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Posted Date: May 14, 2010 12:00:00 AM, By: Milan Doshi
Effect of Inflation on Bank Loans

Effect of Inflation on Bank Loans

Borrowing money from banks at zero interest rate? Milan Doshi shows you how

If you were to ask any person from our parents’ generation, the common advice they would give is:

  1. Don’t borrow any money

and

  1. If you really need to borrow, borrow as little as possible and return it back as soon as possible

Their reasoning is that having a peaceful sleep at night is extremely important. If you were to owe anyone any money, there is this deep-rooted fear that someone might knock on your front door in the middle of the night demanding that they be repaid on the spot.

I am not too sure but perhaps it could partially be due to movies. In many movies, there are scenes where the greedy landlord and his henchmen come knocking on the poor farmer’s door demanding that they be repaid on the spot. When the poor farmer is unable to do so, the landlord then forcefully takes over what few possessions the farmer has and kicks the poor farmer and his family out of the house.

There is no way we can fully appreciate what our parents might have gone through in their generation which shaped their beliefs. Many of them would have lived through the Second World War, the OPEC oil crisis, racial riots, etc. In those days, being able to have 3 decent meals a day was a luxury, something that we today take for granted.

Leveraging on bank borrowings

As a result of this misplaced fear, many of our parents have completely missed out on the power of leverage by using bank borrowings for property investments. In fact, I recall the day my father bought a double-storey house in Singapore in 1973 for S$120,000 which was a big sum in those days. He had taken a 25-year loan and one of his life’s goal was to look forward to the day the property loan is fully settled and the house finally becomes his. The loan was finally settled in 1998 and my father sold off the house for around S$1 million a few years later and moved into a condominium as both my parents had trouble climbing stairs.

Another reason why their generation didn’t like to take up big bank loans for property purchases is that the amount that has to be repaid back over long periods is close to double the original loan amount. They prefer to work hard, save money for a few years and then take a small loan to save on bank interest costs. Unfortunately, their well-meaning advice given while we are growing up makes many people afraid to take on big loans. Hopefully, this article changes your perspective on this issue. 

Are bank loans making you poorer? 

Let’s take the example of a loan for RM1 million at a fixed interest rate of 5% per annum for 25 years. The yearly installment works out to RM70,952 per year or RM5,913 per month. Multiply by 25 years and the amount works out to a staggering RM1,773,800! Imagine borrowing RM1 million but having to pay RM1.773 million back i.e. the principal amount of RM1 million plus interest costs of RM773,800. As a result, many people would rather avoid borrowing money and hence miss out on property investments. Their logic would be “Why take unnecessary risks to make the banks richer and yourself poorer”?

Unfortunately, these people are looking at things from the wrong angle. They don’t realize that the money returned back while in absolute terms is totalling RM1.773 million, its value after taking inflation into account is completely different. You are not paying RM1.773 million today, but RM70,952 per year spread over the next 25 years. The purchasing power of RM70,952 today and its value 5, 10, 15, 20 and 25 years is vastly different.

For readers who are not mathematically-inclined, let me first explain the effects of inflation in an easy manner. Let’s assume RM1,000 today can buy you 1,000 lollipops. If inflation is running at 4% per annum, the value of

                                                    1,000 lollipops
RM1,000 one year from now  = -----------------------
                                                      1 + Inflation Rate

                                                  1,000 lollipops
                                              = ------------------------
                                                      1 + 4% (or 1.04)

                                              = 961.5 lollipops

Hence RM1,000 one year from now can only purchase 961.5 lollipops. Therefore, the value of RM1,000 one year later is the equivalent of RM961.5 in today’s value if inflation is 4% per annum.

                                                       Value of RM1,000 one year from now 
RM1,000 two years from now  = -----------------------------------------------
                                                                      1 + Inflation Rate

                                                         961.5 lollipops
                                                = -------------------------
                                                        1 + 4% (or 1.04)

                                                                    1,000 lollipops
                                              or   ------------------------------------
                                                        (1 + Inflation Rate)2  or 1.042

                                              = 924.5 lollipops

Therefore, RM1,000 two years later is only worth RM924.5 in today’s ringgit.

The formula to compute the Present Value of Future Dollars is:

                                                                                    Future Amount
Present Value of Amount nth years from now =  ----------------------------
                                                                                (1 + Inflation Rate)n

Let’s compute the Future Value of RM70,952 per year over the next 25 years assuming the inflation is 4% per annum:

Year                Amount (RM) in Present Value
   1                     70,952 / (1 + 4%)1 = 68,223
   2                     70,952 / (1 + 4%)2 = 65,600
   3                     70,952 / (1 + 4%)3 = 63,077

Calculate until Year 25 and add up all the various Present Values gives the answer of RM1,108,425. What this means is that while we will be paying in absolute terms a total of RM1.773 million, the actual value after inflation at 4% per annum is only RM1.108 million. Suddenly borrowing money doesn’t look so scary.

In fact, it will start to make even more sense. Study the table below for the Present Value of a loan of RM1 million for 25 years at interest rates of 4% and 5% for various inflation rates:

Notice that if your bank interest rate is 4% (or 5%) and your inflation rate is 4% (or 5%), the Present Value of the Total Installment paid over 25 years will be equal to your bank loan of RM1 million. The bank interest cost and inflation cancels each other out. It’s equivalent to borrowing money at zero interest rate!

Inflation cancels out bank interest cost

If your personal inflation rate is above the bank interest rate, you actually end up paying less back. For example, if the bank interest rate is 4% (which is the current rate of BLR – 1.8% for residential properties) and your inflation is 5%, you actually end up paying back RM902,181 for a loan of RM1 million. Unbelievable, but it’s true.

Malaysia’s official inflation rate is around 3% per annum. Unfortunately this is not what most of us experience on an annual basis especially in recent years. Most families’ inflation rate will hover between 5% – 10% per annum depending on the parents’ (around 4-6% pa) and their children’s (around 6-10% pa) lifestyles. The inflation rate for children is usually higher than their parents due to their different consumption pattern and spending habits. This higher inflation rate actually works in your favor as the bank interest cost is only 4% per annum (i.e. BLR – 1.8%), far below your family’s average inflation rate.

In property investments, inflation not only works by pushing up asset values. It also reduces your borrowing costs when inflation is taken into account! This is another powerful reason why you must invest in good investment properties and borrow as much as possible provided the yields are higher than your borrowing costs. Then sit back, relax and let inflation work its magic on both sides of your Net Worth.  

If you have any comments on this article or questions, please email to me at http://achievers88@yahoo.com. I would highly recommend that you sign up at our moderated getrichbook egroups at:
 
http://finance.groups.yahoo.com/group/getrichbook/

It's free for all my book readers and readers of this article. Only relevant emails pertaining to finance, property and stock investments will be approved for broadcast.

Article Contributed by
Milan Doshi
Financial Trainer and Best Selling Author of
“How You Can Become a Multi-Millionaire Real Estate Investor!”
For more information, visit www.milandoshi.com


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Posted Date: August 05, 2009 12:00:00 AM, By: MortgageLink Advisory
MortgageLink Advisory

Applicable for Entire Loan Period

New Purchase / Refinance

  • Completed / Under Construction*
  • Up to 90% Margin*
  • Up to 30 Years*
  • No Processing Fees*
  • Flexible
  • The more you pay, the more you save
  • Allows installment during construction stage
  • No worry over high BLR fluctuation
  • Daily rests and monthly reducing
  • Zero Moving Costs (applicable for other packages)*
  • Other packages available ~ BLR -1.9% (subject to loan amount)

    *Terms & Conditions apply

Home Loan Advisor
Mr. Rumi Yeo (017-8866 863)
MortgageLink Advisory
(001812856-K)
Tel: 03-7620 0477
Fax: 03-7680 8680
Email: mladvisory@gmail.com


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Posted Date: July 01, 2009 12:00:00 AM, By: Milan Doshi
Borrow Intelligently as Much as You can
During a recent seminar, I challenged all the participants that each one of them must have a goal of having at least RM5 million in bank borrowings for property investments, provided the returns are higher than the borrowing costs. Many participants almost fell off their seats, as it was a little difficult for many of them to comprehend such a figure. Most of them never had any sort of goal as to how much money they should aim to borrow.

Let me explain why you should be an intelligent borrower and aim to borrow as much as you can:

1. You can Leverage and get Rich using the bank’s money and less of your own. The key advantage properties have over other investments such as mutual funds is that you can easily borrow up to 90 per cent of your purchase price. With only RM10,000, you can purchase a property worth RM100,000.

