For many people, buying a home means taking out a mortgage that can end up being a lifetime financial burden, especially for those who get stuck in the rut of monthly minimum payments.
But there are several ways to not only shorten the life of one's mortgage, but to pay less in the long-term as well.
One is by making a large down payment. This allows borrowers greater bargaining power to get a better interest rate from lenders, so that the total interest payment will be lower.
Another is to increase the regular monthly payment. Just adding a small amount on top of the minimum can shave years from the loan repayment period, saving hundreds of thousands of baht along the way.
Given the accrual of interest, the loan balance is perpetually on the rise. For example, a 1-million-baht mortgage with a 5% interest rate per annum over a 30-year repayment period requires a minimum monthly payment of 5,368 baht. But at that rate, the total interest cost will swell to 930,000 baht throughout the term of the loan.
From the above example, the borrower could almost have bought a second home for the amount of interest that was ultimately paid. What's more, for all those years spent getting out from under their debt, the borrower will have foregone the opportunity to build up a nest egg come retirement.
For those looking for a way to decrease their interest costs, Chatpong Watanajiraj, vice-president of Kasikornbank's consumer advisory fulfilment department in the retail business division, says there are a ways to do it. The first is to pay more than the minimum payment, the second to make an annual lump sum payment, and and the third is to refinance.
Higher monthly payments
"Increasing the amount of your monthly payments is the most basic and effective way to cut down [overall] interest costs and pay off your loan faster. It's the method which I recommend to all borrowers," says Mr Chatpong.
Chipping away at the principal early on is a powerful money saver, as the small, regular reductions in debt compound dramatically over the life of the loan, bringing down the repayment period, he says.
Many people think that paying extra money beyond the minimum payment could cause them to be liable for a prepayment penalty, but this is a misunderstanding, says Mr Chatpong.
Prepayment penalties set by banks are only applied in cases of refinancing-- paying off the original loan and replacing it with a new one. But that fee will only be applied if the refinancing is done during the restricted period, normally within the first 3-5 years the loan has been taken out, he says.
Lenders always offer relatively low interest rates during the first three years to attract borrowers, so paying above the minimum requirement will lower the principal and interest payment.
Mr Chatpong says the first way to reduce interest charges and shorten the payment period is to increase the loan payment by the same amount each month.
For example, paying 10% of the mortgage balance as an overpayment every month could reduce the total interest payment by 21% and shorten the mortgage term by 5.5 years.
Normally, the minimum regular payment amount is set at around 40% of the borrower's monthly income, so paying an additional 10% is equivalent to only 4% of monthly income, which is considered the bare minimum, Mr Chatpong says.
Moreover, paying 20% extra every month could cut the borrowers interest payment by 34% and reduce the loan term by nine years.
Lump-sum payment
Mr Chatpong says a second tactic to shorten the mortgage repayment period is using an annual bonus, on top of the regular monthly payment, to make a much bigger impact on the principal.
The method is especially good for wage earners, he says.
Paying five times the due amount once a year could decrease the total interest payment by 44% and shorten the loan term by 12 years, according to Mr Chatpong.
He adds that Thai employees receive, on average, a bonus three times their monthly salary, so paying fives times the minimum payment at the end of the year is manageable, as it would come out to around 1.5 times their monthly salary or half the bonus.
The method is also prudent as it does not chip away at one's monthly salary, which is needed for daily expenses, while what remains from the bonus can still be used for other purposes, he says.
What's more, combining both tactics, for example, paying 10% more every month plus paying five times the minimum payment at the end of each year, could cut the interest payment in half and shorten the term of the loan by 14 years.
Mr Chatpong says most borrowers overlook these basic techniques since the benefits will only be registered in small doses over the course of years, although it will ultimately save them a lot of money.
Refinancing
The other big way to save is refinancing, which will offer a lower fixed interest rate early on and consequently decrease the overall interest payment, he says.
Banks usually apply a fixed interest rate for the first three years of the mortgage, with floating interest imposed later to let banks hedge their risks associated with interest rate movements and customers' repayment abilities.
KBank's interest rate for home loans is set at a fixed rate of 2.5% for the first year and then the minimum retail rate (MRR) minus 0.75 percentage points, which is around 7%, throughout the remaining loan term. As a result, borrowers can save up to 38,000 baht in interest charges for the first year, says Mr Chatpong, adding that the amount saved varies according to the mortgage value.
Borrowers can also refinance with either current or new lenders. A variety of factors, including interest rates and others expenses, will ultimately inform the borrower's decision.
Typically, refinancing with the existing lender will entail a higher interest rate, but without other expenses such as a mortgage fee coming in at 1% of the loan amount, a land appraisal fee of 2,000-3,000 baht and a duty stamp of around 400 baht.
Some banks also require borrowers to take out fire insurance and mortgage reducing term assurance (MRTA), he says, adding those costs should also be taken into account.
Almost all banks allow borrowers to refinance their mortgages with their current lenders every three years, with the exception of GH Bank, which permits some borrowers working at companies which have special arrangements with the bank to refinance every two years.
Mortgage lenders include Government Housing Bank. PORNPROM SATRABHAYA
