Home refinancing is generally the cheapest form of financing available to home owners. But the term “refinancing” has been used quite loosely in sales and marketing speak, leading to certain misconceptions as to what it really is. This article explains what “refinancing” is in the true sense of the word, and discusses related products such as renovation loans and top-up loans.
Mortgage refinance
Mortgage refinancing is the rearrangement of a previous loan to a new loan with different features, including new maturity dates, interest rates or monthly payments. Where there is no existing mortgage loan, refinancing can also mean re-mortgaging of a property that is free of encumbrances.
Example of cash-out refinancing:
Mr. Charlie bought a RM300k condo with a loan of RM270k from Bank A 12 years ago. The outstanding loan today is RM200k.
Loan amount: RM270k
Outstanding loan at 2014: RM200k
Tenure: 30 years (till 2032)
Interest rate: 4.4%
Monthly instalment: RM1,352
He applies to refinance at Bank B. The current market value of the condo stands at RM500k. Bank B then loans him a percentage of RM300k (market value-outstanding loan).
Bank B agrees to lend 90% of market value less outstanding loan (i.e. [90% x 500k] – 200k) after assessing Mr. Charlie credibility. Mr. Charlie will now have RM250k to cash out.
The new arrangement of the loan will be as follows:
Outstanding loan: RM200k
Tenure: 30 years (Till 2044)
Interest rate: 4.4%
Monthly instalment: RM1,002
Refinance cash out amount: RM250k
Tenure: 10 years (Till 2024)
Interest rate: 4.4%
Monthly instalment: RM2,579
Total Refinance Amount: RM450k (RM200k + RM 250k)
Total Monthly Instalment: RM3,581 (RM1, 002 + RM 2,579)
The advantage of refinancing is that you are free to choose to choose any bank that can provide the best housing loan.
On the downside, because to refinance is to undertake a new loan, all the standard entry costs of getting a home loan apply. These include legal fees and stamp duties. If there is an existing home loan, there will be additional redemption charges for the existing loan. Early termination penalties may also apply.
If you are considering refinancing your home, we highly recommend you read our refinancing tips used by experts to avoid the mistakes commonly made by newbies.
Top-up loans
Top-up loan is an additional loan on top of the previous loan amount based on the appreciated market value of the borrower’s collateral. It is suitable for borrowers who demand for an immediate cash out. The top-up loan amount can be banked into a separate account with 2 interest rates or in the previous loan account with a new single interest rate, depending on the banks’ policy. In terms of loan agreement, some banks will redraw a new loan agreement for the top up amount while some will up stamp the previous agreement instead.
Example of top-up loan for cash-out:
Mr Beta bought a condo 9 years ago with a RM120k loan from Bank Y.
Loan Amount: RM120k
Outstanding loan at 2014: RM100k
Tenure: 30 years
Interest rate: 4.5%
Monthly instalment: RM608
Mr Beta then applies for a top-up loan.
Market value: RM250k
Bank Y grants him an 80% of market value less outstanding loan amount (i.e. [80% x 250K] – 100K) after taking his Debt Servicing Ratio and other factors into account. The new numbers are as follows.
Top-up loan amount: RM100k
Tenure: 25 years
Interest rate: 4.8%
Monthly instalment: RM573
Hence, Mr. Beta's total monthly instalment will add up to RM1,181 (RM608 + RM573)
It goes without saying that a top-up loan can only be done with the existing financier. But the advantage is that existing loan documents only need to be up-stamped, compared to redrawn from scratch in the case of refinancing. As such, the entry costs are much cheaper. Additionally, early termination penalties will not be invoked by the current financier.
Renovation loans
A renovation loan is a type of personal loan specifically designed for renovation purposes. It is usually bundled with a home loan and is sold as a package. Banks may offer a better interest rate for home loans when a renovation loan is taken as part of the package. As proof of renovation, documents such as invoices need to be provided. Collateral is not needed for renovation loans.
Loan documentation for renovation loans are relatively simple. As a result, the entry costs are cheap and funds are released the quickest. Just like other personal loans, most renovation loans are calculated using flat interest rate.
Example of how renovation loans work:
Let's take Mr. Alpha as example, Mr. Alpha bought a subsale property with a RM600k loan from Bank X.
Loan Amount: RM600k
Tenure: 30 years
Interest rate: 4.6%
Monthly instalment: RM3,706
After assessing Mr. Alpha's credibility, Bank X decides to loan Mr. Alpha a sum of RM150k.
Renovation loan amount: RM150k
Tenure: 10 years
Interest rate: 7.6% (Flat rate)
Monthly instalment: RM2,200
Hence, Mr. Alpha will have to pay a monthly instalment of RM5,276 (RM3,076 + RM 2,200) in total to service two loans.
Conclusion
The choice between refinancing, taking a top-up loan, or a renovation loan will depend on your needs. This table summarises the differences between them:
| Difference between renovation loan, top-up loan and refinancing | |||
|---|---|---|---|
| Refinancing | Top-up Loan | Renovation Loan | |
| Purposes | -Cash-out - Lower monthly instalment | Cash-out | Renovation of property only |
| Banks Involved | Any bank | Same bank | Same bank |
| Existing Loan Terms | Revised | Unchanged | Unchanged |
| Interest Calculation | Reducing balance | Reducing balance | Usually flat interest rate |
| Loan Period | Up to 30/35 years (DSR calculations for cash out portion are based on 10 year tenure) | - Legal fee & stamp duties on Top-Up amount only - Valuation fee (can be waived) | - Cheapest entry cost - Legal fee on loan agreement only |
| Release of funds | Slowest | Slow | Fastest |
| MRTA | Repurchase | No change for existing loan. Add on purchase for top-up loan. | Not applicable |
| Penalty | Only if previous loan still within lock-in period | None, but lock-in period will be recalculated | None |
But regardless of your choice, take note that for cash-out portions, banks will stress test your repayment ability based on a 10-year repayment tenure due to Bank Negara's 10-year limit on refinancing guideline.
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