Motive is paramount when it comes to refinancing your home loan.

By JONATHAN ROBERTS jonathan@thestar.com.my

REFINANCE your mortgage.

You could almost hear this mantra uttered by property gurus ringing in your ears.The question is, what is refinancing? Basically, refinancing a mortgage simply means replacing one’s existing home loan with a new one.

This could be exercised with the same bank or with the other banks.

The habit of refinancing one’s mortgage is common amongst property investors that know the ins and outs of real estate investing.

But for a first-time homebuyer, why should one opt for mortgage refinancing?

To understand this, we got insights from renowned financial planners and property investor.

When to refinance?

Some might encourage you as a homebuyer to revisit your home loans every once in a while.

There are several reasons as to why a homebuyer should refinance the housing mortgage. When done properly, this manoeuvre can help borrowers save a handsome amount of cash.

First reason: save up on interest rates.

VKA Wealth Planners licensed financial planner Kevin K. M. Neoh.

According to VKA Wealth Planners licensed financial planner Kevin K. M. Neoh, one should consider refinancing whenever the existing mortgage package is outdated.

“For instance, if the Effective Rate on your current home loan is about 6.35% to 7.85% per annum, whilst most mortgages are running at Effective Rate of approximately 4.5% to 4.8% per annum, it is a no-brainer that you should refinance,” he said.

Besides that, many property investors refinance their mortgages to expand their property portfolio.

“If you bought a property at RM500,000 five years ago and the same property is now commanding an Open Market Value (OMV) of RM1,000,000, and you are unwilling to sell it, mortgage refinancing could be a viable option.

“In this instance, refinancing allows you as an investor to have the capital to be freed up without selling your property.

“By refinancing your existing loan to a new financier, you can take up a loan based on current OMV, which will give you additional cash for down payment for another property,” Neoh added.

Having said that, he warned that this strategy involves increment in gearing, hence investors must understand the cause and consequences before making such a bold move.

When NOT to refinance?

GM Training Academy PLT chief executive officer Miichael Yeoh.

 Whilst we have learnt that in a free and competitive market, refinancing your mortgage can be used as an advantageous tool, GM Training Academy PLT chief executive officer Miichael Yeoh cautioned borrowers against refinancing for the wrong reasons.

“Some people refinance their mortgage simply to get cash on hand. They use these monies for other things (liabilities) instead of making higher investment return.

“In turn, they are laden with additional bad debts, which means they have to pay higher instalments,” he said, adding that many people also use the additional monies for the wrong types of investments.

“There are investments that offer very high return, but by and large, most investments are not sustainable for the investors. These borrowers will then lose their capital and must continue to service their monthly instalments,” Yeoh explained.

Important considerations before refinancing

KCLau.com founder KC Lau

 KCLau.com founder KC Lau advised potential refinancers to assess their credit health before approaching the bank.

“If your Central Credit Reference Information System (CCRIS) does not look good, the banks will reject your application,” Lau said.

On top of that, he warned borrowers who want to refinance to take note of the cost of moving from one bank to another.

“Before you refinance, you must do the math. Calculate the legal fees and stamp duty incurred if you plan to switch banks.

“Moreover, take the Lock-In period of your current home loan into account, lest you end up facing a hefty penalty,” Lau said.

Curbing property speculations

In 2013, Bank Negara Malaysia (BNM) issued a new guideline to banks in regards to mortgage refinancing as part of its cooling measures on housing market.

Under the guideline, banks will approve one’s request to refinance only if the borrowers can prove their ability to repay within 10 years. The tenure, however, can be stretched to the maximum period of 35 years.

When asked, all three interviewees heaped praises on the central bank for placing more stringent rules to protect the financial institutions, property market and irresponsible borrowers.

“Many Malaysians are already in high debts, and many still lacks basic financial literacy to protect their hard earned money and savings.

“If we are able to continue to refinance our mortgage to extend the tenure and to increase our borrowings for non-constructive reason, sooner we will be in a situation that is worse than current landscape,” warned Kang.

Yeoh added that banks still want to lend money, but only to prudent borrowers with the capacity to service their loans.

“Without the tightening policies, we could face a subprime crisis,” said Yeoh.

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