Paying off a housing loan is a decades-long commitment, but it doesn’t mean you have to accept the full interest burden. By using loan prepayment strategies, you can shorten your tenure, reduce total interest, and save a substantial amount of money over time
This guide explains how prepayment works, shows you how to calculate the savings, and outlines practical strategies you can apply in Malaysia.
1. What Is Loan Prepayment?
Loan prepayment is when you pay more than your scheduled monthly instalment. The extra amount goes directly toward your loan principal. By reducing the principal faster, the bank charges you less interest in future instalments.
There are two common types of prepayments:
- Tenure reduction: You keep your monthly instalment the same but shorten the overall loan period.
- Instalment reduction: Your tenure remains the same, but your monthly instalment drops.
2. Why Prepayment Helps You Save
Interest in Malaysia’s housing loans is calculated on the outstanding principal. The earlier you reduce the principal, the less interest you pay over time.
Example:
- Loan amount: RM400,000
- Interest rate: 4.2% p.a.
- Tenure: 30 years
- Monthly repayment: ~RM1,955
If you add RM300 extra each month:
- You finish the loan ~5 years earlier
- You save about RM70,000 in interest
see more: House Loan Calculator Malaysia
3. Loan Prepayment Calculation Methods
When calculating the effect of prepayment, focus on:
- Outstanding balance
- Interest rate
- Remaining loan tenure
- Extra repayment amount
4. Prepayment Strategies That Work
a) Regular Monthly Top-Ups
Adding even RM200–RM500 monthly can shave years off your loan. Works well if you prefer consistency.
b) Lump-Sum Payments
Using bonuses, EPF withdrawals, or savings to make a lump sum prepayment can significantly reduce interest, especially if done early in the loan.
c) Hybrid Approach
Combine monthly top-ups with occasional lump sums for flexibility.
d) Early-Year Prepayments
Most of your early instalments go toward interest. Prepaying in the first 5–10 years has the greatest impact on savings.
5. Things to Watch Out For
Before starting, check your loan terms:
- Lock-in period: Some banks penalize prepayments in the first 3–5 years.
- Prepayment rules: Minimum amounts (e.g., RM1,000) or prior notice required.
- Administrative fees: Some banks charge processing fees.
- Opportunity cost: Compare loan interest savings with potential investment returns.
6. Real-World Example: RM500,000 Loan
| Strategy | Tenure | Total Interest | Savings |
|---|---|---|---|
| No prepayment | 30 years | RM378,000 | – |
| RM300 extra monthly | 25 years | RM310,000 | RM68,000 |
| RM20,000 lump sum in Year 5 | 28 years | RM340,000 | RM38,000 |
7. FAQs on Loan Prepayment
Q1. Is it better to reduce tenure or instalment?
Reducing tenure saves more interest overall.
Q2. When should I prepay my loan?
The earlier, the better—since interest is front-loaded in the early years.
Q3. Can I use EPF savings for prepayment?
Yes, EPF Account 2 withdrawals can be applied toward your housing loan.
Q4. Do all banks allow prepayments?
Most do, but terms differ. Always confirm with your bank.
Q5. Is there a penalty for early prepayment?
Some banks charge during the lock-in period (first 3–5 years).
Fredrick is the creator behind houseloancalculatormalaysia.online, dedicated to helping Malaysians easily understand and calculate their home loan payments. With a focus on accuracy and simplicity, Fredrick develops reliable tools and clear guides to empower users to make informed financial decisions. His goal is to provide trustworthy, user-friendly resources that save time and reduce confusion in the complex world of home loans.