Given the current situation of the COVID-19 pandemic and the low-interest-rate environment, many Malaysians are considering refinancing their housing loans.
The reasons could be either to get a lower interest rate or simply to sustain financially. But what exactly is refinancing your housing loan?
What is Refinancing a Housing Loan in Malaysia?
Refinancing is the act of reducing your loan payment by lowering your interest rate. Specifically, refinancing your housing loan means replacing your current housing loan with a new loan under differing terms and conditions.
Simply put, you can think of it as borrowing money again to settle the debt in your current home account.
Homeowners and investors refinance their housing loans for various reasons, and depending on your current financial situation, it is important to know when and why you should consider refinancing.
When should you consider refinancing in Malaysia?
This is totally up to you, but on a serious note, it is best to consider refinancing when the current interest rate is at least 1% lower than your existing rate. This is a good indication given the current low-interest-rate environment.
Please note that Bank Negara Malaysia (BNM) has introduced a new Standardised Base Rate (SBR) that will replace the Base Rate (BR) as the Reference Rate Framework effective 1 August 2022. The new framework ensures all banks will use a single rate – the SBR, driven only by the Overnight Policy Rate (OPR).
Hence, the SBR makes lending rates more transparent. Above all, it helps us to understand the changes in our loan repayments when interest rates change.
Read more about the Standardised Base Rate and how it can benefit homeowners and investors.
Why should you refinance your housing loan?
Now that you know when to refinance, it is more important to understand why you should do so. Here are reasons why people would consider refinancing their housing loans:
1. Lower interest rates
Most Malaysians who took out housing loans before the year 2010 and before the pandemic were charged an interest rate as high as 9.6%. This is way higher than the current interest rate, which stands between 3%-4%.
With a reduction in interest rates, refinancing will save you from paying more interest and allow you to reduce the monthly instalment on your home loan.
Your home loan has a fixed interest rate of 4.8% per anum, and the new refinance interest rate is 3.8%; you will be paying 1% less interest per anum for your remaining loan tenure.
Calculation of Savings
(based on a house loan of RM450,000 for a loan tenure of 35 years)
|Monthly instalment (RM)||2,214.02||2,074.26||1,808.04|
|Total interest payable (RM)||479, 888.40||421,189.20||309,376.80|
|Interest Payment savings (RM)||NONE||58,699.20||170,511.60|
2. Reduce loan tenure
Refinancing your housing loan will allow you to alter your loan tenure depending on your current needs and financial situation. The following exemplifies a loan tenure reduction based on a loan of RM450,000 at an interest rate of 4.5% per anum.
|Loan tenure||30 years||25 years||20 years|
|Monthly instalment (RM)||2,280.08||2,501.25||2,846.92|
|Total interest payable (RM)||370,828.80||300,375.00||233,260.80|
3. Changing to a different housing loan package
If your current housing loan package does not give you the flexibility and payment options you need, you should consider refinancing.
Your housing loan package may feature a fixed interest rate or variable interest rate. The former is fixed throughout the loan’s tenure, while the latter is pegged against the Base Rate (BR) or Base Lending Rate (BLR), depending on the market condition.
Fixed interest rates assure you peace of mind as your monthly instalment does not increase even if BR or BLR increases. Meanwhile, variable interest rates will allow you to pay less for your housing loan, especially in a falling interest rate environment.
You can convert from one to another and vice versa to suit your financial needs and situation.
4. Debt consolidation
If you are currently paying off several different housing loans simultaneously, refinancing could be the answer.
You can consider a once-off refinancing plan that allows you to consolidate debts into one single account. This means making one payment and getting one statement every month. Now, isn’t that convenient?
5. Cash-out to finance a new purchase or other needs
The cash-out refinancing is the difference between your remaining loan and your property’s current market value. The following exemplifies a cash-out calculation that you can obtain from refinancing your housing loan:
|Outstanding loan amount||RM400,000|
|Current property market value||RM500,000|
|Refinance loan||RM450,000 (90% x Current property market value)|
|Costs (legal fees, valuers, etc.)||RM9,000 (may vary)|
|Cash-out earned||RM41,000Cash-out = Refinance loan – Outstanding loan – Costs|
Read about how we help our client refinance their property.
