do? They can require financial institutions to issue, to all borrowers of flat rate loans, a quarterly statement stating the final amount to be paid if the borrower wishes to clear and terminate the loan early.

(I guess the last point would be an eye opener... and maybe this shock theraphy would help in reducing household debt. But nothing would happen... since bankers need to make easy money and car makers need to push and sell cars, and consumers need their loans to live lavishly.. need to keep the wheels of economy spinning... even when spinning out of control into drains.)

Almost every sentence you wrote raises a red flag.

If you thiink 11% is high, I would imagine him paying from 12% to 18% with a credit card.

And how to get money out of EPF... except maybe using fradulent documents... if there was any easy loophole, it would have been abused by many people ages ago, and already closed. So let's not waste time on non-solutions...

It might be high time to face reality that he could be living beyond his salary and financial status... for example, if can't afford to have medical care in a private facilty, then the option is public hospital.

With the high DSR, talking of making some interest savings by changing from one loan to another can be extraneous. Banks would assess the credit risk of the individual and charges the interest accordingly. So we can't simply say that if we were offered an interest rate of x% from Bank A, your friend could save some money by having a lower interest loan by switching to Bank A.

Anyway, the best time to think about making any interest savings was before and during the application of the loan. After making the decision to take any loan, it is already clear how much we have pay in installments every month, and more important, whether we can cover the installments and other bills and expenses from our salary.

What would throw a spanner into the monthly budget is extraodinary or unexpected expenses in some months, thereby missing some payments and incurring late payment penalties and maybe, due to these late payments, the bank increases the interest rate.

If this is what your friend is facing, not able to make ends meet in some months, then maybe the better option is to approach AKPK for assistance... https://www.akpk.org.my/

(See also the AKPK thread in this forum for further info and queries...)

First, I would like to point out that all the long posts were my point of view and 2 cents in this open forum and may digress from your queries... if they are not helpful to you, then hopefully other readers may gain something out of the post.

You maybe using your cc wisely, but your friend in his financially stressed situation might not.... and similarly with taking out of EPF account 2 to supplement the monthly budget might work for you but might not work for him, if his monthly budget is out of control.

We have to differentiate between long term savings and short term savings. EPF is long term savings for retirement. If one has no discipline to control his/her monthly expenditure and make ends meet, and have very little savings or none, at least hopefully he/she got his/her long savings (such as EPF) under control.

Account 2 is 30% of the total contribution into EPF, and 30% is quite a high portion... the growth of EPF savings is not only depended on the monthly contribution, but also dependent on the yearly dividend... in the long term of many years and decades, it is the compounding of the dividends that is the main contribution to the growth and major portion of the savings at retirement.

Fiddle with the withdrawals and reducing Account 2, especially in the early stage of one's life, will lessen the compounding effect... a vast difference in the final amount of savings could be the result of these early withdrawals.

(Putting the earlier withdrawn money back into EPF years latter... losses out the dividend and compounding effect.)

(So what's the fine balancing line between earlier withdrawals and larger retirement savings? Not easy to answer... but if I'm not acting prudently in my short term (monthly) financial matters and have no discipline to live within my salary, I'll be very afraid to touch my EPF savings. I may screwed up in the former, but if I screwed up in the latter too, gone case la...)

Without fully knowing how dire is the financial situation the other person is facing, and his financial means and non-discretionary expenses, and financial acumen (which in this case, hardly any since he is in financial stress), I would be cautious in suggesting band-aid solutions and then keeping finger-crossed that he will learn and change his financial behaviour for the better... and hopefully you too be cautious in your advices to your friend; otherwise you could be doing more harm than good.

================

"... the question is always, will bank lock the money from EPF, and do not treat that as semi-flexi fund."
The EPF website has further info on monthly withdrawals to supplement the monthly housing installments... how to apply, etc... the question of whether the bank lock the money is irrelevant; you pay a lesser amount on the installment, and EPF helps pay the remaining portion.

By the way the question was phrased, any newbie to flexi-loan could mistakenly assumed that whatever amount of money we put into the flexi or semi-flexi could be withdrawn. It is actually the extra money that is above the required monthly installment that can be withdrawn.

The main problem is, I think, that there is confusion on how the bank will treats the extra money - a) as advance payment into future installments, or b) a standby sum to contra outstanding balance and interest charged which can be withdrawn.

As said, the EPF monthly withdrawals are to supplement the monthly installments...

This post has been edited by j.passing.by: May 5 2016, 02:43 PM

I wish you luck in finding the loophole (in getting cash)... and find it fast as it may be closing soon if this loophole is known publicly in forums.

I think you are too focus on savings interest. As said in the 1st post, the goose is cooked - when he had taken the loan because he needed a loan to cover whatever financial shortfall he was facing.

The bulk of the total cost of interest are charged and are paid in the first portion of the tenure.

When your friend took on the loan, he has had most likely got the best deal he could get from the bank... and since he had already paid a portion of the loan, the best value for his money is to continue the loan as scheduled.

There could be hardly any difference in interest savings in terminating the loan early by fully paying its outstanding balance - whether the money is from another loan or EPF.

The main difference from getting own money (out of EPF or other sources) and getting money from CC or another other loan is that in the former method, there is no more monthly installment or one installment lesser to pay - and thus have some breathing room in making ends meet.

Reducing the outstanding balance does not necessary means reducing the monthly installment... it is more likely to reduce the tenure and ends the housing loan earlier.

I would be carefull in fully redeeming the loan... a) housing loan is usually the cheapest loan, and not likely to have any interest savings but a lost by pulling own money elsewhere to redeem it; and b) ending a housing loan has legal costs as in transferring the title from the bank back to the owner, and one should be prepared to pay it which can be a tidy amount.

BTW how do we defined 'financial stress'? To me, speaking about it a friend to seek help is one of the symptoms...