Lately, we received a question from Joe as follows:
So here, I would like to answer this question with a case study below:
Let’s assume that the two apartments Joe has are worth RM 150k and RM 500k respectively. The RM 150k apartment has a mortgage balance of RM 50k. As for the RM 500k apartment, Joe owes an outstanding mortgage of RM 400k. Today, Joe wishes to buy a landed property costing RM 800k and he would like to get a 90% loan to finance the purchase of this property.
Thus, the question is: ‘Could he do so and how does it work?’.
Base Case: What if Joe Could Not Obtain a 90% Loan?
In Joe’s case, he can finance 70% of the property cost with a mortgage. But, this means that Joe needs to fork out 30% in downpayment to buy his house, which amounts to RM 240k. As one who has two tenanted properties, I would assume that Joe is reluctant to have such an amount dumped into a piece of real estate, even if he has it. Joe knows that this landed property is not an investment as he wishes to use it for his own residence.
Here, let’s keep the RM 240k in perspective.
Assuming that Joe has the RM 240k needed in cash. He could choose:
Option 1: Settle the Mortgage with a Lower Balance?
It refers to his RM 50k in mortgage balance for his lower-priced apartment unit. So first, Joe could spend RM 50k in capital to settle this mortgage in full. Hence, it shall ‘free up’ 1 quota for a 90% loan to fund a residential property for Joe. As such, instead of RM 240k, he could pay 10% down payment, which is RM 80k to buy his RM 800k landed property.
So in total, the capital expended is RM 130k (RM 50k + RM 80k).
Option 1 enables Joe to:
1. Retain RM 110k in initial capital (RM 240k – RM 130k)
2. Keep his two apartment units which are tenanted.
3. Use the rent earned from the RM 150k apartment to service his mortgages.
Option 2: Dispose of the RM 150k Apartment Unit
Let’s assume, Joe could receive RM 90k after disposing of his RM 150k property and factoring in the settlement of RM 50k in mortgage balance and all his other costs associated with this disposal. Likewise, this would free up 1 quota to get a 90% loan to finance the purchase of his landed property. Then, Joe could pay as much as RM 80k, which is the 10% down payment for his landed property.
Thus, how long does it take for one to obtain a brand new loan after settling his previous loan? Here, KC Lau, my partner, has answered this as follows:
In this case, the capital expended is negligible.
Option 2 enables Joe to:
1. Retain most, if not all, of his RM 240k in excess cash.
2. Keep the RM 500k apartment.
3. Invest the RM 240k either for recurring cash flow or capital gains.
Option 3: What About Joe’s Wife?
It is possible for Joe to desire a new property if he is contemplating marriage. In Joe’s case, he could ‘ask’ his wife to buy this property under her name or to buy and co-own the property as a couple. But, the thing is – The mortgage would be taken under Joe’s wife’s name.
So, the questions are:
1. Does she have 1 or 2 quotas for a 90% loan on a residential property?
2. Is she comfortable with taking on new debt?
3. Is she expected to service the loan in full, in partial, or none at all?
4. Is she expected to contribute to its 10% down payment?
5. What about estate planning matters?
Conclusion: Which of these Options are the Best?
In short, all options have their pros and cons. It depends on what Joe values the most out of these options. For instance, if he values the flexibility of using cash, Joe could choose to dispose of the lower-priced property in exchange for a new property. But, if he wishes to keep his two apartments, then, settling one of the two mortgages would be a viable option.
So, if you are Joe, which option are you more inclined to choose and why?
Let us know by posting your comments below:
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