If prices were to increase by 10 per cent, your property is now worth RM110,000. Against your original cash outlay of RM10,000, this is a 100 per cent gross rate of return! Instead, if you had invested RM10,000 in a mutual fund and if prices were to go up by 10 per cent, you would have only made RM1,000.

Do bear in mind that Leverage is a Double Edged Sword. If prices were to drop by 10 per cent, your loss on the property would be 100 per cent. Compare this against a loss of only 10 per cent in mutual funds. Hence, you really need to be an intelligent investor as well as careful borrower.

2. Even if you have RM100,000 cash and can afford to purchase the property without any loans, it’s still advisable to borrow money. Reasons being:

a) All important documents such as the title, etc are kept by the bank. If you were to keep the documents on your own and were to lose or misplace them for any reason, it will be a cumbersome process to get a duplicate copy. In case you need to sell, the certified duplicate copies may not be recognised by your buyer’s bank.

Some years ago, a student at my seminar had purchased a shop lot in Sungai Wang and he was sharing with us the problem he faced. Since the individual titles have still not been issued after more than 25 years, owners are required to keep original copies of all Sales and Purchase agreements (SPA) from the developer all the way to the present owner.

It so happened that for the shop he purchased, there were at least seven changes of ownership in the last 25 years and one of the original SPA was lost. Even with a certified true copy of the missing SPA, the buyer’s bank refused to release the loan as the documentation was considered to be incomplete. My student was very lucky to get all his deposits back in this case.

b) When you borrow 90 per cent of the purchase price, you are transferring 90 per cent of the risks to the bank. Many savvy rich overseas investors who invest in Malaysian properties prefer to take bank loans from the local banks even if they don’t need to borrow. The reason they do so is that in a worst case scenario (e.g. developer going bust, country in political turmoil, etc), their loss is only limited to the down-payment of 10 to 20 per cent instead of 100 per cent if they had not taken any bank loans. 

3. Suppose you are paying RM1,000 every month for your fixed term loan for the next 25 years. Due to inflation, the purchasing of RM1,000 per month today and RM1,000 per month in the future will be vastly different. If RM1,000 today can purchase 1,000 lollipops, 25 years later the same RM1,000 can probably purchase 300 lollipops less.

4. Since Your Net Worth = Assets – Liabilities, with properties, you get to enjoy double benefits. Your asset value increases over time thanks to inflation, while your loans are gradually being reduced by your hard-working “employees” or tenants. With other asset types, you only get to enjoy the appreciation aspect only. Even then, part of the return is constantly being eroded by inflation. Inflation works for you in property investments whereas it works against you for other investment vehicles.

5. Let’s assume you have total borrowings of RM1,000,000 spread over the next 25 years at seven per cent per annum. Your yearly instalment RM85,811* (monthly = RM7,150/month) is being covered by the rental income. See the table below for more details

*Note: Formula in Microsoft Excel is “=-PMT(0.07,25,1000000)”


































At the end of Year 1, your loan has reduced by RM15,811 which equates to RM1,317 per month. Frankly, it is nothing to really get excited over. Let’s analyse the numbers at five yearly intervals. See the table below:

Year

A

End
Balance
B

Principal
Repayed
C

In Monthy Terms
C / (A x 12 mths)

5

909,078

90,922

1,515

10

781,555

218,445

1,820

15

602,697

397,303

2,207

20

351,802

648,198

2,701

25

(898)

1,000,898

3,336

In a worst case scenario where property prices remain unchanged, your Net Worth is increasing passively, thanks solely to the reduction in your outstanding loan. Over 25 years, you will be getting richer by RM3,336 per month if your total borrowing is RM1 million.

What if your total borrowings are RM5 million as per my challenge, which I feel is achievable? All the numbers above are multiplied by a factor of five. Over the next 25 years, your net worth will be increasing by RM16,680 (i.e. RM3,336 x 5) per month in a worst case scenario where property prices do not increase!

If you factor in a modest price increase of five per cent per annum, your net worth could easily be increasing passively at double the above figures. Some of my more aggressive students have even set personal borrowing targets of RM10 million. When they hit their borrowing limits in Malaysia, they start investing overseas in countries like Singapore, Australia and others as their borrowings there begin at zero.

With the right knowledge and the right properties in good locations, it’s not too difficult to set up an autopilot investment vehicle that increases your net worth passively every month. In fact, the more you borrow intelligently, the richer you get!

If you have any comments on this article or questions, please email to me at achievers88@yahoo.com. I would highly recommend that you sign up at our moderated getrichbook egroups at:
 
http://finance.groups.yahoo.com/group/getrichbook/

It's free for all my book readers and readers of this article. Only relevant emails pertaining to finance, property and stock investments will be approved for broadcast.

Article Contributed by:

Milan Doshi
Financial Trainer and Best Selling Author of
“How You Can Become a Multi-Millionaire Real Estate Investor!”
For more information, visit www.milandoshi.com

Copyright by Milan Doshi


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Posted Date: June 01, 2009 12:00:00 AM
Refinancing – Part 2

Last month, we spoke to several experts on the basics of refinancing and what it entails. Read on for the rest of their comments on the timing of refinancing and the types of products and services available in the Malaysian market.

When is a good time to refinance?

It is always a good time to refinance if there are significant nett savings attained by refinancing the existing loan, says Moey Tan, chief operating officer of personal financial services at Hong Leong Bank.

“Refinancing, whether through re-pricing with your existing banker or with another bank, will make sense when there is sustained decrease in rates,” says Peter England, head of retail banking at CIMB Bank Berhad.

“For example, the current low interest rate environment makes it a good time to consider refinancing. A borrower may want to change from a fixed term loan product to a more flexible loan like overdraft when he has more disposable income and knows how to leverage on the product flexibility to save cost or invest for potentially higher returns than his interest cost,” explains Goh Ching Chee, Citibank Berhad’s director for mortgage business.

Lim Keatky, head of mortgage of ING Insurance Berhad, feels that homeowners may refinance at anytime as long as they have a valid reason to do so.

“However, before they do so, they must ensure their needs are matched accordingly with the new home loan offer and they have to make sure the up front, ongoing and refinancing cost is properly calculated,” explains Lim.

What to do after deciding to refinance

Whatever your reason is to refinance, it pays to shop around for the best loan product to refinance your current home loan, says Abdullah Abdul Rahman, head of mortgage, consumer banking division of Maybank.

“In order to make the best decision for you and your family, it is important to be aware of your short-term and long-term financial goals pertaining to your financial situation and your home,” says Abdullah.

“Draw out your current situation, your immediate financial needs such as to consolidate your debt or to renovate your home and your future financial needs such as to send your kids to college. Also match this with a long term savings and insurance plan to ensure that you have a nest egg when you retire and no longer earn a constant stream of income. The best decisions are based on the most thorough information,” he explains.

According to Lim from ING Insurance Bhd, it is important to know what you want, and to do a product search prior to deciding on which financial institution to refinance with.

“Do a basic financial plan for yourself. Some of the elements that are important to include in this financial plan are the exact time period you want to finish paying off your housing loan. In addition, be certain how much interest will be incurred for the entire duration of the loan,” advises Lim.

“It’s also important to know the different types of home loans available in the market. Some home loans are based on fixed interest rate while some are based on floating interest rate. Understand how each type can help you achieve your financial plan. It is good to know to what extent of certainty each type of home loan help you achieve your financial plan,” he adds.

Products and services available in the market

With the myriad of products and services available, selecting the right financial institution and the right product can be quite a hassle. However, it pays to research thoroughly to find the best product to suit your own financial needs.

“At Citibank, we offer flexible, best-in-class home loans that meet customers’ different financial and lifestyle requirements. Our current portfolio of housing loans includes our ever popular Citibank Homecredit, Citibank Flexihome Loan, Citibank Housing Loan and Citibank Home Partner-i,” says Goh.

“By default, Citibank will revise customers’ instalment payments when there are revisions in interest rate. This is particularly helpful to customers especially in the current low interest rate environment as this translates to more disposal income for customers to tide over the current tight economic environment,” he explains.

Offerings from ING Insurance include fixed rate home loan, 4.85 per cent for non-zero entry cost, 4.99 per cent for zero entry cost, fixed up to 30 years, and up to 90 per cent financing, says Lim.

“ING offers a great opportunity for the borrower to log in at low fixed rate for up to 30 years. With the fixed rate home loan regime, the interest rate is fixed throughout the life of the loan, which means the monthly payments will not change for the whole period of the loan tenure providing borrowers the peace of mind and stability needed,” explains Lim.

