Like the advice. I'll keep that in mind.

I understand the story, I get the concept of both loans. I can’t see the obvious disadvantage of flexi loan. It is an extreme example though to to compare 15 years to the longest possible loan tenure. I mean practically speaking, if I foresee I can settle in 20 years with some bonus and no big bills coming up, then to provide a buffer I get a 25-year loan.

Although if I did have that much money on hand… I would have taken a smaller loan <90% or something.

PS: debt free here, just trying to understand housing loans.

This post has been edited by adele123: Dec 1 2014, 10:19 AM

Your photo have flaws basically.
Especially on the 35 years loan tenure.
Paper talk you may win, but in actual, if taking longer loan tenure, the most effective way is to dump in lum sump.
And advantage on taking longer tenure is I have better money management in case of emergencies. Paying rm3000 for 15 years and paying rm1800 for 35 years and in between dump in money to reduce principle are 2 different things.

You talk about the cost effective this and that, but you have nothing to show for.

Typically my clients who want to take shorter tenure are stopped by me when I tell me about taking longer tenure and paying just as much as if they were taking longer tenure of RM3000+. In the event where they need a better cash flow they can always reduce their installment to its intended amount of RM1800.

For the BUMIPUTRAs taking a shorter tenure is also really wrong because of their access to ASNB and Tabung Haji funds that regularly gives a dividend of more than the interest charges set by the bank.

In fact, ASB has NEVER given dividends of lower than the BLR rate, as such if you have a loan calculated based on a reduction of the BLR rate (for example, BLR minus 2.4%) you will be on top of the game for years to come.

You see, when I give advice, I back them up with illustrations, examples, and numbers.

As long as the other party is very clear with their background, then there's no reason not to engage in healthy discussion. In this case, wild_card_my's background is pretty clear. There's no such thing as a healthy debate where only one party wins by putting the other party down; if you stay mature and level headed then there is no reason to resort to personal attacks.

Back to the case at hand, wild_card_my has tabled a good point in where taking a longer loan is not necessarily a bad thing as it still allows the option for the borrower to repay at the original loan tenure that they intended. Do you have a point to counter this? As a curious bystander, I am really interested in getting both sides of the table.

A very wise adviced indeed.. Thanks

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.

Just happened that i have same situation with the i-John

j.passing.by could you shed more light?

This post has been edited by Petro-Canada: Dec 1 2014, 04:49 PM

question:

Recently i come across a hongleong assurance endowment plan that basically goes
1. dump in large capital for 6 years
2a. opt to take small bonus out yearly, and then a bigger sum at 30 years (the bigger sum i calculated to be around 4% interest per annum)
2b. dont take out anything, but end up with a huge sum at 30 years (which i calculated to be around 6% interest per annum)

now this is unguaranteed and downside is maybe around 3% per annum

now i m aware that the reaction to endowment is generally negative in this forum - and i'd like to understand why.

i guess the only negative that i can see is that it locks up your funds for long term and reduces flexibility, is there anything i m missing?

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.)

what loan phgilosophy is this? you calculate and make up your mind which is better. make it clear why you say one is better .Mean what you say and say what you mean, not pusing pusing end up what is the message?

Old people always have their stories. My message is simple, when you apply for a loan:

A. If you take shorter tenure, you cannot choose later on to lengthen the tenure for ANY reason.

B. If you take longer tenure, you have the flexibility of paying it in shorter terms, or leave it be and pay as a longer tenure.

I have no story to tell other than what you can see above. I was dragged along, but the core of the message stays true.

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

Go to HL Assurance thread.

opportunity cost. you lock up your funds for so long you only get that little additional return... why not i put in something else... bla bla bla

actually i notice that the negativity is usually a result of the customer's ignorance as well and also half-truth by agents. if you set your expectations right, understand that you money gets locked for a long time and that your commitment MUST continue as specified (you know... suddenly no money to pay, then die lo).

and the thing about forum is... when they are angry, they complain... when they are happy... they rarely come and say they are happy right? now there's bias lo...

HLA? 3% of interest? Sure or not? I calculated are about 0.1-0.5% wor.

You know, you post such long story to basically come to a conclusion that most of us already know..
Option b being the more flexible option allows john the freedom to match a fixed loan, allows john the freedom to pursue other investment opportunity if it comes up, allows John to react to emergencies if required, basically to do whatever he wants.. With the downside of temptation to waste money on other things and not discipline to stick to plan..

No offense, but it's not some huge discovery. Many other posters gave same answer without the tl;dr

that is the problem with ego, talking like got lots of hidden gems in the bag, wait, to be continued, beating round the bush ,come back to square one.

haha..

talk macam very pro but isi tak ada...

then said other people ego but don't know how ego he/she is...

kind of wondering how success is j.passing.by