Property Loan Refinancing in Malaysia: [A Complete Guide]
Property Loan Refinancing in Malaysia: [A Complete Guide]
Ryan Pasupathy
With all the news recently about the lowering of the bank’s Overnight Policy Rate or OPR, many of you might be wondering whether you should consider Property Loan Refinancing.
Is Property Loan Refinancing a good idea?
What is property loan refinancing actually?
Can I get cash-out from property loan refinancing?
How can I begin the process of property loan refinancing?
Despite there being some other guides out there, I’m going to cover all these issues in-depth, to make sure that every aspect of refinancing is explained in thorough detail.
And… also give you some tips as well!
By the end of this article, you should know absolutely everything there is to know about home loan refinancing in Malaysia and be fully equipped to decide and proceed with your application.
What is Property Loan Refinancing?
Property Loan refinancing is the adjustment of the current property loan that has been taken in order to purchase to a property. A new loan will be given, and it will replace the old one.
Almost everyone takes out a loan to buy a property and depending on the property and the profile of the individual, this can range from financing of anything from 50% – 90%. (Except for those extremely wealthy individuals who can afford to buy property with just cash!)
So, when someone refinances a loan, they are simply exchanging their current loan for a new one.
Why Should Refinance?
There are various reasons to refinance your property loan. It’s important to know why you want to refinance your property loan and then to understand what you will be getting out of it because there are significant costs involved in refinancing.
The main reasons for refinancing your property loan are:
1. To Cash-Out on your property’s capital appreciation
2. Debt Consolidation
3. To adjust your loan interest rate
4. To adjust your loan tenure
5. Remove other borrowers’ names from the loan
[Find Out the True State of Malaysia’s Property Overhang Now]
Can I Get Cash-Out from Refinancing?
In Malaysia, Cash-Out Refinancing is the most interesting and attractive reason for refinancing your property loan. It has to be done correctly however and is not as simple as a lot of people might think.
The most common misconception is that if you bought your property at RM300,000 and now it is worth RM500,000 (as per other listings on Propertyguru), that means you can refinance your property and you’ll get RM200,000 free cash in hand!
This will then allow you to roll over this cash into your next investment or reduce any high interest debt, after you pay off the balance of your previous loan.
The concept itself is not wrong, but there are a number of issues that need to be taken into consideration.
As we all know, very few things are actually free in this world and that includes your cash-out from refinancing.
You’ll need to bear in mind a few things:
a. You Can Only Borrow Up To 90% On the Property Value
Just like when you bought the property the first time, the banks are only going to lend you 90% of the property value.
Many banks also don’t allow you to refinance at a 90% loan margin.
Most will only give you up to 80%.
Assuming 90% financing you’ll only get RM180,000 and not RM200,000 cash-out as you might’ve initially expected.
b. Your Loan Repayments Will Increase
The main thing a lot of people fail to realize is that when you refinance, you are basically taking out a new loan on the new amount that you are being given.
So, your repayments for this new loan, will be based on this new sum that you have refinanced.
This means that if you have now taken out a new loan amount of 90% on your RM500,000 property (RM450,000), whereas your previous loan amount was based on 90% of your RM300,000 property (RM270,000).
Your loan repayment for RM270,000 at 4.25% with a 35-year tenure, would have been RM1,236.31.
Your new loan repayment for RM450,000 at 4.25% with a 35-year tenure, will be RM2,060.52.
That’s a difference of RM824.21.
A property that was positive cashflow before, might no longer be making you money after refinancing.
c. Some Banks Cap the Loan Tenure
In 2013, Bank Negara Malaysia issued guidelines stating cash-out from refinancing would be capped at a 10-year tenure.
This would mean that instead of your new repayments being RM2060.52, it would be RM4,609.69 instead!
Luckily for all of us, what most of the banks have done to meet this guideline is to simply use this 10-year tenure limit to check your Debt Service Ratio (DSR) instead of capping the entire sum to 10 years.
To make the assessment they split your cash-out portion and your balance payment up separately to check on your loan eligibility.
They will then calculate your DSR by taking the cash-out portion on a tenure of 10 years and the balance payment portion on a tenure of 35 years.
In this example, you will have to be able to payback:
RM1,236.31 per month for the RM270,000 balance portion [35-year tenure]
+
RM1,843.88 per month for the RM180,000 cash-out portion [10-year tenure]
Or a grand total of RM3,080.19 per month.
This figure will only be used to check your eligibility for the loan approval however, your actual repayments if the loan is approved will still only be RM2,060.52.
So, if you don’t bust your DSR at RM3,080.19 per month, your loan should get approved.
d. The Value of Your Property Will be Determined by a Valuer
The amount that you can refinance at will be determined by a property valuer and not by the asking price you see on propertyguru or other property listing websites.
To get a good estimate of the property price, you should look up similar unit sales history on a website like Brickz.my.
Here you’ll get a more accurate representation of the kind of value your property has and subsequently what kind of amount you can get from refinancing it.