Meanwhile, Hong Leong offers two major types of home loans namely, Hong Leong MortgagePlus and Zero Moving Cost packages. The former is a flexi home loan linked to a non-interest bearing current account to provide customers advantages such as, daily interest savings, easy access to cash, shortened loan period and the flexibility of depositing and withdrawing funds.

With the Zero Moving Cost package, the customer would not need to pay legal fees, processing fees, valuation fees and stamp duty when refinancing with Hong Leong Bank.

“CIMB Bank is the second largest property financing provider in the country, offering both conventional and Islamic financing,” says England. The bank offers flexible home financing where balances from both conventional and Islamic account can be used to offset the outstanding principal.

“This means that the more you have in your account, the less you pay in terms of charges (interest or profit) for your home financing. Our Islamic Flexi Home Financing-i, launched in January 2009, garnered more than RM300 million in sales, within its first month,” says England.

At Maybank, one will find the MaxiHome promotional package and MaxiHome standard package, in addition to its range of facilities and benefits. The former recognises and acknowledges the premium that properties located in prime areas offer, therefore the packages are priced competitively in the market. The latter, which also offers attractive rates to complement the promotional package, is available at all branches nationwide to meet the needs of customers throughout the country.

“In addition to these attractive low rates, the MaxiHome loan packages are designed to offer attractive lower monthly repayments which will enable customers to own their dream house without compromising on their other financial commitments or lifestyle,” says Abdullah.
The MaxiHome loan packages, depending on the type of property purchased, offers a slew of attractive benefits including Zero Payment benefit, Pay Half benefit, Pay Later benefit or Pay Less benefit.

To find out more about the products and services offered by these banks, kindly contact your nearest branch for a personal consultation

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Posted Date: December 30, 2008 12:00:00 AM
Home Loan Frequently Asked Questions
Home Loan Frequently Asked Questions
How much can I afford?
This depends on your income and other financial obligations. As a rule of thumb, most house buyers buy houses that cost 1.5 and 2.5 times their annual income. For example a house buyer earning RM40,000 a year would buy a house between RM60,000 and RM100,000. Furthermore, the monthly loan repayment should not exceed about 1/3 of your gross monthly income. In assessing your repayment capability, the financial institution would also take into account your other debt repayments such as car loan, personal loan and credit cards.
How much can I borrow?
This will depend on the value of your property, your income and your repayment capability. Margin of financing can go as high as 95% (inclusive of MRTA). The higher the margin, the higher you will have to pay per instalment. Also, at a given rate, a shorter tenure will require you to pay higher instalment.
How long does it take to process a loan?
It usually takes about one to two weeks for your loan application to be approved from the time you supply full documentation. You should ask the financial institution for the checklist of documents required for the application to avoid any delay.
What is the difference between conventional financing and Islamic financing?
Under conventional financing, your outstanding loan consists of principal plus the interest charged on you. The interest is actually the financial institution's cost in obtaining the funds. Islamic financing works on the concept of buying and selling where the financial institution purchases the property and subsequently sells it to you above the purchase price.
Why do I need a valuation?
A valuation is required if you are buying a completed property. The financial institution requires a valuation to ascertain whether the property provides sufficient security for the loan given. It also provides an indication that the property is worth what you are paying for.
Do I need to appoint a lawyer? Can I choose my own lawyer?
Yes. You need to appoint a lawyer to draw up your loan documentation. Normally, the financial institution will provide a panel of lawyers who are familiar with their documentation requirements for you to choose from. If you prefer to engage your own lawyer, you should discuss this with your financial institution.
Who pays for the legal fees?
Generally, legal fees are borne by the buyer. However, certain developers and financial institutions may offer to pay the legal fees on the legal documentation as part of their marketing package. In addition, some financial institutions also extend financing for the loan documentation fees.
What if I run into financial difficulties and cannot meet my loan repayments?
If this happens, you should contact your financial institution to discuss a reasonable repayment program, which could include extending the tenure of the loan.
Can I pay off my loan in full earlier than the agreed loan tenure?
Normally there will be penalty charges for early loan settlement. Depending on the financial institution, penalty charges will range between 2-5% of the outstanding amount. The charges that are made will depend on the type of product you have chosen and when you decide to redeem your loan. Note that in some loan packages, there are certain minimum periods you need to observe before full settlement is allowed.
Is there any waiver of penalty fees for early loan settlement?
Any waiver of penalty fee is strictly at the discretion of the financial institution.
Why does my outstanding loan remain high at the initial stage despite the repayments made?
During the early years of the loan, a significant amount of your repayments will go towards the payment of interest. So if you make partial repayments to repay the principal sum outstanding, you make substantial savings in your interest payments and thus shorten your loan tenure.
Can I make extra payments other than the monthly contractual repayments?
This depends on the terms and conditions stated in your loan agreement. By paying in extra money each month or making an extra payment at the end of the year, you can speed up the process of paying off the loan. When you pay extra money, be sure to indicate that the excess payment is to be applied to the principal. However, if you make a lump sum payment or partial repayments to your principal loan, you must give notice to your financial institution. The notice period ranges from 1 to 3 months.
Do I need a guarantor for a loan facility?
This is at the financial institution's discretion and depends on the credit standing of the borrower.
Does the financial institution have the right to charge my loan account for any miscellaneous charges incurred by them such as late payment charges, legal costs, insurance, etc?
The financial institution's power to impose charges on your account is normally indicated in the Terms and Conditions of the loan.
How long is the grace period for payment of my monthly instalment/interest?
Generally, the financial institution gives a grace period of 7-14 days for you to repay your instalment payment. Any payment received after the grace period will be subjected to late payment charges.
When does the financial institution release the loan to the seller/developer?
For houses under construction, the financial institution will release the progressive payment to the developer based on the claim made upon completion of each construction stage as certified by the Architect's Certificate. For completed properties, the loan will be released upon completion of legal documentation or when all relevant approvals, such as the approval of the state government have been obtained.
Can I purchase a house under joint names and apply for the housing loan only under my name?
The financial institution will consider such applications on the merits of each case, under the following circumstances:
  • The co-owners are related as husband and wife, and one party is not working and the other party is solely responsible for the loan
  • The co-owners are related as father/mother and children, the parents are old and not working and the children will be responsible for the loan
However, the above is at the financial institution's discretion and they may also consider other circumstances.
If the developer abandons the project, am I still required to service my interest/instalment payments?
Yes. You are still obliged to service your loan based on the loan agreement signed between you and the financial institution. However, since the financial institution has vested interest in the property, you could discuss a repayment plan with your financial institution. You should also report the matter to the Ministry of Housing & Local Government. 
What happens when the loan is fully repaid?
When the loan is fully settled, the financial institution through its solicitors, will release its charge on the property. The financial institution (chargor) will uplift his claim on the property and the title to the property will be transferred to you.
What happens in the event of death of a borrower who has not bought insurance?
The deceased's survivor/next of kin can claim through the court the rights of the deceased's property. The person will have an option to either proceed to service the loan or redeem it. However, most financial institutions make it compulsory to insure (MRTA) against such an event.
What can the financial institution do if I do not make repayments?
If you fail to make three consecutive payments, the financial institution will take the necessary actions to recall the loan. In the worst case scenario, the financial institution will foreclose the property and sell it to settle the loan. The borrower would still be liable to pay the difference between the auction price and the loan amount outstanding.
What is the most convenient way to repay my loan?
Financial institutions offer a wide range of services to make banking easier for you. Some of the alternative ways of servicing a loan include:
  • Open a savings/current account and arrange for standing instructions with minimal charges (if you maintain deposit and loan accounts with the same bank, the charges may be waived)
  • Through an ATM transfer
  • Internet Banking
  • Telephone banking service
  • Deposit your cheque at the deposit machine or send your cheques direct to your financial institution
Should I consider refinancing my loan if I am offered a lower interest rate?
The main consideration in refinancing would be the costs involved. As you are clearly aware, you have incurred a substantial amount to pay for the necessary fees to obtain your first loan. For example, processing fees, legal fees, stamping and transfer fees. Refinancing means you would have to incur the same charges again. Before you decide to refinance, you should ensure that the savings from the lower interest rate is enough to compensate all the costs incurred associated with refinancing, including penalty charges, if any.
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Posted Date: December 30, 2008 12:00:00 AM
Standard Chartered strips away the unnecessary with its latest home loan

It can be difficult to compare the vast array of BLR-pegged financial products on the market today. Standard Chartered’s innovative new home loan, MortgageKLIBOR, gives customers the real truth, along with better rates and more stability.

