Property offers both an attractive investment, and the unique opportunity to own your own home. Yet like any investment, property can present investors with difficult decisions during times of economic hardship.
The economic impact of the COVID-19 pandemic offers an unfortunate example of just such an event.
As if it’s not bad enough that we’re now battling an unknown virus that can take lives, there’s a very real possibility for many that hard financial decisions are ahead.
That could well mean the need for an option to refinance a housing loan, or even the sad reality of selling their property.
Understanding The Market Before You Choose To Refinance
The first step in the question of refinancing vs cashing out should be understanding the current market conditions. Is it a buyer’s market, or is it a seller’s market?
If properties in your area are highly desirable, and prices have been rising in recent years, there’s a good chance you’re in a seller’s market.
That means you’re in a strong position to sell your home for a good price, with a positive return on your investment.
Rising prices also mean that a property’s valuation is likely to have increased as well. That can be an important consideration when it comes to home refinance.
A buyer’s market is when conditions are more in favour of the person purchasing property, rather than the person selling it.
That may be down to localised conditions, such as owning a condo in an area where 10,000 new units have just been released, or it might be down to a more widespread and long-term economic shock that pushes down prices.
Unfortunately, the case of the COVID-19 pandemic is increasingly looking like such a sustained market shock, joining episodes like the 2008 Financial Crisis as a period in history that property investors would really rather forget.
Yet when it comes to the question of selling or refinancing your house, it’s undoubtedly going to create challenging market conditions for sellers.
Complex market conditions can also come with special circumstances, as is the case with COVID-19. Our banks offer six-month loan deferrals for individuals and small businesses, which may help blunt the immediate economic pressure of home loan debts.
So in this buyer’s market, how should owners balance the need to refinance a home loan versus selling their property?
Relying On Refinance
Home refinancing may well be the best move for many property sellers in a buyer’s market.
The fundamental value of your property may be strong, but if market conditions are against you, you’re unlikely to realise that full potential at the current time.
Difficult economic conditions often make for difficult economic decisions. If you’re in need of extra cash liquidity, your property represents a valuable asset which can be used to access additional financing.
Refinancing your home loan is a way to leverage that asset value of your home, releasing cash to meet your short-term needs, by adding to your overall home loan debt in the long term.
It may also be the case that you can access better interest rates on your home loan through refinancing.
This is especially attractive at times where Bank Negara Malaysia is cutting interest rates to stir economic activity.
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Refinance vs Selling: 4 Things To Ponder
If you’re facing the question of refinancing a home loan or selling your property, here are four key areas you should consider first:
1) Check your lock-in period
The lock-in period is a contractual obligation tied into your home loan. It defines a period during which you’ll be charged a penalty by your home loan provider if you refinance your loan or sell your property.
This penalty is typically between 2%-5% of your total outstanding home loan. That can represent a pretty significant financial penalty at the start of your home loan!
Check your lock-in period duration, and ensure you factor this into any financial decision surrounding refinancing or selling your property.
2) Assess if the value of your property is greater than the outstanding loan amount
Assessing the possible benefits of refinancing requires understanding how your current loan commitment compares to the value of your property today.
If your property valuation has fallen significantly, it may be challenging to access additional financing.
If the outstanding amount on your home loan is a higher amount than the assessed value of your property today, banks may not be able to offer a home loan refinancing package that frees up cash.
3) Ensure you can afford repayment costs in the event of property refinancing
Refinancing should never just be based on whether banks can offer you money, but also on whether you can afford to pay it!
There’s no point accessing property refinancing if you’re going to struggle to make the monthly repayments.
Of course banks won’t usually offer you a home loan if you’re assessed as not being able to pay it, but in uncertain economic times, you should be extremely careful to ensure you’ve properly assessed your capacity to make repayments.
4) Check your credit score is still in good standing
Banks are committed to ensuring the money they give out is likely to come back. It’s sort of a thing they do, in order to protect their own interests.
That means credit scores are an important part of the property purchase process. If you want approval from a bank, you need to follow the best-practice to boost your credit score.
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Selling In The Right Circumstances
Every property ownership is unique, which means the option of selling might still be the best choice for some. Assess all the options before making an assumption about the right one for you.
When economic challenges are widespread across an economy, it’s likely that the number of buyers in the market will be reducing along with the number of sellers.
While that doesn’t take into account things like an existing property overhang, it does mean that there’s unlikely to be a sudden new influx of properties for sale for a very limited number of buyers.
With a market subdued across both key areas of supply and demand, the pendulum shouldn’t swing too far into an extreme in one direction.
If you are inclined to sell, be sure and consider any simple renovation ideas or even tasteful home decor ideas that might beautify your home and boost your chances of a sale.
This is the perfect time to enhance the value of your property with all those homecare tips and remodelling tricks you’ve been meaning to put into action.
Keep an eye on the market too. That’s the best way to understand how supply and demand might be changing, but also what kind of properties you’re competing against.
Understanding what’s popular, and what can set your property apart, provides opportunities to boost your chances of a sale.
One of the most important things you can do to enhance your property potential is finding the right property agent for you. You can access a huge list of agents by region on PropertyGuru.
There’s also a special consideration to take into account around the Movement Control Order (MCO).
It’s extremely important to stay safe and follow Government advice during this period. That means property sales, and indeed moving property, are extremely restricted in all but the rarest of circumstances.
Once viewings are available and accessible again, take precautions to keep your prospective buyers (and yourself) safe.
Follow smart hygiene measures when welcoming visitors to the property. That’s an important consideration for everyone involved.
If people don’t feel safe visiting your property, they’re less likely to look positively on it as a place to live in future!
What’s The Right Choice For You?
Not only is property a complex industry, but personal finances present complex circumstances to consider.
There is no definitive answer to which is the right choice between refinancing or selling your home. If you’re at all in doubt about how to proceed, it’s best to seek independent professional advice.
There’s no right or wrong answer for everyone, but there’s almost certainly a right choice for you. The tips and insight on this article can help ensure that choice is an informed one.
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Disclaimer: The information is provided for general information only. PropertyGuru International (Malaysia) Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.