Mastering Your Housing Loan – A Q&A Session

Home buyers usually use loans to purchase their homesPosted Date: Jul 02, 2012 By: AceScube

Home buyers usually use loans to purchase their homes, and this rings especially true with the Malaysian market. The property is charged to bank at market value and borrowers are to repay the housing loan for about thirty to forty years or until it is fully paid off.  With the information age at its peak, people are now well versed and equipped with crucial information like seeking for advice and opinions before purchasing a property. Mr. Kevin Cheong, The Managing Director from AceScube (M) Sdn Bhd is keen to share his expertise on getting the best loan package and the advantage of managing Base Lending Rate (BLR) throughout loan tenure. Q: Steven signed up for a flexi loan for a sum of RM 200,000 with 35 years repayment tenure in 2009. According to the Letter of Offer, monthly repayment is RM 856 with the bank offering BLR-1.80% , and BLR at that time was 5.55%. Steven is planning to made monthly repayment at RM1,000 instead of RM 856.00 to shorten repayment tenure by 7-10 years. Is Steven’s targeted savings achievable with his revised repayment amount? A: Firstly, BLR has increased from 5.55% to 6.60%, and it will keep fluctuating throughout the loan tenure. Steven is responsible for paying his monthly repayment amount according to BLR to ensure the loan tenure ended according to contract. The remaining monthly repayment amount has prolonged his loan tenure, with accordance to the increased BLR. With reference to Table 1, monthly payable interest differs by RM 134.50, even though outstanding balance is reduced to RM 192,500. Monthly payable interest is higher with lower outstanding balance due to increase of effective interest (6.6%-1.8%=4.8%). Steven needs to adjust his monthly repayment to RM 982.00 to pay off his loan by contract term. If BLR increases to 8% in another 3 to 5 years, effective interest would become 6.2% (8%-1.8%). Estimating the loan balance to be RM 185,000.00, Steven is expected to serve higher monthly payable interest at RM 943.00. Thus, Steven fails to achieve his targeted saving with his initial plan. In order to achieve Steven’s targeted saving, he must able to monitor his housing loan calculation system and current BLR to calculate monthly repayment amount for 25-year tenure. He will need to study his every loan account statement for the interest charge by bank is according to repayment tenure of 25 years to ensure his saving on tenure and interest. Q: Is the BLR poised to be at an increase for the near future? A: BLR is set by Bank Negara Malaysia (BNM). The BLR fluctuates because of macroeconomic performance such as GDP, unemployment rate, and price indices. Another popular BLR influence is the open market initiatives, such as buying and selling properties. If the economy is overheating (i.e. entering into bubble conditions), BNM generally takes action to increase the overnight policy rate (OPR), which leads to BLR increase. This leads to an increased cost of capital, which in turn increases interest costs and lower number of people taking loans or borrowing money for finances and investment. The purpose of an increased OPR is to lower the cost of capital (by decreasing the cost of interest), which theoretically is supposed to lead to more lending as borrowers find it economical to take out loans to buy property and capital equipment. Since interest costs fall, borrowers are more likely to take out loans to finance initiatives than they would otherwise. According to BLR records since 1976, BLR has fluctuated to 12% twice and average BLR for twenty years is 8%-9%. Our current BLR is relatively low at 6.6%, and the inflation rate in near future is expected to be increase. Thus, majority of the analysis show that BLR is at the uptrend of 1% to 2%. Borrowers are advised to have debt stress test and plan ahead in managing debt when BLR increases. This could avoid property charged to bank being foreclosed by end financiers.