The robustness of the property sector lately has been accompanied by huge growth in the financial industry. Today, prospective home owners should navigate their way through a variety of lending products offered by banks / institutions which are conventionally pegged to the Base Lending Rate (BLR).

Cutting through the complexity that consumers face when shopping for a home loan, Standard Chartered Bank Malaysia Berhad has launched a revolutionary new product, MortgageKLIBOR, as an innovative response to this need. Once again Standard Chartered makes its mark as a leader in product innovation and delivering a superior customer experience. MortgageKLIBOR is the FIRST conventional home loan offered by a bank that is pegged to the three-month Kuala Lumpur Inter-Bank Offered Rate (KLIBOR) – which is lower than the average market financing rates. Launched alongside the OptiOverdraft standby credit facility, MortgageKLIBOR is available only through Standard Chartered.

Why KLIBOR?

3 things make Standard Chartered’s newly launched MortgageKLIBOR a unique and revolutionary product – transparency, greater savings and rate protection.

Firstly, what you see is what you get from MortgageKLIBOR. MortgageKLIBOR is based on the borrowing and lending of funds between banks and can be checked directly from any major newspaper daily. By pegging to this inter-bank rate, Standard Chartered is revealing its costs and margins, giving consumers a clear, transparent view of interest rates. There are NO other fees or charges, hidden or otherwise.

Secondly, KLIBOR has been consistently lower than BLR (see graph below). For example, BLR had been hovering at 6% from January 2004 to January 2006, at which point it began climbing to 6.75% or maximum at 6.8% (where it is still remaining for the moment). On the other hand, KLIBOR has remained consistently under 4% and has even dipped to below 3%. This translates to greater savings when financing through MortgageKLIBOR.

Finally, Standard Chartered has added an additional security feature of fixing the repayment rate on a 3-month interest rate, rather than on KLIBOR’s daily fluctuations. Standard Chartered sets its 3-month fixed rate by adopting the KLIBOR rate on the last business day of the previous quarter, updated every quarter. This gives customers precious stability.

Taking pride in Malaysian homes

Taking pride in helping Malaysians own homes, Standard Chartered believes in meeting a home owner’s concern in managing the total cost of owning a home. The bank is now offering a high financing margin of up to 89%, with an additional 5% for the Mortgage Reducing Term Assurance (MRTA), an insurance plan that provides full housing protection.

Currently, MortgageKLIBOR is offering KLIBOR + 1% p.a. (for a limited time only). Its fixed repayment rate for KLIBOR from 1 April to 30 June this year is 3.61%. Thus, customers who sign up with MortgageKLIBOR enjoy a rate of 4.61% p.a.

For more information on MortgageKLIBOR, call 1300-880-388 or visit www.standardchartered.com.my or walk into any of our 37 branches nationwide.


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Posted Date: November 01, 2008 12:00:00 AM
Who’s in command? Your home loan or you?

Who’s in command? Your home loan or you?

For many people, their homes are probably the biggest purchase of their lifetime. After the purchase, homeowners suddenly find themselves bound – unsure whether their home loan is a partner or a master.

HSBC Bank Malaysia Berhad recently conducted a brief survey of homeowners to gauge their control over their home loans and also to find out whether homeowners have any strategies in paying off their home loan as quickly as possible.

Changing from conventional to flexible home loans

From the survey, one of the biggest shifts is the move towards flexible home loans, as compared to conventional home loans. Over 50% have flexible home loans, with only about 10% and 30% opting for conventional and fixed rates home loans respectively. HSBC foresees this as a growing trend as more and more people realise the benefits of being able to pay more into their home loan account in order to reduce the outstanding balance and interest payable on their home loans, yet still have the flexibility to redraw the excess payment when the need arises.

However when it comes to the details of their home loans, the survey disclosed surprising results. More than 50% of homeowners are unsure when it comes to the current interest rate they are servicing where else 59% do not know or cannot remember their outstanding loan amount.

On the reverse, 66.7% of them are able to state the number of years they have left to settle their home loans. There is no doubt that homeowners look forward to the day that they can finally be rid of the big financial burden.

Are you in charge of your home loan?

From the survey, it was interesting to discover that most do not have strategies to reduce their home loan tenure or the interest payable on the home loan. Over half of those surveyed were unsure of how to reduce their home loan outstanding balances or to shorten their home loan tenure as quickly as possible.

Daily rest – so what?

From the survey, it was discovered that almost 70% are dutiful home loan paymasters – depositing their monthly instalments when they are due and surprisingly not taking advantage of daily interest calculations. They are unaware that by simply paying their instalments early or fortnightly, they can reduce their interest payable since the outstanding balance would be reduced.

Excess payments

When it comes to excess payments, the figures do not fare much better. Excess payments are extra deposits, excluding monthly instalments that go towards reducing the principal loan amount. From the survey, only 33% have deposited excess payments regularly, while 48% have never done so. 11% do so occasionally, while 4% intends to and another 4% totally have no idea what excess payments are.

However this could be due to the type of home loans they have. Only flexible home loans allow you to deposit excess payments freely without notice or charges. You can deposit excess payments with conventional home loans but it is with greater hassle as notice or fees may be imposed. For the fixed rate home loans, excess payments are usually not allowed.

EPF home loan reduction scheme

On the other hand, the survey showed good response towards the Employees Provident Fund (EPF) home loan reduction scheme. 44% of those surveyed have withdrawn from the Account II to reduce their outstanding home loan balance. As for those who have not done so, some prefer not to touch their EPF money as they recognize it as a retirement fund and some feel that the interest from EPF is relatively high therefore it is better to leave the funds in there.

Still unsatisfied

From the survey, it showed that a majority are not satisfied with their home loan. When asked what they would change if there was one thing they could change about their home loans, it was discovered that a whopping 35% wanted to reduce the tenure, 25% wanted lower instalments and 25% wanted a shorter lock-in period. Only 11.5% had no complaints and were happy with their home loans.

It is interesting to note that 25% wanted lower monthly instalments. One way to tackle this is through refinancing. With lower interest rates, one can effectively lower the monthly instalment amount by opting to refinance the existing home loan to a flexible home loan. With the right refinancing package and a flexible home loan, such as HSBC HomeSmart, you could save RM500 a month^ for the first year of refinancing and there’s zero moving cost^^ too! Of course, there is also the lock-in period to consider – a defined number of years which does not allow you to cancel your loan without any penalty fee being incurred. But if you are out of your lock-in period, refinancing should be considered in order to take advantage of lower interest rates.

Stay in command

One conclusion from our brief survey was that many are only aware of the EPF scheme as their sole method to pay off their home loan quickly. The sad thing is, many people neglect the mechanisms that are already in their home loans in order to be in control of their home loan. Those with flexible home loans can utilise the benefits of the same to help them own their homes faster. The good news is that it is not difficult to gain control. Just adopt some of these cost-saving measures to wrestle control back into your hands.

Excess payments together with a flexible home loan are an excellent combination, as it allows the homeowner to reduce his or her outstanding balance and reduce interest payable almost instantly. One highly recommended strategy is to deposit one’s entire salary into the flexible home loan account, such as HSBC HomeSmart. The excess payment can be withdrawn as and when needed via the ATM or chequebook, but while it is in your flexible home loan account, it will work towards reducing the interest payable.

You could also deposit your savings and fixed deposits in your flexible home loan account to further reduce interest payable on your home loan and to also shorten your home loan tenure. You would then be able to save on interest from your flexible home loan account which could be as high as 6% p.a. Such savings would serve you much better than the low interest earned in your savings account (circa 1.5% p.a.) or fixed deposit (circa 3.7% p.a.).

The bottom line is – the more you deposit into your flexible home loan account, the more you will be able to reduce your interest payable and shorten your home loan tenure. The trick is to park any idle funds into your flexible home loan account until needed. Now is the time to take a look at your home loan again and see how you can be the one in control.

This column is brought to you by HSBC HomeSmart, the home loan that is flexible enough to let you rearrange your priorities anytime.

The benefit from HomeSmart is that it helps you pay off your home loan in half the time* or allow you to withdraw the excess payment for important things that just can't wait. To afford a more expensive home at a lower instalment amount, you can consider Step-up**, an optional feature for HomeSmart.

For more information on HomeSmart or our other home loans, call HSBC at 1 300 88 0181 or log on to www.hsbc.com.my.

