One of the largest, singular monthly expenses for the average Malaysian household comes from home loan repayments. With refinancing, you could benefit from smaller monthly instalments, less total interest costs, and in addition, free up cash tied in your home.
A refinancing loan will essentially see you take out a new loan to cover your previous loan, and while this might sound counterintuitive, it could actually help you manage your current mortgage and monetary needs more efficiently:
You might want to consider refinancing if:
You have built equity in your home and want to cash out:
If the value of your home has increased over the past few years, the difference between your home’s initial value and its higher current market price can be utilised to ‘pull’ money out of your home. How does this work? Take a look at this example:
Assume that the initial value of your home is RM 300, 000; the current value after 10 years is RM 400, 000 and the remaining unpaid balance on your mortgage is RM 250, 000. Now if you were to borrow 80% of the current value, you could free up RM 70, 000 in cash*.
The obvious benefit here is that you can procure financing at a much lower interest rate when compared for example, to a personal loan.
*Note: Calculated after deducting the unpaid mortgage balance, but without taking into account any entry and exit costs.
You want to take advantage of better interest rates:
Mortgage interest rates tend to fluctuate and if your current home loan was ill-timed, i.e. when rates were high, refinancing without cashing out or lengthy tenure extensions, could help you reduce total interest costs.
Granted, this does not happen as often as borrowers would hope, but when it does, it’s a shrewd method to restructure the terms of your loan.
Even if market interest rates remain relatively stable, you may just want to switch to a different bank that can offer you more attractive, promotional rates. Remember that even a tiny change in interests can bring major savings due to its compounding effect and the long-term nature of most mortgages. However, if you are borrowing a larger amount, over a longer tenure, even with lower rates than your previous loan – your total interest costs would likely increase.
You want to extend your loan and pay lower monthly instalments:
Your finances are dynamic and this means that even though you’ve always been able to make your mortgage instalment payments on time, certain life events (loss of income, a new addition to your family or medical issues) can change your level of affordability.
But nevertheless, continuous late payments will not be tolerated by any bank and complete loan defaults should be avoided at all costs if possible. Here, refinancing could help restructure the terms of your loan before your situation deteriorates further to cause high levels of debt, a blemished credit status and even bankruptcy.
By extending the tenure of your loan, you can readjust to pay a more affordable monthly instalment.
You are having difficulty managing your debt and need to consolidate:
If you are overextended on multiple loans and credit card bills, you can use a refinancing facility to bring all payments under one roof.
Depending on the types of loans that you are consolidating, refinancing can provide you with comparatively lower interest rates. For example, the use of refinancing to cover personal loans, credit card bills and even a second home mortgage could fetch you solid interest savings.
However, with other types of financing, such as car loans for instance, the benefit may not lie in a reduced interest rate but rather with smaller monthly repayments.
This is because car loan interest rates are typically already lower than mortgage rates. The real issue here however is if your lending bank practices the Rule of 78 (which most do), then, early settlement through refinancing may not sufficiently provide enough interest savings. Furthermore, the interest rates for most auto loans in Malaysia are not calculated on a reducing balance method, but instead as a fixed and flat rate.
Yet for those with affordability issues, refinancing can help reduce the monthly payable sum by spreading your loan for a longer period to accommodate more achievable repayments.
More points to consider when refinancing:
Even though it may be a powerful tool to help you manage your finances, refinancing may not be suitable for some. You’ll need to be cautious with refinancing loans if:
It’s very early in your loan and you have not built up much equity, are still under your lock-in period (which could trigger penalties) or are subject to Real Property Gains Tax. In this case, you may not garner enough savings to warrant a refinance.
You need to cash out quickly; a personal loan would provide a swifter release of funds since processing for refinancing essentially takes about as much time as a regular mortgage.
You have had a problematic credit history; a refinance would add to your debt and this could further impact your credit status.
Other entry costs to your new loan and exit costs from your old loan such as valuation charges, insurance, stamp duties and other legal fees would overshoot your potential savings.
- Planning to cash out large amounts – note that as of 2013, Bank Negara Malaysia has imposed a tenure limit for cash-out refinancing, forcing much higher repayments.
When done right, refinancing can offer a way out of high interest rates, unaffordable repayments and a way into more freed cash. This is why it’s imperative to review your loan commitments periodically and as a result, get more for your money.
The best way to score a good deal on refinancing mortgages is by simply comparing and shopping around. For quick and effective access to the most attractive rates and loan packages, do check out Loanstreet’s Home Loan Refinancing Comparison page.
READ MORE: Refinancing basics and tips used by experts