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%. 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 realized 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 capitalizing 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

This article is contributed by Sr Tan Chai Liang, a Valuer/Estate Agent/Auctioneer who blogs at www.intproperties.com.