Top Reasons to Refinance Your Property

My ex-staff has a home loan with the following facts:

• Current principal outstanding – RM70,000
• Current interest rate – BLR + 0.25% (6.05% based on current BLR)
• The best part is the market value of the property now is RM150,000 compared to purchase price for 6 years ago at RM90,000.

So, he approached me to discuss on opportunity that he may exploit from this situation.

First of all, my suggestion was for him to get a revision on his interest rate from his banker based on the current market offering of BLR – 1.80%. However, the reply is not in his favour i.e. the bank only offered him BLR + 0%. Since the loan is subsidised by the employer for about 30%, the effective interest rate charged on him is about 4.3%. This rate is still higher than the market rate of 4.0% - 4.2%.

So, the second step was to look on the possibility of refinancing his property with a better package with opportunity to get extra cash out from the same property. Easily he can get about RM50K from this refinancing.

So we sat down together doing some analysis with all available options. The results will depend on the strategic implementation and market condition later on. I hope with a proper financial planning and management, he will succeed in accumulating wealth and enjoy a better life.

Perhaps I could share some reasons for people to refinance their property as follows:

• Save interest rate charged - Generally, a new financier will offer lower rates from existing financier, therefore borrower able to save interest
• Reduce monthly instalment - New financier offer lower interest rate, the monthly instalments will be reduced accordingly.
• Shorten loan tenure - A borrowers initially may be applying loan tenure for 30 years, after he or she financially is more stable, he or she may decide to commit high monthly repayment which also directly will shorten the loan tenure e.g. 25 years or 20 years.
• Cash out home equity - Usually a property value will be appreciated through years, when the property value increase and the loan outstanding reduce, it will create an home equity for owner (borrower) . When owner (borrower) refinances the property the home equity will be cashed out.
• Debt consolidation - Understandably nowadays consumers are taking more than one borrowing , e.g. car loan, personal loan, credit card outstanding, term loan for business, study loan, over draft etc. Borrower may take opportunity to cash out the home equity and pay off the rest of loan or borrowing to consolidate the debt.
• Reduce home loan account - Borrower may have more than one home loan account, he or she can refinance to cash out one of the properties’ home equity to pay off the rest of the home loan account.
• Switching from variable rates to fixed rates or vice versa - Fixed rates and variable rates have very different features: variable rates are fluctuating according to BLR which is announced by Bank Negara Malaysia (BNM). Whereas fixed rate, the rates is constant even BLR is fluctuating. It is common that, fixed rates are much higher than the variable rates at the time a borrower sign acceptance of the offer.
• Switching from conventional loan to Islamic loan or vice versa - Basically Islamic and conventional financing have no far differences. The major difference is the way or concept of Islamic financing is Syariah compliance. Some Muslim borrowers may change package to adhere to Islamic borrowing concepts.
• Change financier - Some borrowers may be experiencing unsatisfied quality of service provided by existing financier. So they refinance is to put their loan account to new financier.
• Cancel MRTA- MRTA made it compulsory by most of the bank in the first time of borrowing of borrowers’ house. Borrower may refinance to other financier so that they allow to cancel the MRTA to get life insurance which is in long term provide better benefits and coverage.

 [Reasons shared by AMS Consulting YOUR MORTGAGE HUB]