 ^The above calculation is based on certain conditions; i.e. (1) the customer's current applicable interest rate of BLR + 0% with his/her existing financier; (2) the first year interest rate of HSBC HomeSmart under the "Refinancing Interest Package" offers; and (3) where the loan amount is RM400,000. The projected savings of RM500 per month based on the above conditions is only applicable for the first year of refinancing with HSBC HomeSmart. Savings may vary from individual to individual depending on the loan amount and current interest rates charged by their existing financier. HomeSmart Refinancing Interest Package offers are applicable to loan amount above RM250,000 with minimum tenure of 15 years. Offers end 31 October 2008.

^^Subject to the Bank's absolute discretion, zero moving cost package is only applicable to home financing above RM100,000. Moving cost refer to, inter alia, legal fees, valuation fees, stamp duty and other disbursement or charges relating to the preparation of the legal documentation by the Bank's panel lawyers. The zero moving cost package is subject to the terms and conditions as stated in the legal documentation.

*This is dependent on fulfilment of certain conditions namely the loan amount granted and its tenure, monthly income and savings and/or idle funds that can be maintained by the individual in the HomeSmart account.

**Available for salaried individuals aged 40 and below (applicable only for new purchases that are under construction or completed).

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Posted Date: June 25, 2008 12:00:00 AM
Loans and Financing Institutions

Loan Rates

Local Bank Telephone
ABN AMRO Bank 603-2169 4672
Affin Bank Bhd 603-2055 9898
Affin Islamic Bank Berhad 603-2055 9000
AIA CO LTD
Al Rajhi Bank 603-6204 3350 / 1 300 82 6000
Alliance Bank Bhd 1 800 38 3123
AMBank Bhd 603-2612 6888
AMFinance Bhd 03-2612 6888
Asian Finance Bank
Bangkok Bank
Bank Islam (M) Bhd 603-2690 0900
Bank Kerjasama Rakyat
Bank Muamalat 603-2697 7077
Bank Of China
Bank Of Nova Scotia 603-2148 1881
Bank Simpanan Nasional 03-2162 3222
CIMB Bank Bhd
CIMB Islamic Bank Bhd
Citibank (M) Bhd 603-2383 8800
EON Bank 603-2771 8860
Hong Leong Bank 03-7980 7843
HSBC Bank 603-2050 7878
ING Insurance Bhd
Lloyds TSB Asia
Malaysia Building Society Bhd
Malaysian Assurance Alliance Bhd
Maybank 603-2074 7776
OCBC Bank 1 300 88 5000
Public Bank Berhad 603-2176 7021
RHB Bank 603-9206 8118
RHB Islamic Bank Bhd
Southern Bank 603-2071 7118
Standard Chartered Bank 603-7720 4033
United Overseas Bank 603-2772 6658
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Posted Date: June 04, 2008 12:00:00 AM
Why take Islamic financing

Why Take An Islamic Financing


 
Introduction- Islamic Banking

Broadly, Islamic Banking is a system that follows Islamic Law (Shariah), principles and Islamic-based economics.  Essentially it prohibits the collection of interest but rather instalments paid or payable to the Islamic financial institution consists of a pre-determined profit component. Further, Islamic law prohibits investing in businesses that are considered unlawful, or “haram” or contrary to Islamic values.  To the consumer, whether Muslim or otherwise, Islamic Banks have much greater social and moral responsibility to ensure that their principles of financing are fair to the everyone.

Financing mechanism

A fundamental difference between Islamic financing and conventional loans is in an Islamic financing transaction, a bank essentially buys the property from the seller or you (in case of refinancing), and re-sells it to you plus profit, while allowing you to pay for the purchase in instalments. A conventional loan is given on a debtor/creditor borrower/bank relationship. “Interest”, representing the bank’s cost of funds is charged.

Profits

To the customer, the Islamic bank’s profit is calculated prior to approval of financing application based on the total principal amount, tenure and agreed profit rate. . Policies such as daily or monthly rests apply in the same manner to both Islamic and conventional financing. Similarly, monthly instalments are calculated using the standard amortisation mathematical model.  A further similarity between interest and profits on the home finance is the rate for Base Lending Rate (BLR) and the Islamic Base Floating Rate (BFR) is at 6.75% at current.

In Islamic financing , profit is  calculated upfront and for the whole tenure of the financing facility based on the standard amortisation table. The “sale price”, which consists of the principal and the profit is then determined.  In fixed-rate Islamic financing as in most conventional fixed rate loans, the monthly instalment and tenure of the facility are determined at the onset of the finance facility and does not change throughout the tenure of the loan. In a variable rate Islamic finance, any increase in the profit rate will either lengthen the tenure of the loan or change the monthly instalment amount just like in conventional loans. A decrease in the profit rate will result in rebates to the customer or a shorter tenure similar to conventional loans. A major difference between Islamic loans and conventional loans is that there is a lot more clarity if/when BFR is revised and there are any changes to your financing terms.

Another difference between Islamic floating profits and conventional floating interest is that with the former, there is usually a ceiling rate, ie a maximum profit an Islamic loan provider will earn. To the consumer, this is an advantage because historically, BLR has increased to as high as 12.27%.

An often overlooked benefit of Islamic finance is that unlike most conventional loans that charge “penalty interests” on late payments, an Islamic financing provider cannot and therefore does not charge “compounding penalty interest”, as it is against Islamic principles. Additionally, Islamic banks are governed more strictly on Islamic policies relating to late payment interest at 1% and hidden fees and charges.

Loan Documentation

As Islamic financing involves a sale to the financial institution and buy back from the customer, the Loan Facility Agreement in a conventional loan is replaced by a Sale And Buy-back Agreement in an Islamic financing facility. The total loan amount determined at the onset of the loan will be the buy-back price. From a legal perspective this is essentially comparable to a charge on the property by the financial institution under conventional financing. Other financing documentation is similar to conventional loans.

To the consumer, the difference between the Islamic Sale And Buy back Agreements and a conventional Loan’s Facility Agreement is that, should a customer chooses to materially alter the terms of the finance such as increase the facility amount to more than the approved limit, a new Sale And Buy-back Agreement need to be drawn up and signed whereas a conventional loan would only need to be up-stamped and hence cheaper.

Early settlement

A common misconception is that since the purchase price in the buy-back agreement is determined at the start of the financing facility, if a customer chooses to repay early, he must bear all profits to the Islamic bank as calculated upfront on the whole finance tenure.  In practice, Islamic banks refund the access profits in the form of a rebate, therefore clearly offsetting the total calculated upfront profits.  An additional benefit in Islamic finance is early repayment penalties are often lower than conventional banks. Bank Islam for example, has an early settlement penalty of only 2% for a period of 5 years.

Stamp duty discount


The stamp duty payable on an Islamic financing facility is cheaper by 20% compared to the stamp duty payable on a conventional loan. This incentive was announced in the 2007 Budget and is available from Sept 2, 2006 to Dec 31, 2009. A further Government incentive is a stamp duty waiver for the redeemed amount when refinancing from a conventional to an Islamic home finance.

Other Benefits

In general, house owners insurance related to Islamic financing offer wider coverage than the standard fire insurance.  For example, the Long Term Houseowner’s Takaful (LTHT) covers damages related to natural disasters and “acts of God”.
Islamic financing also offers other attractive features equivalent to that of conventional loans, such as stepped-up payments, no repayments during construction period and free moving cost low lock-in penalties.

An additional overlooked benefit of Bank Islam financing is that maximum debt service ratio for your total commitments is 75%.

Obtain an Islamic Financing Package Quotation

Islamic banks in Malaysia have come a long way since the Islamic Banking Act came into effect on the 7th of April 1983. In these 25 years, Islamic banks have needed to compete in the market with conventional banks. Contrary to popular belief, Islamic banks offer very competitive home financing products with very attractive features. There are currently 12 fully fledged Islamic Banks and more than 150 different Islamic home financing packages in Malaysia. Therefore, when shopping around for financing for your property, it may be worthwhile considering an Islamic financing package.


This article has been provided courtesy of Bank Islam Malaysia Berhad.  Bank Islam Malaysia Berhad is the first Islamic Bank established in Malaysia in 1 July 1983.  After two and a half decades in operations, Bank Islam Malaysia Berhad has proven that Islamic banking has a way forward with its activities expanding rapidly throughout the country.  The bank was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992. Bank Islam has 90 branches. For further information see www.bankislam.com.my. For a free consultation contact callcenter@bankislam.com.my.



