Today, we are going to do a case study of a real story. Mr.Tan (of course not his real name) took up a home loan from Alliance Bank. Nowadays, the home loan package offer is irresistible. I met Mr. Tan and we discussed about this matter whether should he refinance his mortgage. He will have to pay the early settlement penalty if he do it this year. He wants to know would it be advisable to refinance his home loan now to seize the all time low interest rate opportunity recently.

Let’s look at his present situation and his existing home loan:

• Loan provider: Alliance Bank
• Original loan amount: RM190,711.10
• Current interest rate at 2nd year: BLR +0% = 6.75%
• Installment: RM1243/month
• Outstanding loan: RM160,498.80
• Remaining tenure: 29 years
• Penalty for early settlement: 3% of original loan amount or RM5,000 whichever higher = RM190,711.10 x 3% = RM5721.33

Image: Existing home loan interest schedule

So I do an analysis what would happen if he refinances his mortgage to OCBC bank.

Image: OCBC home loan offer

He thinks that BLR will most like falls in the future. So he opt for the variable interest offer with zero moving cost. Zero moving cost means the bank will pay for all the loan agreement, stamp duty and also the property valuation fees.
So here is the package he will get

• Year 1-5: BLR – 1.4% = 5.35%
• Thereafter: BLR – 1.55 = 5.20%

Let’s assume BLR stay the same at 6.75% for easy calculation. Anyway, the BLR rate is pretty standard.
Mr.Tan doesn’t want to pay any extra amount for the refinancing process. He just wants to continue his installment monthly as usual. Thus, I said it is better to finance his penalty of early redemption by including it in the new home loan application. So he can choose to finance his penalty paid to Alliance bank. Here are the new home loan details:

• New loan amount = existing outstanding loan + penalty = RM160,498.80 + RM5721.33 = RM166,220.13
• New tenure: It is advisable to get the longest term possible because you will have low cash flow commitment but still have the flexibility to pay extra — in this case — 30 years

## Comparison Methodology

In order to make a fair comparison, we will just look at the remaining outstanding loan after 4 years from now by paying the same installment of RM1243/month throughout the 48 monthly installment. For the loan package that provides the least outstanding principle loan result, it wins!

### Without Refinancing

If Mr. Tan don’t refinance and stick with Alliance bank for another 4 years.

Image: Existing home loan details

Image: Existing loan repayment schedule

Note that the outstanding loan after 4 years is RM142,639.10 as highlighted.

### With Refinancing

If Mr. Tan refinance his mortgage to OCBC bank by having to pay the penalty which is also financed in the new loan.

Image: New mortgage details

Image: New home loan repayment schedule

The outstanding loan after 4 years is RM138,919.89 as highlighted.

So the number actually tells the story: RM142,639.10 vs RM138,919.89.
If Mr. Tan refinance his home loan, he will be RM3719.21 richer after four years. Is it worth the hassle? Mr.Tan just need to meet me a few times to sign the offer letter. Everything is free! He doesn’t need to pay extra and the loan tenure is shorten to 17 years only! This is also the best time to refinance because if he decided to refinance a few years later within the lock-in period, the penalty is still the same because it is calculated from the original loan amount, not the outstanding loan.

Image: Penalty – worth to pay!

Conclusion: With proper analysis methodology and good advice from a financial consultant, you can save thousands ringgits to refinance your home loan even though you might need to pay penalty for early settlement.

Technorati Tags: , , ,

KCLau

Personal finance author and trainer

### 12 replies to "Case Study: Why You Should Refinance even with Penalty"

• Rani

Hi Sir,
I’m in dilema now. I need to remove my brother’s name from my house loan. I have only 2 option to do that, 1. Refinance or settlement. My loan balance at present is 158k and interest rate is 4.5. For 22 years. My monthly installment = 1070.Now, if i refinance for the loan amount only, still d interest rate will be higher and i will be paying more interest to the bank right? Some friends suggest refinance according to the market value n keep d cash for investment purpose. My house current value is Rm 420k. 90% loan will be 380k – 158= 222k.. Legal fee will be around 10k.
Should i refinance for d loan amount only or more amount n keep d cash. I dont have any other loan. What is d best i can do. please advice

• KCLau

It depends on how are you going to invest the extra cash out. If you have the skill to generate more than 4.5% mortgage cost, then it is worthwhile to invest the cash out.

• […] Case Study: Why You Should Refinance even with Penalty […]

• dilemma

Hi KC, nice blog!!
I juz bought a house last 2 years with RM600++ monthly instalment @ 5.25%.
Now, im thinking of to refinance it.
Reason is to have extra cash to settle off personal loan.
What do you think?

• KCLau

There shall be a penalty involved for early settlement. You will have to consider whether it a good move.

• ABDUL BHARI

I OWN A HOUSE WHICH HAS OUTSTANDING 80206.00. I STARTED TO PAY LOAN ON 2005. THERE ARE ANOTHER 20 YRS TO GO. IF I WANT TO REFINANCE IS IT WORTH. MYMONTHLY PAYMENT IS RM511 AT 4.2% INTEREST. PLS ADVICE

• KCLau

Your interest rate is pretty low already. I don’t think it is worth refinancing because it will incur moving cost.

• Gaurii

Interesting website Lau. I only regret that I never browse ur site before i bought my house

• KCLau

Hi Gaurii,

It is never too late. You will buy your 2nd, 3rd …. and more houses later.

• PlatinumGirl

Thanks KC,

I sure hope that i will make more money online. Hehehe. Same to you too.

• kclau

Hi PlatinumGirl,
Thanks for visiting my blog. Wish you a better financial future ahead.

• PlatinumGirl

Ahh. This is a nice post. I could use information you provided here. A bit like the dilemma i had earlier this year, which i later decided not to refinance due to the advice from a loan exec.