Shorten the loan tenure or maximized the loan tenure?
Certain borrower’s of housing loan have this idea imprinted in their mind. They want to pay less interest charges and quickly settle their housing loan, hence they opt to shorten the loan tenure and quickly pay off the housing loan.
Well nothing wrong with this, but I beg to differ, this doesn’t benefits us the borrower at all. Because we will commit ourselves with high installment payment, hence tighter cash flows. We aren’t a wise investor if we do so (just my opinion =P)
Let me give you an example below, scenario A with shorter tenure 20 years, scenario B with longer tenure 35 years max.
|Effective Interest rate:||4.5% rate|
|Loan tenure:||20 YEARS|
|Total payment 20 years:||RM 607,344|
|Loan Amount:||Rm400k loan|
|Effective Lending rate:||4.5% rate|
|Loan Tenure:||35 Years|
|Your installment:||RM1893.03/ month|
|Total payment 35 years:||RM795,072|
The contrast different:
a. The total payment for A is lesser than B. Which is great if you look at the total amount you will be saved in long term.
b. The monthly lowest fixed installment payment for B is lower than A. You have to commit RM2530.60 minimum to pay your monthly installment, which is RM700 more than scenario B, what if suddenly you need the extra cash flow?
It will be detrimental to your current financial well-being.
Why not chose scenario B, paying RM 1893.03 monthly BUT paying additional:
RM 637.57 (RM 1893.03+637.57= RM 2530.60) / month
Your Total interest payment would be the same as 20 years RM 607,344.
Because you are committing the same installment amount as 20 years, if consistently the same throughout, you will pay off the loan in 20 years time exactly like taking 20 years loan tenure.
The perks by maximizing loan tenure 35 years, you won’t need to commit higher installment but have the flexibility to pay more if you have extra cash flow.
Any inquiries do drop down at the comment section below 🙂