For a complete list of fixed rate loans, please visit www.money3.com.my


Asian Finance Bhd
4th June 2008

 


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Posted Date: May 04, 2008 12:00:00 AM
Loan Table by Asian Finance Bank, Money 3


 





For a complete list of fixed rate loans, please visit www.money3.com.my


Asian Finance Bhd
4th May 2008

 


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Posted Date: May 01, 2008 12:00:00 AM
Refinancing – Part 1

Refinancing – Part 1


Financing a home is a long term commitment and while it may be tempting to refinance when there seems to be better interest rates offered by a multitude of banks, it is important to first know the basics of refinancing and what it entails. iProperty.com speaks to experts from five banks about things to look out for before and after deciding to refinance

What is Refinancing?

“Refinancing refers to paying off an existing loan or mortgage with funds secured from a new loan. Most times, the new loan will be of the same value or higher than the existing loan, and homeowners might use the same property as collateral to apply for refinancing,” explains Goh Ching Chee, director for mortgage business at Citibank Berhad.

According to Abdullah Abdul Rahman, head of mortgage at Maybank’s consumer banking department, it is possible to get ‘extra cash’ by taking advantage of the property’s rising value to obtain a larger loan amount. As the refinanced loan pays off the current home loan, home owners will have a balance for other expenditures.

In a nutshell, to refinance is to switch the financing of your current home loan to another financial institution to enjoy more favourable lending conditions, says Moey Tan, Hong Leong Bank’s chief operating officer of personal financial services.

According to Tan, homeowners should consider refinancing their existing home loan if there are significant savings to be enjoyed by doing so.

“Take for example, Mr Lim’s case who in 2004 took a 30-year housing loan for RM300,000 with effective interest rate of 6.55 per cent. His current monthly instalment is RM1,907. In 2009, Mr Lim’s outstanding loan amount is RM280,000. Mr Lim could opt to refinance his loan with Hong Leong Bank to enjoy BLR (base lending rate) minus 2.20 per cent per annum for whole loan tenure of 25 years,” she explains.

Why Refinance?

“Homeowners choose to refinance for several reasons. They may want to save interest cost by replacing their current loan with a more cost-efficient home loan package offered by their bank or another bank; reduce monthly mortgage payment; lessen or increase their loan tenure; and possibly, use funds for medical payments, children’s education or consolidate all their other debt into one that has the lowest interest charges,” says Goh.

According to him, the timing that homeowners select to refinance their loan depends on their financial needs and obligations. “Usually, refinancing becomes popular when interest rates are lower. People start calculating their mortgage interest rate, and look for more value-for-money mortgage packages in order to enjoy the greatest savings.

“Nevertheless, customers are urged to contact their banks first, before they make any decision towards this end, in order to negotiate for a lower level of interest rate levied, before seeking loan packages from other banks,” says Goh.

The primary reason for refinancing is to reduce current interest rate, monthly repayments and/or loan tenure. According to Abdullah, home owners may want to lower monthly repayments to set aside money for other uses or to save in an investment product every month.

“If you think interest rates may rise, you may want to refinance to a fixed rate loan. Another reason for refinancing, particularly if your home has increased substantially in value, is to tap into your home equity for additional funds for emergency and other ventures,” says Abdullah.

“An important and often overlooked reason for considering refinancing is to consolidate your debts and deposits for better cash flow management. Refinancing can be one of your first steps towards spring cleaning your financial state of affairs. If you are paying high credit card or overdraft interest, you may want to clear some of this debt to save you money in the long run,” he adds.

Therefore, says Lim Keatky, ING Insurance Berhad’s head of mortgage, refinancing can be considered if homeowners are looking to meet the following objectives:

  1. to reduce monthly home instalment
  2. to reduce interest rate or cost of borrowing
  3. to change the term to maturity or extending the repayment period
  4. to reduce risk (by switching from a floating rate to fixed rate home loan)
  5. to raise additional fund which can be used for various reasons such as pay off borrowing bearing higher interest rate, pay  off short term debt, etc
  6. and to improve overall cash flow budgeting.


“The pros of refinancing are that homeowners may receive more favourable loan terms and conditions in terms of interest rates, prepayment conditions and more as compared to their first loan. On the other hand, the cons include incurring additional costs to perfect the loan agreement and to pay off stamp duty. If these costs are already covered by the financier, the loan will usually be imposed with a higher interest rate. Additionally, fresh terms may also be imposed in a refinancing arrangement for example, the lock-in period will probably start all over again,” says Lim.

Things to Look Out for

According to Lim, homeowners who opt to refinance should be aware of the costs that they will need to incur to complete the whole refinancing process.

“This includes any fees or penalties that their existing financier may impose upon exiting from their existing loan contract. In addition, a responsible financial institution that offers professional advice and excellent customer service is also a key consideration because the borrower and lender will be establishing and engaging in a long term relationship for the whole duration of the loan tenure,” he adds.

Peter England, head of retail banking of CIMB Bank Berhad, cautions home owners to consider the savings versus costs incurred if their primary goal of refinancing is to lower the rate charges.

“Sustaining a longer term relationship with your banker is probably a less costly option and helps build your credit ratings with the financier. Consumers with fixed rates may be tempted to refinance especially with the lower BLR and BFR (base financing rate) currently. As with other financing, lock-in periods and associated penalties apply,” says England.

Apart from understanding the banker one intends to have a long term relationship with, there are several other considerations too, he says. When opting to refinance, home owners should ask themselves the following questions:

  1. Does your existing banker allow you the option to re-price? What is the agreed lock-in period?
  2. What are the costs involved – legal and transfer fees?
  3. Do you have to pay penalties to break the initial contract?
  4. Are these costs capitalised into new financing contract, and if so, what are the incremental costs?
  5. How long does it take to complete the transfer, and does your refinancing bank have the necessary after-sales service to ensure a smooth transfer?
  6. What are the new lock-in periods and penalties imposed by the new financier?
  7. Are the new rates offered promotional (for one or two years) or for long term (for the entire tenure of the financing)?

“Home financing is a long term commitment that generally spans between 15 and 30 years. The cost of home financing can vary especially where there is substantial volatility in rates. The best thing to do is to have a discussion with your banker about re-pricing your existing home financing,” says England.

Watch out for Refinancing – Part 2 in which our experts talk about when to refinance, the process of refinancing, as well as the myriads of home loan related products and services available in the market.


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Posted Date: March 04, 2008 12:00:00 AM, By: Asian Finance Bhd
BLR Wears Prada



 
Of the many benefits one gains having being in the home loan industry for many years, one in particular is a clear insight into how people think when choosing a home loan. Many factors are in play but none as influential as the “interest rate” of the loan, usually taken as the indicator of the cost of the loan and hence a borrower’s ability to afford the said loan.

However, the true cost of a loan is often mistaken simply because the interest rate or cost of the loan consists of 2 separate components, one of which is constant and the other a variable, and it is the variable that is often overlooked.

Interest Rate = Base Lending Rate (BLR) + Spread (a.k.a. Margin)

Whilst a lending bank will usually define and fix the loan’s spread e.g + 1% or -2%, the other component which is equally if not more important, is the Base Lending Rate which is truly a factor beyond anyone’s prediction especially over a long term such as the loan’s 25-30 year tenure.

For most of us, the author not excluded, it is best for us not pretend to understand the “invisible forces” that make the BLR go up or down. It is often said in jest that when the US Treasury sneezes, the rest of the world catches pneumonia. Whilst it may have been said as a joke, what is certain is that Malaysia’s BLR is something that moves in response to a number of internal and external forces, none of which are within the loan borrower’s control. Imagine that! You have no control over what may be the single largest debt you own.

So, if the interest rate of a loan is so important to the borrower (to the extent that a mere 0.1% difference is adequate to swing a borrower’s decision from one lender to another) shouldn’t we make an effort to understand this variable called BLR. Afterall. This is one factor that can have such an impact on one’s continuing ability to afford the loan over its entire tenure, not just in the initial “honeymoon” years.

Much can be learned about BLR from just looking at the BLR chart below.

 

Let us examine what we can learn from the chart.

Observation 1.

BLR is NOT a constant and it changes in response to internal/external economic influences. Therefore, if a loan you are planning on taking is a BLR-based loan, you must accept the fact that the cost of the loan that you decided you can afford when you signed on the dotted line, may not be the cost you will be obliged to pay in future.

Taking the “cheapest” BLR-based loan available in the market today, a mere 1% average increase in BLR over the tenure of the loan will see to it that the borrower pays about RM40,000 more in interest [ read-RM40,000 more in cost]. Dare we postulate a 4% or 5% increase, or is it cozier to stay in denial?

