Although you may have heard the term ‘refinancing’ multiple times, you may not know there are three distinct refinancing packages, each suitable for a certain purpose.
Rate and term refinancing is a type that’s most commonly taken up by 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 others.
However, the most popular is cash out refinancing, because it releases extra cash to homebuyers to cater to their other needs. Here’s a quick look at the 3 types:
1) Rate And Term Refinancing
A rate and term refinancing changes your interest rate for the better without changing your loan amount.
This refinancing package is particularly suitable if the interest rate on home loans significantly drop 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 a lower home loan interest.
If you took a home loan before the OPR was reduced, you’d still be paying the higher rate. So, if you want to take advantage of this low interest rate without changing your loan amount, then this is your best option:
- Say you have taken out a home loan with a 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 save 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.
You will have a lower monthly obligation, which will put you in a better position to pay your instalments a lot more easier than before.
2) Cash-In Refinancing
Cash in refinance is 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, first you’d need to 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.
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 puts your new LTV at 80%, with a 20% home equity, which will make you eligible for refinancing.
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 to negotiate for better terms and conditions in your new mortgage.
You can apply for cash in refinancing even if you have an 80% LTV, as you can opt to improve your LTV, thus increasing your chances for a reduced monthly payment or better interest rate.
3) Cash-Out Refinance
Cash out refinancing is the most popular among the three as it offers you extra cash. Basically, if you have an existing property, cash out refinancing allows you to borrow 90% on your current property value.
Say you bought a property at RM300,000 ten years ago. 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! This is why:
- Previously, your loan amount was 90% of RM300,000 worth property = RM270,000
- On current valuation, your property is worth RM500,000.
- So, now you have taken out a loan on 90% of RM500,000 = RM450,000
- If your loan duration and interest remains the same at 35 years at 4.25% per annum, your old loan interest costs RM1,236.31 while your new loan interest would cost RM2,060.52.
So, you will be paying RM824.21 more on interest.
Therefore, though 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 on how a cash out refinancing may affect you in the long run. It will shed more light on whether you will be capable of taking the additional risk or not.
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 HOC.
The Home Ownership Campaign (HOC) 2021 was introduced by the Malaysian Government to help homebuyers to afford purchasing 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 RM1 million, 10% discount on the property price, and more!
With all that, you will be purchasing your new home at a bargain price. Pairing that with your decision in cash out refinancing will enable you to put the money you got to good use.
In the future, you will gain from the capital appreciation of your new home and your rental incomes, which will help you to pay the additional internet payment with ease.
If you are ready to get the most out of your refinancing package by opting for a HOC property, make sure you come to a decision quickly, as the campaign is only available till 31st December 2021!