You still won’t know for sure though until the valuer has given their appraisal.
e. Your Loan Balance Might be More Than You Think
It’s important to check how much of the loan balance is remaining, as when you pay back your housing loan, you normally begin with paying back most of the interest during the first few years and only more of the principal amount later on.
So despite you having paid what should amount to RM50,000 over the last few years, you’ll find that your loan balance will not actually reflect this.
So, just remember to check with your bank the exact loan balance so you can have a better idea of how much equity you own in your property.
This will allow you to gauge what kind of cash-out you can expect.
f. There Are Lots of Refinancing Fees
Besides all the other things that might’ve come as a surprise, you’ll want to know that refinancing is far from being free.
There are numerous charges that you’ll have to pay to get any of that cash-out amount.
Refinancing Fees include:
1. Loan Agreement Stamp Duty Fees
2. Valuation Fees
3. Legal Fees
4. Disbursement Fees
5. Exit Penalty Fees (if any)
[Read About Property Taxes in Malaysia in Our Complete Guide Here]
You will have to pay 0.5% of the loan amount (RM450,000) for the Loan Agreement Stamp Duty Fees = RM2,250.
There are tiered fees for Property Valuation, and for our example, it will cost 0.25% of the first RM100,000 and 0.2% for the balance RM350,000 bringing the total fees to = RM950.
Legal fees will be charged at 1% for the first RM500,000 = RM4,500.
Disbursement fees vary from bank to bank and also on the type of loan, but we can use RM1,000 as a rough estimate.
Depending on your original loan, it may have had an early settlement fee which is normally a flat fee or a percentage on the loan amount being settled. This flat fee might be a few thousand ringgit or sometimes up to 3% of the outstanding amount being settled.
Sometimes loans also have a lock-in fee that mean you are not able to refinance during this period unless you pay a fee which can be up to 5% of the original loan amount.
So, it’s best to only refinance once this period is over.
For our example we’ll assume that there are none of these, but it’s important to check on this.
This will bring the total fees to RM8,700!
g. You Will Need To Surrender Your MRTA
Unless you are refinancing with the same bank, you will need to surrender your MRTA policy as it is non-transferrable. Do not forget to insist on cash-out of the surrender value from the bank to help you offset some of the fees.
h. The Time it Takes to Process Your Application
Processing times for refinancing are long.
After submitting your application, it will take up to a week before your application is approved and anything from 3 – 6 months for the bank’s lawyers to handle the entire process before you will even see a cent of that cash-out in your bank account.
[Have You Heard About Property Fractionalization Being Done in Malaysia?]
Other Reasons to Refinance Your Property Loan
Besides Cash-Out Refinancing, the other reasons for refinancing are fairly straight-forward and much of the things to bear in mind above, are the same.
Refinancing your property loan basically allows you to make changes to your current property loan should there be any reason that you need to make amendments to your existing loan, in terms of tenure, interest rate or borrowing entities.
The most common of these is to get better interest rates so you can reduce your property loan repayments each month.
It can also be used for consolidating debt that you may have on other higher interest loans but this will also be done as a cash-out refinancing just with the cash portion going out to pay off your debt instead.
How Can I Begin the Process of Mortgage Refinancing?
The first step to start your application is to get in touch with a bank of your choosing based on their refinancing plans that they have available.
Once you have seen what kind of options are available to you, you’ll need to have the bank of your choosing check on your eligibility by submitting the all necessary documents required to them.
These documents will be very much similar to all the documents that you prepared when you initially applied for your loan to buy the property.
The helpful banking stuff will basically guide you throughout the rest of the way on what is needed to be done and what the timeline is like. (Remember the whole process will take anything from 3 – 6 months, so you’ll have to be patient)
Refinancing Tips
- Only consider refinancing after at least 10 years of ownership if you are looking to do a cash-out refinancing. This way you will have acquired significant equity in your property and have brought down your loan balance enough to be worth your while.
- It’s normally best to opt for a Full Flexi Loan as your refinancing loan. This will allow you to have the option of reducing your monthly loan payments by leaving your cash-out portion inside the account. You’ll then be able to only draw out as much as you need, only when you need it.
- If you need the entire cash-out portion of your loan and want to save some money on your loan refinancing fees, you should opt for an Islamic Loan. This is because when converting from a conventional loan to an Islamic Loan, you’ll get to enjoy a Loan Agreement Stamp Duty waiver.
- Make use of Propertyguru’s amazing Refinancing Calculator so you can easily figure out all the details of your refinancing numbers such as your new monthly loan repayments as compared to your old loan, and also what kind of cash-out you can expect!
- Check out all the latest property refinancing deals on imoney or Loanstreet to get the best deals available and figure out which are most suitable for you.
I hope that you’re much more confident now in understanding how property loan refinancing works and if it is something that you should be considering for your own properties.
Do let me know if you think I’ve left anything out or if there’s anything else I should add to this guide!