Observation 2

How high can BLR go? Well, if BLR prediction were a sport, it must surely rank somewhere between darts and mumblety-peg. Sometimes the sharp end bounces back. But seriously, BLR as the chart indicates has spiked to almost 13% twice in the last 25 years (coincidentally the favorite tenure of loans) with the most marked increase being in January 1995 from a base of 6.6%, to a high of 12.27% in June 1998.

To put it into perspective, if you had taken a RM225,000 loan in January 1995 and signed on to pay approximately RM1531 per month, you would be paying about RM2,400 for the same loan three years later. Of course to assist you the bank may allow you to maintain the same monthly repayment but you will end up paying for many more years that anticipated., and ultimately at a much higher cost than you thought when accepting the loan in 1995.

A bank’s letter of offer today states that the bank’s BLR is 6.75% presently which gives the illusion that the rate is fixed. It is not and one must remember that the loan’s overall interest rate is ultimately determined by BLR which can be a highly strung kid tripping on sugar.

And we might as well now correct a very popular misconception. As competition amongst lenders become fiercer over the recent years lenders have indeed slashed their spread or margin which gives the impression that interest rates are southward bound. Remember the loan’s interest rate is a function of BLR + Spread. BLR so happens to be on the upward trend rising from 6% to 6.75% over the last two years. Again, any discussion of rates going up or down is mere conjecture and a borrower should look at the loan being taken over a 25-30 year horizon.

Observation 3.  

They say life is about timing but in reality a lot of good opportunities become lost waiting for “perfect conditions”. A BLR based loan would be great to have when BLR does nose-dives but is that where we are at now?

When the base rate hit an all-time low of 6% in 2003, lending became so cheap that along came a number of loans FIXED at ridiculously low interest rates. Fixed rate loan as the name suggests are unlike BLR-based loans in that there is no BLR influence and as such the interest rate, ie cost of the loan is fixed from the beginning.

Fixed rate loans today are offered by a number of Insurance Companies through their mortgage departments, as well as a host of Islamic Banks. Fixed rate loans on offer range from 5.75% with some lock-in period to 7.25% without any lock-in (no penalty for early settlement). There are even some “hybrids” i.e. BLR-based loans with rates capped at a maximum rate of 7%-8%.
Translated, with these loans, you KNOW how much you are going to pay and you never have to pay a cent more regardless of what economic cycles we are in. Having the certainty and peace of mind? Now that’s really good value. The bonus is, these loans are fixed at a rate lowest in history.

However, it is not a mystery why fixed rate loan uptake is still a low percentage of the overall industry loan growth. Put a BLR-2% loan (at  6.75%, BLR-2% = 4.75%) beside a loan fixed at 5.75% and the untrained eye would say the BLR-based loan is cheaper, and it may very well be the case but for the fact that BLR fluctuates and presently seems to be fluctuating upwards.

Cosmetics have become very important in packaging loans and this is where the fixed rate loans can look like pumpkins beside a Prada-clad  loan with rates of 2.5% in year 1, BLR+0% in Year 2 and BLR plus or minus spread for subsequent years. Remember the highly strung kid on a sugar hit? He is wearing Prada (with apologies to fans of The Devil Wears Prada).

In conclusion, as you debate between Lender 1 with rates at BLR-2% with 5 year lock-in and compulsory MRTA and Lender 2 with rates at BLR-1.6% with 3 year lock-in, and no MRTA and Lender 3 at 0% in the first year followed by BLR+0% in subsequent years and Lender 4 with rates of BLR-0.5% Flexi and Zero Entry Cost and Lender 5 with that free 42” Plasma TV…..throw into the equation, another factor. Ask yourself how much BLR increase can you really afford?

Having said all that, the case must be made for BLR-based loans with flexi features that allows you to offset monies kept in deposit against a corresponding sum of the loan’s interest. BUT, be sure that you have the said “monies in deposit” for the interest-offset effect to happen, and all the big money you are going to win from your friends at the next World Cup when Paraguay beats Argentine shouldn’t count in your analysis.

For now, smart money is on the lowest fixed rate in history. Some fixed rate loan providers will absorb your entry costs (ZEC packages) and may even be convinced to throw in a couple of Prada bags to carry your worries away.


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Posted Date: March 01, 2008 12:00:00 AM, By: The National House Buyers Association (HBA)
Progressive vs 10:90 payment system
With the inclusion of the two types of contract of sales forms – Schedules I and J of the Housing Development (Control & Licensing) Regulations 1989 (‘Housing Regulations) the government has allowed the 10:90 concept of housing delivery to run to parallel with the sell-then build (progressive payment) method. In this article we highlight the comparisons between the two payment concepts.

 

 

You can easily see where the 10:90 concept gets its name from. The progressive stages of construction are already contained in the Schedule for Payments under the progressive payment system. However, for the 10:90 concept, the developer still has the duty to periodicallyinform the purchaser on the progressive stages of the construction through Clause 4 of the regulated contract of sale.

Schedule of payments- 10:90 concept

(1)The purchase price shall be paid by the Purchaser to the Vendor by instalments at the time and in the manner as prescribed in the Third Schedule.

(2)The Vendor shall, at its own cost and expense, within fourteen (14) days upon the completion of each of the following stages issue a written notice to the Purchaser which shall be supported with a certificate signed by the Vendor’s architect or engineer in charge of the housing development and every such certificate so signed shall be proof of the fact that the work therein referred to have been completed:

(a) the substructure of the said Building, including its foundation;

(b) the superstructure of the said Building, including its structural framework, walls with door and window frames placed in position and the roofing, electrical wiring, plumbing (without fittings), gas piping (if any) and internal telephone trunking and cabling to the said Building; or

(c) the internal and external services of the said Building including the sewerage works, drains and roads serving the said Building and the internal and external finishes of the said Building including the wall finishes.

 

After decades of debates and discussions, the 10:90 concept, although termed ‘build-then-sell’ concept in the Housing Regulations, was finally made possible through the amended Housing Regulations on 1 December 2007 by the Minister of Housing & Local Government. The regulated contract of sales is for purchase for housing development units launched or under-construction. However, the 10:90 payment system as in Schedules I (Landed with Building) & J (Subdivisions)of the Housing Regulations is similar to the normal payment system of a completed property and as near as you can get.

In whatever payment system of a yet-to-be completed property, you are dependent on the developer to finish the job of completion. As construction takes times, it comes with potential pitfalls. These are:

  • the unit may not be ready for occupation by the time scheduled;
  • the development may end up not being built at all;
  • changes in value;
  • plan modification;
  • quality of construction
  • your circumstances (financial or health)  could change but you have already entered into a binding contract.

However, with the 10:90 payment system, the purchaser is not ‘locked in’ with a loan that has to be paid in the event the project is delayed beyond the scheduled completion date or worse still abandoned.

Now, that there is a choice of payments for new homes, potential buyers should not leave it to the developers to decide on whether a project comes under progressive payment or 10:90 concept. Look out for developers who offer such payment schemes to minimise your risk.The ball is now in the buyers’ court. So what should it be?

The National House Buyers Association (HBA) is a voluntary, non-governmental organization manned by unpaid volunteers. For more information, check out their website at http://www.hba.org.my

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Posted Date: February 04, 2008 12:00:00 AM, By: Asian Finance Bhd
Islamic Financing - Sources of Funds

Like conventional banking, Islamic banks also need funds to operate its banking activities. Basically there are two (2) main sources of funds, namely (a) shareholders’ working capital and (b) deposits collected from customers.  For a dual window banking operation, all funds belonging to the Islamic banking scheme are segregated from those related to conventional banking and to avoid comingling of the funds, a separate accounting system is adopted.

The original source of the funds has to be ascertained to ensure it comes from “halal’ sources. Under a dual window banking operation, the initial paid-up capital is normally given on al-Qardh Hassan basis (benevolent loan) by the parent conventional bank, thus there shouldn’t  be any issues regarding the source of the funds as there are Muslim scholars questioned on the source of capital injected for the scheme.

Deposits from customers are collected from various contracts, which can be briefly described as follows:

  1. Current Account-i : This type of deposit is contracted under the principle of Al-Wadiah or guaranteed trust. Under this contract, the Islamic bank guarantees the return of the principal deposit sum. Deposits can be withdrawn through issuance of cheques, automated machines or over the banking counter during banking hours. Since deposit is placed under trust, Islamic banks normally do not give any returns for this type of deposits.

