The product is structured to provide a mortgage facility which could allow borrowers to enjoy immediate interest savings by maintain an amount of positive balance within a current account. Similar products are offered widely by the banks ie. MortgagePlus by Hong Leong, Savelink by Alliance Bank, so forth.
Fundamental mechanism
The mortgage is set up with a loan account and current account. For any balance which maintained in the current account, it will incur corresponding interest savings. For instance, a simple numerical example, a loan account which shown current outstanding stands at 500k and a linked current account with positive balance of 200k, thus, on a daily basis, the interest will be calculated based on the differential of, 500k - 200k = 300k, instead of the entire outstanding of 500k.
** The current account will come with a cheque book as well, market price is RM 200 to be paid for setting up such facility (not refundable in most cases), monthly maintenance fee of RM 10 is chargeable.
Main advantages are:
. As long as you could maintain a significant cash pool within the current account, such mortgage will induce a significant interest savings throughout the tenure.
. Avoid the hassle of prepayment / paper work to knock of the principal with additional payment which commonly observed by borrowers with regular / standard term loan.
. Allow the withdrawal of fund / maintain higher liquidity while enjoy short-term interest savings as compare to term loan.
A simple illustration in calculating interest charge:
Common mistakes / Mispresentations / Misunderstanding
. I suppose the additional payment will knock off the principal but it seemed like it did not happen.
. I paid a large sum of prepayment to the loan account but the month-end statement shown no interest savings!
. I was told that the additional fund which paid to the loan account will knock off the principal and I could redraw them easily but I found out that the additional fund neither knock off the principal nor redrawable-easily!
. I had poured much money into the current account but the interest savings does not happen.
Some of the bankers might initially deliver a wrong message to the clients that such mortgage allow unlimited amount of prepayment to be made to knock off the principal and reduce the interest cost, and the additional fund within the account is withdrawable.
The fact is, a flexi mortgage product is NOT structured to allow the outstanding to be knocked off at any time in any amount. The loan account of a flexi mortgage is functioning similarly to a standard / regular term loan mortgage. Thus, if any additional amount / payment is made to this loan account, by default, it will be treated as prepayment for next installment (so, it will not bring you any interest savings or knock off any of the principal).
A correct utilization of interest savings feature is, putting the additional fund into the current account and interest incurred will be calculated base on the differential between the current account and loan account. It should be noted that no matter how much money had been putted into the current account, it would NOT affect the outstanding balance in the loan account. The direct impact is on the interest calculated instead of outstanding.
Some existing users of such facilities experienced no interest savings for putting money into the current account. This problem might caused by the current account which opened is not for this product. Type of current account which serves the flexi mortgage is not the same type as a regular current account, thus, to ensure the right type of current account is opened, borrowers are advised to bring along the offer letter to the branches and present it to the staffs over there. Opening a regular current account and putting the money inside will not serve the purpose.
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