STAY AHEAD: Adrian gives more tips on how to stay ahead of your bank and save money in the process
7. Tax planning
When you purchase a property for investment, you will want to take a loan with monthly instalments (together with the outgoings of such property, i.e. service charges, sinking fund, quit rent, assessment, taxes, etc) that match the income (i.e. rentals) of such investment property. From an investor’s point of view, the property is self-financing and over the years, the property will pay off by itself and be free from any debts.
As an investor of property, you may want to do some tax planning. All investors will have to pay tax on the “profit” of your investment, i.e. the surplus of the income over the expenses of the investment, i.e., the outgoings of the property and the interest payable on the loan taken to acquire the property. Repayment of principal will not be considered as an expense. During the earlier years of a loan, much of the repayment is towards interest. Accordingly, the “higher” interest payments reduce the profit of the investment and therefore the tax payable is lower.
However after several years of repayments, as the loan is slowly paid down, more of the repayments will go towards the principal, as opposed to interest. When that happens, the expenses will reduce and the profit of your investment in the property will increase, and so will your taxes. In such an event, it may be a good idea to increase the loan (by an additional loan or refinancing) and increase the interest payments and therefore reduces the taxes payable.
Another tax-saving way that you may consider is if you have an investment property which has a loan on it and also a loan on the home you are staying in. You may want to reduce the latter loan and increase the former loan. The simple logic is you are paying tax on the investment property and not on the home you are staying in. Therefore, by increasing the interest repayment on the loan taken on the investment property, it would reduce the profit thereof and accordingly taxes payable for the same.
8. Get an ‘all-in-one’ account
An ‘all-in-one’ account allows you to use your mortgage as your key financial product. This means you have one account into which you can pay all of your income and from which you pay your living expenses as well as making your mortgage repayments.
An ‘all-in-one’ account can make a huge difference to the speed at which you pay off your loan. Because the whole of your income is paid into the account, you are reducing the principal on which interest is charged. Of course, every time you withdraw from the account for living expenses, the principal (and therefore interest liability) will increase but careful use of the ‘all-in-one’ account can save you interest payments and cut short the term of your loan.
For example, if your loan balance is RM100,000, interest would be charged on a daily basis and charged on that full amount each month. If you have an ‘all-in-one’ account where you remit all your income and savings, that money will offset and reduce the loan balance, upon which interest is charged. Rather than earn interest at the “low” saving or fixed deposit rates (3.2 per cent), that money effectively reduces the loan balance and interest payments, thereby “earning” interest at the higher rate applicable to the loan (6.75 per cent).
An ‘all-in-one’ account is also useful when you are able to make additional payments towards the loan. If you are only able to make the equivalent of the minimum repayment on your loan (and not put in any extra), you may be better off with a standard conventional loan where the interest rate is lower.
However, it's not unusual for borrowers using an ‘all-in-one’ account to cut the term of the loan from 25 years to less than 15.
9. Use your credit cards
Credit cards allow you to postpone the payment of your bills free from any interest if payment is made before the due date. You can charge all your bills to your credit cards and keep your money in an ‘all-in-one’ account longer. Every day that your money is in the ‘all-in-one’ account is another day that interest is calculated on a lower loan balance. As soon as you pay your credit cards’ bills out of your ‘all-in-one’ account, interest will be charged on the higher loan balance. Take full advantage of the interest free days offered by your credit cards.
Don’t forget to pay your credit cards’ bills before the due date thereof.
10. Refinance and save
One of the best ways to repay your loan quickly is to refinance your loan to a lower rate but don’t change the amount of repayment. This means you continue to pay as if the interest rate is the higher existing rate.
This will allow you to pay off more of the principal with each payment and accordingly reduces the time you finish paying off the loan. For example, if you refinance a 25-year loan of RM100,000 from an interest rate of 7.5 per cent (BLR + 0.75%) to 6.75 per cent (BLR + 0%) but continue to pay repayment based on the higher rate, you could cut about three years and nine months off the term of your loan and as much as RM33,255 in repayments.
However, make enquiries on what it will cost you to refinance. For example, there may be penalty fees payable on your existing loan and legal fees, stamp duty and valuation fees payable for your new loan. Work it all out and see if it makes financial sense to refinance.
11. Staying Informed
Information is your greatest weapon. By staying informed about what is going on in the housing loan market, you might be able to stay a step or two ahead of your lender. And if you can stay one step ahead, you are already on your way to paying off your mortgage faster.
With any long-term commitment, there is always a tendency to let your loan roll along, pay your monthly instalments as and when they fall due and don’t think about it. This attitude can be a big mistake. Keep yourself abreast of what is developing in the mortgage industry and you might find that there are opportunities to put yourself ahead. Interest rates change and new products may allow you to seize an opportunity or negotiate a better deal.
Stay informed and stay ahead of the game.
12. Get the ideal loan to suit your needs
Getting the right loan the first time is the biggest consideration when it comes to saving money. You need to ensure that your loan is best suited to your circumstances.
Shopping for an ideal loan may be difficult but it may be worth your while to invest some time to do some research. Make sure you speak to the bankers and mortgage consultants and search for information through the internet for the available loan packages in the market.
Choosing a loan is about knowing what you want. Make a list of all the features of the loan packages that are important to you and rank them according to importance. And you will be able to filter through the array of loan packages and through the process of elimination, you'll see the one that's right for you. Remember, different loans have different purposes so you need to match a loan to your need.
Ditching the features you don't need can reduce the interest rate of your loan.
Adrian Un is the Managing Director of Mortgage Broker Sdn Bhd.