A Simple Loan Rate Appeal Letter

I just can't believe it.

I can't believe the TRUTH about the existence of certain groups of people that are not willing to do a simple task to save their money but instead cramping up their tiny brains speaking about surviving economic crisis or making their money work harder.

Fine if you may argue that these people don't know YET about such money saving task.

I'm talking about revisions of your housing mortgage interest rates.

Firstly, I would like to make a few points about your monthly repayment.

#1: If the bank've reduced your repayment amount, that doesn't mean you pay lesser in total.

Meaning if your current repayment amount is MYR1000 per month and your bank sent you a letter informing you that now you can pay MYR900 instead of the original RM1000, beware.

The rationale can be explained like this:

When the bank calculates the monthly instalment amount upon the creation of the offer letter, usually the calculation is made using some baseline rate at that moment, e.g. Base Lending Rate, or your first year effective rate.

Let's assume now that rate is 5% and the repayment amount is MYR1000.00. Also assume that your contract rate is BLR-2%.

If the effective rate remains stationary over a particular period of time, the MYR1000 is properly follow the amortization table schedule. In a better scenario, the effective rate dropped and the partial amount of the MYR1000.00 is used to deduct directly into the loan principal. Good because you can cut short your repayment tenure, e.g. settle the entire in 25 years instead of the original 30 years tenure.

But what if the effective rate increased... Imagine the BLR now is 8% and your effective contract rate will become (8-2)% = 6%. Now the MYR1000 is insufficient because the increased interest amount will "eat up" the principal repayment portion thus you will spend more money the loan and you might get surprised when you are required to fork out a relatively large amount of money for the last instalment of the loan in order to orderly complete your loan obligation. Bad idea.

Solution: Make sure you pay your monthly instalment according to the real effective rate instead of the static amount in the loan contract. Some banks do notify you about the new amount to be paid whenever the effective rate changed BUT there are banks "forgot" to do it.


#2: Fire Insurance, Misc and Other Charges debited into your loan
If your loan requires the purchases of MLTA or fire insurance or etc that auto-debited the amount into your loan, these amounts will become part of the overall principal you need to pay off if you didn't offset them immediately using an equivalent amount of extra loan repayment. Don't underestimate the magnitude of these amounts because the interests on them will get compounded over let say 30 freaking years.

Solution: Don't do the auto-debit thingy or make sure you do extra repayment to offset these extraordinary items in your account.


#3: Make sure your effective interest rate is reasonable
I remember there was a time when a fixed rate 5.99% mortgage loan package is considered as an attractive market deal. Of course, if you view the fluctuation of the market interest rates over 20 to 30 years, then stick to 5.99% for the entire tenure does make some senses. But hey, at this moment, people are paying say BLR-2% which translated into effective rate of 3.55% and you are paying extra 2.44% which is roughly extra MYR2440 each year for every 100k principal outstanding you borrowed, i.e. an extra MYR7329 for a 300K outstanding for 1 year. And you should know that due to amortization effects the first few years of repayment contributed the most to the total interest paid.

Who cares what will be the rates 10 years from now? What's matter is to SAVE money NOW.

Among many options, more commonly you can opt to either APPEAL or REFINANCE your loan.

For fixed rate package, it is not likely that the institution will accept your appeal to reduce the rate because they mayargue that in the long run the interest rates might still shoot up and it's a risk to them too.

NOTE: It is true that if you don't want to withstand the OPPORTUNITY and RISK from interest rate fluctuation, then you better stick to your fixed rate package. No point shouting later when the interest rates make a cinematic return to sky high.

So, you might consider refinancing your loan meaning taking a new loan to substitute the fixed rate one. Refinancing package might include certain options such as zero moving costs and blah. Ask your banker thoroughly about how much you can save by refinancing because this way will involves paying legal fees and doing the entire process of going through land office and blah.

Another option is to make an appeal to the bank to REVISE your effective rate.

Plainly speaking: Ask them to reduce.

It is in the bank's interests to retain customers/loans when the competition is fierce due to volatile interest rate movements and consumer spending patterns. The idea is simple: If the rate is really reduceable and the bank refused to reduce, then REFINANCE and move away from that blood sucking bank. Loss of loan accounts mean loss of PROFITs.

The trick is that the appealed rate wouldn't be as good as refinancing rates although they can be comparable. What the bank have in mind is to remove your economic incentive to REFINANCE so that you don't feel like going through all the trouble just to save a couple of hundred bucks YET the bank still earn a level of interest enough to cover their required rate of returns.

Note: Even when your loan is within the locking period (Usually 3 or 5 years), you can still appeal for a reduction if the savings are large enough to justify it.


Solution: Talk to your banker about APPEALing your rate and use the following template if you like to submit the appeal application. The template is a Word 2000/2003 document and you need to replace some information inside with your own details.

Loan Appeal Letter Template

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Reply to: tigerspank33
- If the bank offered a not so satisfactory rate to you after your appeal, you can always reject it and either appeal again or consider refinancing options.


