Most of us serve our housing installments by paying the exact monthly amount stated in the loan tenure. However, let’s say you suddenly get a raise or a windfall and decided to pay more for that particular month, you can actually opt for a Capital Repayment.

Unlike the monthly installment we are paying the bank which pays for the capital and interest portion of the loan, Capital Repayment is used to reduce the capital portion of the loan, not the interest.

Most banks require that you give advance written notice if you would like to proceed with a Capital Repayment, which I feel is totally unnecessary. The reason why I think they are doing this is because they want to make the process troublesome so that you won’t be making too much Capital Repayments (just my speculations!). They could easily just provide a checkbox in their payment slip where we can just tick “Excess Payment goes to Capital Repayment”. I know some banks are already doing this, and this is always good for the consumers. Look for the bank that doesn’t require you to give any notice for Capital Repayment.

Also, when you do a Capital Repayment, make sure to look for those that also come with redraw facility and that they don’t charge you a bomb for every withdrawals. For example, after making a RM 50,000 Capital Repayment, your boss fired you the next day. After 2 months browsing Jobstreet, you still can’t find a job. This is when you might need to withdraw some money from the RM 50,000 windfall you had, and a redraw facility that is flexible can really help you through tough times.

Do note that Capital Repayment is not equivalent to Advance Payment. You will still need to continue serving your monthly installments even after making a Capital Repayment.

Advance payment or advance installment is when you are paying more than your monthly installment. Most banks also reduces your principal when you make a lump sump advance payment. Advance payments are usually made for the sake of convenience, for example, you might want to put pay 3 months ahead and safe the trips to the banks. The savings you get from advance payment is not significant as compared to Capital Repayment.

As a conclusion, exercising Capital Repayment is a good strategy to shorten your loan period and save up on the total interest paid during the entire loan tenure.

In the next tip, we’ll talk about setup fees and maintenance fee.

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