11 Smarter Ways To Refinance Housing Loan

What is Refinance Housing Loan

Property refinancing refers to replacing an existing mortgage loan with a new loan under different terms and conditions, whether from the same financial institution or a different one. Homeowners usually refinance housing loan to get a better interest rate on their loans or to lower their monthly instalments. Simply put, a new loan is taken based on the current price of a particular property and used to repay the balance from the old loan. The homeowner will only need to pay the instalments for the new loan.

3 Types of Home Refinancing in Malaysia

1. Rate and Term Refinance

Rate and term refinance involves changing the previously applied interest rate to a better one without altering the amount of your loan. This refinancing package is suitable when housing loan interest rates significantly decrease in the current market. This type of refinance will reduce your monthly commitments, thereby stabilizing your financial position.

For example, if there is a change in the Overnight Policy Rate (OPR) in Malaysia that causes the existing interest rate to decrease, those who took out home loans before the OPR reduction would still be paying a higher rate. Therefore, if you want to take advantage of this lower interest rate without changing the loan amount, you can refinance your home.

If the current value of your existing property is RM500,000, you could save nearly RM10,000 per year. In other words, this type of refinancing would be beneficial if there are changes in the OPR to enjoy lower monthly payments.

2. Cash-In Refinance

You can consider this type of refinance if you want to pay a substantial amount to the principal of your existing mortgage before refinancing. This ensures a better position for negotiating a lower interest rate and better monthly installments for your new home loan. In essence, it offers a better alternative if you have less than 20% equity in your home.

3. Cash-Out Refinancing

Cash-out refinancing is the most popular among these three packages because it offers additional funds to you. Essentially, if you already own a property, this type of refinance allows you to borrow 90 percent of the current value of your property. Suppose you bought a property for RM300,000 ten years ago, and today it is valued at RM500,000. The maximum loan margin allowed for refinancing is 90% of RM500,000, which is RM180,000.

You can use this money to buy a new house, pay off high-interest debts, or even settle the remaining balance of your existing loan to reduce the monthly interest payments on your old home. However, this obtained RM180,000 is not free, because:

• • Previously, your loan amount was 90% of a property valued at RM300,000 = RM270,000.
  • Based on the current assessment, your property is valued at RM500,000.
  • So, now you have taken out a loan of 90% of RM500,000 = RM450,000.
  • If the period and interest rate of your loan remain at 35 years with an annual interest rate of 4.25%, the interest rate on your old loan is RM1,236.31, while the interest on your new loan is RM2,060.52.
  • This means you have to bear an additional cost of RM824.21 per month.
  • You may enjoy extra funds for other purposes, but the monthly installment will increase, potentially increasing your monthly commitments.

Advantages of Refinance Housing Loan

1. Lowers the interest rate

Leveraging on the changes in the Base Rate (that influences the interest on home mortgages), home refinancing is the best way to reduce your monthly mortgage instalments particularly if you apply while the base rate is lower or while the bank is offering a better interest rate.

Say the fixed rate on your mortgage is 6.85% p.a.. A bank offers you to refinance your home with a new interest rate of 4.35% p.a.. Through refinancing, you will get a total interest savings of 2.5% throughout the rest of the loan tenure. Say the value of your property is RM300,000. With this interest savings, you can save as much RM7,500 p.a. or RM625.00 per month.

2. Leverage on property capital growth

Capital growth is the rise in asset value, including property. Over time, you too can see a value growth on the assets you own, and home refinancing is a way to directly benefit from this.

E.g. You have an outstanding balance of RM40,000 on your mortgage. However, the current valuation of your property is RM500,000. You are eligible to refinance your home at a 90% margin out of RM500,000, which totals to RM450,000. You can therefore use the RM400,000 to pay off the mortgage, and keep the remaining RM50,000 for your own use.  

3. Extend the loan tenure

If you face any problems with your monthly cash flow, taking up a refinancing scheme with a longer loan tenure can help reduce the amount you pay as monthly instalments. This can leave you with more disposable income for your monthly expenses.

E.g. You get a new housing loan for RM400,000 with an interest rate of 4.8% p.a. for 35 years (flexi loan, 90% margin & lock-in period of 5 years). The monthly instalment is around RM1,771.

After paying this for 10 years, you decide to refinance the property at a lower rate (4.35%) over the same tenure length. Assuming that the outstanding balance is now RM350,000, your monthly instalments are now at RM1,633.

4. Change from fixed rate to variable rate, or vice versa

Depending on the package you select, your mortgage loan may offer a fixed interest rate (where the interest rate remains the same over the loan tenure regardless of market changes), or a variable interest rate (where the interest rate adjusts according to any changes in the property market).

A fixed interest rate saves you from worrying about any changes to your loan because of its nature; while a variable rate allows you to pay less for your monthly instalments if the property market dictates so. Through home refinancing, you can move from one package to another, whichever fits your financial needs more. 

5. Debt consolidation

If you have more than one commitment at the same time, a home refinancing scheme allows you to consolidate all of your existing commitments into a single account, so you will only receive one statement and pay debt to only one party each month.

