What is property refinancing ? (Updated 31/07/18)

Refinancing

I have noticed that many people are still unclear on the subject of property refinancing. The aim of this article is to give you, the reader clarity on this topic. Once you understand how property refinancing works, you might just save yourself a lot of money.

Before we go any further, let’s get the terminology right. Refinancing refers to debt restructuring. Borrowers refinance for 2 main reasons:-

  1. To get a lower interest rate or monthly repayment.
  2. To obtain an additional loan amount for personal usage.

For example

Existing Loan

Amount:            RM 500,000

Rate:                   5%

Tenure:              30 years

Installment:       RM 2,684.00

Total Interest:  RM  466,278.00

New Loan

Amount:            RM 600,000 (Additional RM100,000)

Rate:                   4.3% (Lower Interest Rate)

Tenure:              30 years

Installment:       RM 2,969.00

Total Interest:  RM  468,921.00

From my experience in banking, there are two types of refinancing plans.  You can either do internal or external refinancing. A common mistake borrowers make is that they assume that refinancing means moving their existing loan to another bank. Did you know that you could also do internal refinancing using your current bank? In fact this is what you should consider first before anything else. Borrowers can appeal for lower interest rates and also request for an additional loan amount if the market value of the property has increased

The benefits include:

  1. Lower legal fees. You will be surprised at how much you will be saving. You will only need to pay for the stamping of the additional loan amount.
  2. For the additional loan amount, you get the money a lot sooner.
  3. If the request is for a lower interest rate, no legal fees will be incurred.
  4. It saves time

Nevertheless do take note on the following:-

  1. There might be a possibility however that the new interest rates offered by your current bank may be a bit higher than refinancing your property with another bank. Get your facts right first. Do proper research before committing.
  2. You may be asked to do a fresh valuation.
  3. Please read the additional terms and conditions on the bank’s letter of offer before proceeding.

 

If you feel that internal refinancing does not help you, you can always opt for refinancing with another bank. If you decide to do this please take note of the following before proceeding…

  1. Cost of legal fees
  2. Valuation Fees
  3. Mortgage Reducing Term Assurance purchase
  4. Time line to complete the transactions.
  5. Additional terms imposed by the bank

Whether you decided to refinance internally or externally, please read the new letter of offer before you sign. Many borrowers have signed without reading and understanding the terms. Again, there are no such things as standard documents. Do not regret later.

I always put great emphasis on reading everything before signing. Here’s an example why.

A few years back a borrower came to me bringing along his documents including the bank’s letter of offer. The EPF had declined his request for withdrawal to reduce his housing loan. After looking through his documents he subsequently requested the bank to reduce his current interest rate to which the bank approved. The EPF had reject his request because the new letter of offer classifies his entire loan as “personal” instead of “housing”. Be extra careful regarding this.

Please note the current conditions by Bank Negara.

  • Top up loan (RM100,000 to RM150,000 , RM50,000 is considered top up)
  • For Debt Service Ratio (DSR) calculation the banks can take maximum 10 years only.
  • Monthly repayment can be based on full tenure.

*Read DSR Calculation to understand more

This can affect your loan approval.

I hope that my brief write up and explanation will help you in refinancing your property.

From the desk of

Miichael Yeoh

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