How does refinancing a housing loan work in Malaysia?
When you refinance your housing loan, your new housing loan package will have a different interest rate, tenure and terms. It could be from the current bank you initially worked with or a different bank.
The process of refinancing a housing loan is similar to that of getting one in the first place. You will start with browsing and evaluating interest rates, terms, and packages from various banks and compare them with your current housing loan terms.
What are the costs involved?
Refinancing comes with incurred closing costs and fees that you will need to take note of:
1. Moving Cost
Moving cost refers to items you would need to pay for in refinancing your housing loan. They include property valuation fees, legal fees, disbursement and loan agreement stamp duty.
If you plan to save on interest, do your homework and compare these items thoroughly against the savings in interest that you would obtain via refinancing. You do not want the refinancing to cost more than the savings you make.
2. Loan Lock-In Period
A lock-in period is where you will incur a penalty, should you decide to pay off your housing loan within the said period fully. The penalty varies between banks and usually is around 2% to 5% (on your original loan amount).
Don’t forget to check whether or not your existing housing loan has a lock-in period and if you are still bound by it.
What are the steps involved in refinancing?
The steps of refinancing a housing loan are similar to that of getting one in the first place.
- Check your current housing loan for its lock-in period.
- Contact your current banks or other banks to find out the deals they are offering.
- Negotiate for a better ELR, especially if you are not in a hurry to cash out.
- Compare and contrast all the offers before choosing which bank to proceed with.
- Lastly, make your right choice and enjoy its benefits.
What if your refinancing application is declined?
Although your refinancing application meets compliance standards, it is still vulnerable to rejection. However, worry not, as this is where BlueBricks can help you.
Leading loan agency company in Malaysia
BlueBricks has years of experience as a loan specialist providing loan consultancy services and comprehensive loan rejected services.
If you are submitting a new loan application, BlueBricks offers FREE consultation and reports for CCRIS and CTOS prior to the submission. Above all, we do not charge any prepayment for the provision of said services.
Loan Rejected Services
Our niche is giving all-inclusive loan rejected services and acted as a one-stop solution to the clients. They include providing refinance housing loan rejected services to clients.
Our expertise lies in helping failed applicants identify the reasons for rejection, devise a strategy, execute amendment and rearrangement, and resubmit to the bank with a higher chance of approval.
You can find more about our refinance housing loan rejected service to help you with your current or future application.
Refinancing Housing Loan – FAQ
Deciding to refinance your housing loan requires thorough homework and sometimes a considerable commitment. Hence, we have compiled a short guide to help you before you apply for refinancing your housing loan.
1. What is a lock-in period?
Banks set the lock-in period to prevent borrowers from selling their properties too fast before the principal and interest portions are paid off. It usually is 3 to 5 years and comes with a penalty of 2%-5% (charged on the bank loan amount).
2. How to obtain my credit score?
You can obtain your credit score report through Bank Negara Malaysia or any certified credit checking agency.
3.Does “no-cost” refinance means zero closing costs?
Not necessarily, as this could mean that the closing costs are bundled into your final loan amount. Hence, it is important to identify all the terms before making your decision.
4.Is it worth it to refinance?
Refinancing a loan is worth it if you can lower your interest rate enough to save money every month and in the long term.
5.Does refinancing a loan hurt my credit score?
Refinancing your loan will initially hurt your credit score, but this is normal. It is due to the hard inquiries from the application and opening of a new credit account.
Moreover, review the new loan details to ensure they are updated per the refinancing terms to protect your credit profile.
6.What do I do after refinancing my housing loan?
Continue making payments on your original housing loan until the refinance process is complete. Then, you can start paying for your new, refinanced loan until it is settled.