There are many banks and cooperatives (koperasi) that offer this facility, such as Co-opbank Pertama House Loan that offers home refinancing by consolidating all of your debts like credit card and personal loan debts.

6. Save on renovation costs

It is wise to reinvest the extra cash you gain after refinancing your home back into your home. Use that money to fix whatever needs repairing, expand spaces or just beautify the house. These are great in further increasing the house’s market value.

7. Convert from conventional to Islamic loan

If the mortgage is previously a conventional loan, you can convert it into an Islamic loan by refinancing the house. Some of the advantages of an Islamic loan are:

• The ceiling profit rate is the maximum profit that can be earned from a sales-based financing. The profit from the loan is based on the Islamic Base Financing Rate (BFR) and it is variable based on the market conditions, but will not exceed the ceiling profit rate.
• The profit is charged on the principal payable, and there is no profit compounding in Islamic banking. This makes the profit rate for an Islamic financing product much lower than a conventional loan, plus penalties on late payments are also lower.

Disadvantages of Refinance Housing Loan

1. Administration costs

A home refinancing process is pretty similar to a home-buying process, where there will also be a property valuation process along with its corresponding cost. Some of the costs involved include:

• Bank processing fees
• Legal fees
• Stamp duty
• Sales and purchase agreement (SPA) fees
• MRTA

If the total of these costs exceed the amount of money you earn through the refinancing process, you might want to reconsider this refinancing altogether.

2. Monthly instalments increase if loan tenure is shortened

The monthly instalment amount increases because the loan tenure is now shorter.

For instance, the loan offers a financing for up to 35 years, but you are only eligible for 30 years because of your age. This will make the monthly instalments higher for your case.

A shorter loan tenure is a good thing, but if it only causes your instalments to go higher, that might only serve as a burden that is even worse than prior to the refinancing.

3. Total loan amount increases according to current property value

When you refinance your property, the new loan will be based on the current value of the property, which is likely higher than when you first bought it. This also means that the total loan amount becomes higher than before. Therefore, you should really think if it is worth borrowing a higher overall amount, and if this is balanced by the extra money you earn from the refinancing.

4. Long application process

If you need the extra money quickly, perhaps refinancing your home is not the way for it. This usually involves quite a long process, and therefore a long time before the transaction is completed and you can earn the money.

As an estimate, the overall process of home refinancing can take from 3 to 5 months if there are no hiccups along the way. If any problem is encountered, the process will take longer than that.

5. Risk getting penalised if there is a lock-in period

Usually, banks will impose a ‘lock-in’ period to prevent borrowers from reselling their property shortly after purchasing them, and too long before the principal and interest are paid off. Depending on the institution, there might be a penalty of 2 to 5% of the total loan amount if the property is resold or refinanced within the lock-in period.

Banks also impose this lock-in period to prevent their customers from moving on to rival banks too quickly. This period usually extends from 3 to 5 years. Refer the bank offer letter or contact your bank to know your respective lock-in period.

The penalty is quite high and in most cases it is not worth paying for it, so you should rather wait until the lock-in period is over. Be sure to not rush into the home refinancing procedure.

How to Refinance Housing Loan

If you are unsure on how to refinance your home, this guide is for you.

1. Have ownership of the property

If the home is purchased under your partner or parents’ name, you can still opt for a joint loan.

2. Check for current market value

A home refinancing is only profitable if the current market value of your home is higher than at the point of purchase. Otherwise, it will not bring you as much savings.

3. Get CCRIS report

Before proceeding to apply for any loan at all, it is advisable to first check your CCRIS Report. This is where all your credit history, like repayment histories and all the loans you have owned, are recorded. This is something that banks will surely do too.

The bank that you are applying for the new loan with will analyse your credit history through this report. They will check your salary, your total commitments, and your repayment behaviour to assess whether they trust to let you borrow from them.

If you have a record of missing payments for 2 months or more, that can make it tricky for your loan to be approved.

4. Check eligibility for housing loan

The success of your refinancing pursuit depends on whether you are approved for the new loan. There are many ways for you to check your loan eligibility, online or by visiting a bank.

By checking online, you can get an estimate of whether you should refinance your home or otherwise. Alternatively, to get more detailed and specific quotations, you can visit a bank branch so that they can check and calculate your rates, although this is more time-consuming.

By visiting a bank, you can also know the details about the new loan, like the interest rate, loan tenure, etc, and you can use this information to decide.

5. Housing loan application

Once you are done with steps 1 through 4, you can proceed to the loan application itself.

It usually takes 1 to 2 weeks to receive the approval or rejection, but it may take longer if the bank requires more supporting documents from you.