Reply to: meitang
- Yes, the bank might charge you a minor fee (usually less than MYR100) ONLY after your appeal is approved. No fee should be applicable if say the appeal is being rejected.

Reply to: mmmsss
- You need to speak to your banker to find out the potential savings because refinancing will involve more costs than simply appealing to reduce the rate.

Should You Pay Off Your Mortgage Before You Retire?

by Emily Brandon

Financial planner Nancy Langdon Jones of Claremont, Calif., likes the idea of having her home paid off before she retires. Her husband, actor Claude Earl Jones, would rather have the money invested than tied up in the house. "For my husband, it was very important that he could look at his brokerage statement and see that the money was there," she says. "I wanted to know that if something came up we wouldn't have to worry about the house payments."

After sitting down with a financial planner to get a neutral, third-party view, the Joneses found their compromise: downsizing to a smaller house (with a more manageable mortgage payment) while keeping most of their savings in their brokerage account.

Their struggle illustrates a divide in the financial planning industry. Should you own your home free and clear before you retire? Or is it better to keep your mortgage and invest the money elsewhere at perhaps a higher return while reaping the mortgage-interest tax break? Here are factors to weigh when deciding which path is right for you.

Compare interest rates. The typical 30-year, fixed-rate mortgage interest rate is currently 6.57 percent, according to the Mortgage Bankers Association. If you are getting a higher average rate of return on your investments elsewhere than your interest rate, it makes sense to keep your mortgage. Just over half of affluent baby boomers born in 1948 who have both mortgages and investable assets of at least $1 million do not plan to pay off their mortgages until their 70s, if ever, according to a recent survey of 500 people by investment management firm Bell Investment Advisors.

"Mortgages help free up funds that otherwise would be tied up in property ownership for investment in equities," says Jim Bell, the firm's founder and president. Investing in the stock market money that would otherwise be tied up in home equity also gives you the option of raising cash to deal with unexpected expenses like medical bills or even rising gas prices.

Pay it down. If you're not sure whether you can achieve a higher return in the stock market or aren't willing to take the risk, then you should prepay your mortgage principal as you approach retirement. "We don't know what the earnings are going to be in the market," says Vern Hayden, a certified financial planner and president of Hayden Financial Group in Westport, Conn. "The guaranteed return on your money is the interest you were paying" on the mortgage.

Refinancing from a variable-rate loan to a fixed-rate mortgage can give you a better idea of what your payments will be in retirement. Brent Neiser, a certified financial planner and a director of the National Endowment for Financial Education, recommends paying down principal above your monthly payments when you can. "Adding money at your discretion gives you the ability to stop that when times are tighter," he says. On a $150,000, 30-year mortgage at 6 percent interest, paying just $100 extra per month would save you $45,000 and allow you to pay off the debt seven years sooner than following the normal payment schedule.

Don't rob your retirement plan. According to the most recent Federal Reserve Survey of Consumer Finances, 32 percent of households headed by someone age 65 to 74 were carrying home-mortgage debt in 2004. It can be tempting to dip into your 401(k) or IRA to pay it off. But mortgages shouldn't be paid off in the absence of other savings. "You need to have a balanced approach of keeping that retirement savings robust and also have regular savings for emergencies so you don't turn to the credit cards if your refrigerator or furnace breaks down," Neiser says. Also, pay off higher-interest debt like credit cards and car loans before your mortgage. "If you have your money tied up in a paid-off mortgage, in order to access that equity which is in your house, you have to go pay the bank to get your money [by refinancing the loan]," says Elisabeth Plax, a Beachwood, Ohio, financial planner and wealth manager for Plax & Associates Financial Services. "If you invest it, all you have to do is liquidate it" by selling.

Consider tax breaks. The interest you pay on your home mortgage is tax deductible on up to $1 million in debt. You can also typically write off interest on up to $100,000 of home-equity debt. But you benefit from this tax perk only if all your itemized tax deductions, including your mortgage interest, add up to more than the standard deduction that almost everyone gets automatically. For 2008, the standard deduction amounts are $5,450 for singles, $10,900 for couples, and $8,000 for heads of households.

Jonathan Pond, a financial planner and author of Grow Your Money! 101 Easy Tips to Plan, Save, and Invest, argues that you need to be in the 35 percent tax bracket, or make at least $350,000 annually, for the tax break to be worthwhile. Most Americans in the 25 percent tax bracket might pay, say, $10,000 in mortgage interest but save only $2,500 in taxes.

Look at the emotional aspect. Some 16 percent of workers and 10 percent of retirees think making mortgage payments or paying for a house is the most pressing financial issue facing Americans today, according to an Employee Benefit Research Institute survey done this year. But knowing that you own your home can give you a sense of stability in retirement--security that the possibility of stock market gains will never be able to. "Paying off the mortgage is going to reduce their need for cash flow when they go into retirement," Hayden says. "I just think people ought to get out of debt because times are so uncertain, and the less they are shackled, the better they are going to be able to deal with whatever their problems are going to be."