Sean admits he rarely talks about the loan side of buying, even though rules on eligibility change often. In the first episode of his mortgage series, he asks Rena Choong, FAR Capital's head of mortgage and his own investment coach, how different loans charge interest.
How does a housing loan charge interest compared with a personal or car loan, and which type should you take if you want to pay it down faster?
“What you should do right now is actually first take a full flexi loan.”
Rena Choong, head of mortgage at FAR Capital, in conversation with Sean
A housing loan charges interest only on what you still owe, so a lump-sum prepayment cuts the interest and can shorten the loan, while personal and car loans fix the interest up front. If you will prepay or draw money back often, take a full flexi loan; on a semi-flexi loan you must ask the bank to apply any extra payment to the principal.
Why
Flat-rate loans charge all interest up front
A RM100,000 personal loan at 6% over 10 years adds RM60,000 of interest at the start, so you repay RM160,000, about RM1,333 a month. Paying it off early saves nothing unless you settle the whole amount.
Housing loan interest falls as you pay
On RM500,000 at 3.3% over 35 years, the instalment is about RM2,000, and early on roughly 70% of it, about RM1,300, is interest. Prepay RM100,000 and interest is charged on RM400,000 instead, so more of each instalment goes to principal and the term could shrink to 20 or 25 years.
Extra money in semi-flexi just sits there
Pay RM2,500 instead of RM2,000 on a semi-flexi loan and the bank still takes RM2,000; the rest is carried to next month without cutting interest. You have to register a prepayment by form, phone or email, and withdrawals need an application and a fee. Sean found his own surplus rent had been sitting idle this way.
Full flexi works like a cheaper overdraft
A full flexi loan lets you prepay and withdraw online at any time for a monthly fee of about RM10 to RM15. It suits business owners and the self-employed with uneven cash, and costs far less than an overdraft at 5% to 6%.
What to do
- Check whether each loan you hold is flat-rate or balance-reducing before deciding which to pay down.
- Put spare lump sums against a balance-reducing loan's principal, not into a flat-rate loan you can't settle in full.
- On a semi-flexi loan, save extra money into a lump sum and tell the bank in writing to apply it as a prepayment.
- Choose full flexi if your income is irregular or you may need to draw the money back out.
- Clear credit card debt first: it costs about 18% a year, against under 3% on Sean's latest housing loan in 2022.
Editorial Note: Summarised from Sean Tan's full episode with Rena Choong. The answer is theirs, not Sean's; the quote is in their own words and the rest is our paraphrase. This is general information, not legal advice for your situation. Figures reflect the recording date, so check current rates and rules before acting on them.
THINGS TO KNOW BEFORE APPLYING FOR HOUSING LOAN (EP 1)
Sources & Verification Data
Summarised from Sean's full English captions for episode 1 of his mortgage series with Rena Choong, FAR Capital's head of mortgage (August 2022). The quoted answer is Rena's own words; everything else is paraphrased. Rates are as stated in 2022, so check current ones. Sean is a customer of FAR Capital, not its owner.