Before applying for a loan, these are the few things you must know:

Breakeven point

The easiest way to determine the breakeven point on the refinancing is by dividing your monthly savings by the closing costs, of which include:

• Valuation fee
• Credit report fee
• Title fee
• Tax service fees
• Origination fee

This can be summed up as:

Months to breakeven point = closing costs/monthly savings

a. Home equity (current home value) This ties in closely to leveraging on property capital growth, as we mentioned earlier.

b. Home insurance or mortgage insurance protects your house and its contents from losses or damages. It also protects you from any liabilities that happen inside or on your home. When you choose to refinance the home, you might be asked to take up a new home insurance package too.

c. Renewed loan tenure The key to home refinancing is obtaining a lower interest rate, although you might also want to pay attention to the loan tenure i.e. the repayment duration. Whether it is short-term or long-term, choose what suits you best, then compare the interest rate to the loan tenure that you have chosen to see which one makes you pay the instalment that suits you most.

d. Interest or profit rate Be sure to read the terms of the new mortgage loan thoroughly. Keep an eye out for hidden conditions that might cause you to pay more than intended.  

6. Compare across home financing products

Determine whether you prefer a conventional or Islamic financing. Our personal recommendation is to go for Islamic financing, whether you are a Muslim practitioner or otherwise.

7. Check for ‘lock-in’ period

This is commonplace for all banks. The usual lock-in period is for 3 years, but it can also go up to 5 years. Islamic financial products usually do not offer lock-in periods too.

This condition can be a hassle if you decide to refinance or resell your property, because you will need to pay a penalty of 3% of the loan amount. This is a big amount that you will be better off avoiding.

8. Sign letter of offer

Once you are clear and informed about all the loan’s terms and conditions, put down your signature on the letter of offer accordingly. After this process, it can still take 3 to 4 months after everything is finalised. The longer you delay the signature, the longer it will take.

9. Sign with a lawyer

After the offer letter has been signed, the bank will then assign a lawyer to create a loan document. Subsequently, you will be required to sign this document in the presence of the lawyer.

These documents can appear long and windy, but most of them are standard. Just be sure to be absolutely clear on all the matters related to your loan.

After that, the lawyer will conclude the refinance process. You might need to follow up from time to time to know its progress.

10. Site visit by bank valuer

Be prepared to receive a call from a bank valuer planning to visit your home. This is a step for banks to determine the true market value of your property.

The evaluation process includes a visit to your home and its surroundings and some photographs for documentation, and this can take as short as 10 to 15 minutes. After that, a report will be sent back to the bank to confirm the true value of the property.

11. How long is the overall house refinancing process?

The new bank will first pay off any outstanding debt to the previous bank, but it is easier if there is no outstanding debt. Once all of these steps are done, you can receive your cash in 3 to 5 months.

What is an LPPSA House Loan

In Malaysia, government servants are entitled to a special benefit to finance their home purchases through Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA).If you are a civil servant and have yet redeemed this benefit, get it soon!

Benefits of LPPSA House Loan

Some of the advantages of LPPSA financing are:

• Up to 100% loan margin with interest rate as low as 4%.
• Your eligibility for the financing will only be measured by what is stated on your salary slip, and any outside commitments are disregarded,
• Those already with high commitments are also eligible.
• Eligible for a second financing scheme, provided that the debt for the first loan has been paid off completely. This is also with the condition that the monthly instalments do not exceed 50% of current basic salary.
• Tenure of 30 years for the first financing scheme, and 25 years for the second. This is still subject to the applicant’s age at the point of application.
• Home financing scheme that extends to the age of 90.
• The interest is charged based the diminishing balance method, which means that the interest decreases each subsequent month.
• Financing to buy property on behalf of family members is also permitted.

How to Refinance LPPSA House Loan

The process is similar to regular home refinancing, except there are even more benefits to the latter.

If you apply for refinancing for an LPPSA home, after your application has been processed, the bank will appoint a valuer to verify the true current market value of your home, and this will be reported back to the bank.

The refinancing process usually takes around 2 to 3 months, although in some cases it can go up to 6 months. This can happen if the land has a strata or individual ownership title, where the bank will need to first get approval from local authorities.

After the loan gets approved, you will be asked to sign a loan contract in the presence of a bank lawyer. The bank will then pay off you existing LPPSA loan, and the cash balance will be credited into your bank account.

Refinance vs Debt Consolidation

Refinancing is the process of transferring a collateral loan from one financial institution to another. It is a common practice for mortgages as well as car loans.

The maximum loan tenure allowed for a used car is 7 years, while for a new car it is 8 to 9 years.

For a residential property purchase, the maximum tenure is 35 years. A long tenure is usually associated with high interest or other risks such as inflation. There are 3 types of home refinancing:

1. Rate & Term Refinance – This package is used if there is a significant drop in housing loan interest rate in the current housing market.
2. Cash-In Refinance – This is the best choice when you have less than 20% of your home equity.
3. Cash-Out Refinance – This is the most popular package as this is the one that can offer you extra cash.

Debt consolidation is also known as an overlap loan . It certainly does not wipe away your existing debts, but it consolidates all of them into a new personal loan.

In simpler terms, you will be able to use the money from the new personal loan to pay off your existing debts. To ensure that this can be achieved, the interest rate for the new loan must be lower than the average interest rate of all your existing debts combined. Choose the best credit provider for you, such as these bank and koperasi loans with rates as low as 2.95%.

Video: 7 Ways to Settle Housing Loan Within 15 Years, Be Sure to Save this Info!

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