How to refinance your home loans smartly

As competition is heating up amongst the commercial banks for banking on home loans, more new home loan promotions and competitive refinancing packages are available in the market to entice homeowners to refinance their existing loans. Following the latest cut of interest rates by Malaysia’s central bank, most commercial banks have already revised their base lending rates (BLR) from 6.75% to 5.75-6.0%. Update : The Malaysia’s central bank has cut interest rate again on 24th Feb 2009, BLRs of commercial banks have further revised lower to 5.55% - 5.60%. With interest rates trending lower, it is a good time to review, restructure and refinance your existing loans. There are several good reasons that home owners would benefit from switching their loans to a new loan with lower interest rates;

1. Lower your monthly installment payment
2. Debt Consolidation
3. Using the Existing Equity in the Home
4. Shorten the term of your home loan
5. Combine a first and second mortgage
6. Reduce the interest you pay over the life of the loan
7. Switch from conventional housing loan with variable rate to a fixed rate loan or Islamic loan (or vice versa)
8. Eliminate MRTA mortgage insurance

Before opting to refinance, it is important for home owners and property investors to consider the savings or benefits of refinancing vis-a –vis the costs of refinancing. Do your own break-even analysis between long term savings and refinancing costs to determine whether the savings really outweigh the costs of  refinancing or otherwise. More at Making sense of mortgage refinancing and Should I refinance now ?.

However, there are circumstances whereby refinancing might not give you the maximum savings such as when you have short remaining years to retire your loan etc Refer why say no to refinancing.

For Malaysia home owner as well as property investors who are uncertain of holding the property for long term or you have plans to sell off the property in the near term, not all refinancing packages will provide you the best refinancing benefits. Refinancing packages with features of “Zero-Entry Cost” or “Zero-Moving Cost” may not necessarily the best option, depending on your financial needs. Under such packages, although you are not required to pay any processing fee, legal fees, stamp duty, valuation fees upfront, the loans are subject to higher interest rates and imposition of exit fees or early redemption penalty up to 5% of the loan amount (vary from bank to bank) in the event that you choose to redeem your loan within the lock-in period of 5 years. Example if a house owner has to redeem his loan of RM200,000.00 within the lock-in period, he has to pay 5% of exit fees ie RM10,000.00!!!

We have come across property sellers who were stuck with loans with lock-in period and only realised that if they decide to take up a good deal offered by interested buyer, they have to pay the exit fees for redeeming the loan prematurely. On the other hand, if they choose to wait until the expiry of lock-in years ie after 5 years to avoid payment of exit fees, they might lose the opportunity of capitalising gains or losing the sale due to changing market conditions. For investment properties, the better alternative is to look for refinancing packages with no exit fees or shorter lock-in period which give you more flexibility in terms of selling / renting,  though initially you may have to pay slightly higher interest rates and documentation costs, it is still better than paying exit fees which could end up diluting your capital gains.

Below is a simple checklist to guide you on home loan refinancing :-

1 Get information on the current mortgage

For the current mortgage, you should be able to get the following information from the bank:

- the outstanding balance or ringgit amount left on the mortgage;

- the remaining number of years on the mortgage; and

- the interest rate on the loan.

2 Get information on the new loan

For the new loan, you should get information on the following:

- the terms or the number of years of the new loan; and

- the interest rate on the new loan.( the latest interest rate can be as low as BLR - 2.4% )

3 Get the costs of refinancing

The costs you are likely to encounter when refinancing include:

- processing fee or application fee;

- credit check fee;

- legal fees;

- stamp duty;

- disbursements fee;

- valuation fees; and

- redemption fees (if applicable)

4. Shop for best refinancing loan packages that suit you.

- Find out the latest home loan promotions by various lenders in Malaysia :-

-Malaysia Home Loans - What’s New (January 2009)

-Conventional home loan packages

-Islamic Home Financing Packages

-other home loan packages offered by non-bank lenders; AIA, ING

For advisory on property investments in Kuala Lumpur and Penang, email to us at Izrin & Tan Properties Sdn. Bhd or call us at +604 6588333 (Penang Office) or +603 92839782 (Kuala Lumpur Office) and we would be pleased to assist.

New housing scheme by SP Setia in Penang Island

New housing area in Prai

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4 Responses to “How to refinance your home loans smartly”

  1. LOKE Says:

    An informative blog… I hope you can write a post about the differences among all the home loan packages like flexibel and fixed rate packages, their strengths and weaknesses… Good job…

  2. investment-gan Says:

    I came across your blog when I was randomly searching around for some property information for Malaysians. An informative blog indeed. Keep up the good post.

  3. el the man Says:

    interesting. one more thing to mention, some people re-finance to get some extra cash for renovation.

  4. ING Home Loan Says:

    At this current economic environment, fixed rate shall be the best choice for long term financing. Because everybody is uncertain on how well the economic will perform in the future. It’s the right time to fix the interest rate while it is still low currently.

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