By Fahri Ahmed
There are three distinct refinancing packages, each suitable for a certain purpose.
Rate and term refinancing is mostly common for homebuyers who want to take advantage of lower interest rates in the market.
Cash in refinancing is for those who want overall better terms and conditions, but it is slightly more expensive than the other options.
However, the most popular package is cash-out refinancing because it releases extra cash to homebuyers to cater to their other needs.
Rate and term refinancing
This refinancing package is particularly suitable if the interest rate on home loans significantly drops in the current market.
For example, today the Overnight Policy Rate (OPR) in Malaysia is at an all-time low at 1.75% making way for lower home loan interest. If you had taken out your home loan before the OPR was reduced, you would still be paying the higher rate.
So, if you want to take advantage of this low interest rate without changing your loan amount, then rate and term refinancing is your best option.
Say you have a home loan with fixed interest at 6% per annum. The current interest rate is 4% per annum. If you refinance your home loan now, you will save 2% on your interest every year till the rest of your loan tenure.
Therefore, if your house is worth RM500,000 and you save 2% on loan each year, you would be saving up to RM10,000.
While this may not consolidate your debts or give you access to extra cash, it would certainly reduce your financial burden.
Cash in refinancing
Cash in refinancing can be considered if you want to pay a large amount towards your existing mortgage principal before refinancing. It puts you in a better position to negotiate a lower interest rate and more favourable monthly instalments in your new mortgage.
It may sound expensive but it is a preferable choice if you have less than 20% equity in your home. To know where you stand on your equity, calculate your Loan-to-Value (LTV) ratio.
For example, the property valuer says the current value of your home is RM200,000 and you have paid only RM10,000 towards your home loan.
That means you still owe RM190,000 on your existing loan. Thus, your LTV ratio is 95%, meaning you have only 5% equity in your home.
If your LTV is 80% or less, then you need not apply for cash-in refinancing. However, if your LTV is more than 80%, then this refinancing package is your best option.
Since your LTV is 95%, you can apply for cash in refinancing and pay RM30,000 as a lump sum to reduce your existing loan principal to RM160,000.
That makes your LTV 80% with 20% home equity, which will make you eligible for refinancing.
Cash-out refinancing is the most popular among the three as it allows you to borrow 90% on your current property value.
Say you bought a property at RM300,000 ten years ago. Suppose today the property is valued at RM500,000. The maximum loan margin you are allowed to refinance is 90% of RM500,000 which is RM180,000.
You can use this money to buy a new home or reduce other high interest debts. You can even pay off the balance of your existing loan to reduce your monthly interest payment on your old home.
However, you must keep in mind that the RM180,000 you will be getting is not free.
Previously, your loan amount was 90% of RM300,000 worth of the property, which is RM270,000. At current valuation, your property is worth RM500,000.
So, now you have taken out a loan on 90% of RM500,000, which is RM450,000. If your loan duration and interest remain the same at 35 years at 4.25% per annum: your old loan interest costs RM1,236.31 and your new loan interest would cost RM2,060.52. So you will be paying RM824.21 more in interest.
So, while you will have more free cash to invest in other things, your monthly instalments will increase, tying up your daily income to more debt payment. Make sure to consult with a financial advisor as it would shed more light on whether you are capable of taking the additional risk.
Apart from that, cash-out refinancing is an excellent way to buy a new home. If you are already thinking of refinancing to free up cash and reinvesting somewhere useful, you can take advantage of the Home Ownership Campaign (HOC), which was introduced by the Malaysian Government to help homebuyers afford new homes.
It collaborates with reputable developers to match homebuyers with vacant homes. Not only that, it offers 100% stamp duty exemption for houses worth up to RM 1 million, a 10% discount on house price, and more.
With the reduced home prices and stamp duty exemptions, you will be purchasing a new home at a bargained price. Roping this investment in your cash-out refinancing will enable you to put the money you got from cash out to good use.
In future, you will also gain from the capital appreciation of your new home and your rental incomes which will help you to pay the additional interest payment with ease.
If you are ready to get the most out of your refinancing package by opting for HOC, make sure you make your move now. The HOC scheme is only available till 31st May 2021.
For more information about cash-out refinancing, why not check out how much you may be eligible to cash out using our Refinance Calculator?