  2. Savings Account-i :  Savings deposits are collected under various principles, namely:

    1. Al-Wadiah – similar to current account except it does not have any cheques facility. Under strict principle of Al-Wadiah, the bank is not supposed to give any returns. Nevertheless, if the bank decides to give some returns, it is given as a hibah or a gift. To compete with local conventional banks, local Islamic banks do give out hibah on mas’lahah (public interest) reason.
    2. Al-Wadiah & Mudharabah – alternative to Al-Wadiah savings where the bank is not supposed to give any returns, a hybrid of Al-Wadiah and Mudharabah (loss & loss sharing principle) deposit product was introduced. Under this principle, certain portion of the profits derived from the Mudharabah investment is shared with the depositors.
    3. Mudharabah – Depositors (correct terminology should be investors) will be entitled for some profits based on agreed profit-sharing ratio pre-determined on placement of the funds.

  3. General Investment Account-i  is an investment account with pre-determined profit sharing ratio and maturity period. General investment deposits are contracted under the Mudharabah concept, where depositors and the Islamic Banks agree at the time of placement, the profit sharing ratio and the placement duration. To subscribe to the principle of fairness, depositors who place fund under longer tenure will be paid higher profits then depositors who place fund on shorter tenure. Thus, generally, the longer the placement tenure is,  the higher the profits will be for the depositors. Brief understanding of formulas used by Islamic Banks in Malaysia on profit distributions shall be discussed in next article.

  4. Specific Investment Account-i is a unique investment product where depositors will be advised on where the funds will be invested, the minimum amount that they can invest, the projected returns and the adherence risk that comes with it. Generally, returns on specific investment account are very much higher, however  there are depositors who are keen to place their funds under this type of deposits. Any losses from the project shall be borne entirely by the depositors. Generally, depositors for this type of deposits are by invitation only and common projects that bank will use for this funds are real-estate related.

  5. Commodity Murabahah-i is another form of unique deposit contract. Under this contract, the customer will purchase commodity (normally crude palm oil or metal) from a broker, say Broker A, and sold to the bank on deferred payment (including customer’s profit margin). Once the ownership is transferred to the bank, the bank will sell the commodity to another broker, say Broker B at a discount for cash. Purchase and sale of the commodity are considered “real transfer”. Any slip up on the transaction, one party may end up holding the commodity. On maturity of the deferred payment term, the bank will pay the customer at the agreed sale price. Technically, this product is a fixed profit rate deposit account.

  6. Islamic Interbank Money Market – excess funds in the bank can also be invested with another bank. This type of transaction can either be placed under the principle of Mudharabah or commodity murabahah. In Malaysia, short term funds (say, one day to a week) are normally placed under Mudharabah. When a bank is short of funds, assume all their investments have already been placed out/invested and to recall the investment would result to a loss for the bank, and there is an immediate need to cover its position (say, due to certain unexpected withdrawal by its large depositors or it has to make a large financing drawdown), it normally makes a call to another bank with excess fund to invest (technically, under conventional banking it is termed as borrowing) by making placement with them. Unlike normal general investment account-i placement where the profit sharing ratio has been pre-determined by the bank, under interbank money market system, the banks will negotiate on the profit sharing ratio before making placement. If funds are placed under Commodity Murabahah, same principle earlier mentioned will apply.

The rate of returns on deposits depends on the returns on investments ventured by the individual Islamic banks. Unlike conventional bank where depositors will get a fixed return regardless of how the banks perform, depositors of Islamic Banks will earn higher returns when profits on investments ventured by the Islamic Banks are higher. In fact, most Islamic banks offer profit rates declared on a month-to-month basis where if a customer placed his deposit under 12-month tenure, he may be paid with 12 different profit rates. Due to competition, the profit rates offered by Islamic banks tend to follow the conventional interest rate trend. If the conventional interest rate starts to hike, the customer who places under longer tenure placement will enjoy higher return. In most situations; on average, they enjoy higher returns compared to if they are to place the same funds under a longer tenure in conventional banks. The situation however may be reversed if the interest rate is on reducing trend. The writer is of the opinion that when the Islamic deposits accounts for more than 50% of the conventional bank, deposit performance of Islamic banks may no longer be influenced by the interest rate trend. Currently, to avoid commercial displacement risk (depositors moving from Islamic to conventional or vice versa for better interest/profit rates), most Islamic banks are still somehow using  conventional interest rate trend as a benchmark to plan its deposit strategy except for longer tenure deposit (usually 15 months and above) where Islamic banks’ profits are higher than conventional banks.

As mentioned in our introduction article, Islamic banks do not impose any penalty for pre-matured withdrawal of general investment deposits unlike conventional banks, where it normally pay half of the actual interest contracted. Islamic banks on the other hand, will pay the actual profit rate declared to the nearest available tenure on completed month.

One major issue where depositors are still not accustomed is the unavailability of returns on the certificate of deposits for General Investment Account-i. What will appear on the deposit certificate is a profit sharing ratio. Since returns on investment ventured by the bank can only be determined after profits has been quantified, Islamic Banks will not be able to translate the profit sharing ratio into actual return at time of placement thus they can only provide ‘indicative profit rates’ based on actual profit declared for previous month.  A point to note is that this indicative rate will only act as a guide to gauge the kind of returns the depositors will get for their investments and it is by no means ‘the profit  rate” for the following months. The returns on deposits for the following months may be higher or lower (fluctuate) , depending on the actual returns on investments declared by the Islamic Banks on the following months. Thus, before making investment, depositor are advised to study the profit rates trend of the Islamic Banks to ascertain potential return that they will get for the following months and so on.

Next week we shall highlight the profit distribution method and various value propositions that the customers will enjoy when placing funds with Islamic banks.


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Posted Date: February 01, 2008 12:00:00 AM, By: The National House Buyers Association (HBA)
Prescribed Forms for Sales Contracts – What’s New

Dissolution of a Joint Management Body

What terrifies house buyers most? Not getting the right price for their home, choosing the wrong developer or facing the paperwork?

More often than not, it turns out to be ‘facing the paperwork’, and in no small part due to the fact that most house buyers does not bother to read their contracts before signing.

Only purchases from housing developers of yet-to-be-completed properties are subject to the prescribed forms of contract of sales.  With the Housing Development (Control and Licensing, Amended) Regulations 2007 coming into effect from 1st December, 2007, yet another round of changes to the prescribed forms take place.

This amendment substitutes the previous two forms of contracts of sales and includes two (2) new ones to allow for the inclusion of the two (2) different modes of progress payment - as well as land parcels.  And they are enumerated below:
 

  • Schedule G: Sale and Purchase Agreement (Land and Building) - 12 progressive payments;
  • Schedule H: Sale and Purchase Agreement (Building or Land Intended for Subdivision into Parcels) - 12 progressive payments;
  •  Schedule I: Sale and Purchase Agreement (Land and Building) - Contract of sale for build-then-sell [10:90 concept] – two (2) progressive payments;
  • Schedule J: Sale and Purchase Agreement (Building or Land Intended for Subdivision into Parcels) - Contract of sale for build then sell [10:90 concept] – two (2) progressive payments.

If you intend to sign on for a unit from a housing developer, it is only in your interest to know exactly what type of contract of sale would be applicable.  For instance, some buyers - who have read about the Housing Development (Control and Licensing, Amended) Act 2007 [Act 1289] having taken effect from 12th April, 2007 - and are perhaps hoping that the increase in the defects’ liability period from 18 months to 24 months would apply to their contracts purchased after April 12th may be disappointed.

On the other hand, those looking to purchase units in service apartment developments and who have waited anxiously for the inclusion of such properties under the Housing Development (Control and Licensing) Act 1966 need only search for projects launched from 1st December, 2007 for their forms of contracts of sales to be applicable.

Old or new?

The ‘savings clause’ in the Housing Development (Control and Licensing, Amended) Regulations 2007 allows sale and purchase contracts of a housing accommodation signed between 12th April 2007 and 30th November, 2007 to continue in full force and effect; notwithstanding any inconsistencies with or contrary to any provisions in the amended Regulations.

For buyers who have or are intending to make their purchase after 1st December, 2007, the new prescribed forms of contracts of sales would only apply if the project has no other signed contract of sale before 1st December, 2007. This means that the new prescribed forms of contract of sales would only apply to new launches after 1st December, 2007.

The ‘savings clause’ reads, inter-alia:

Savings

16.(1)Nothing in these Regulations shall affect the validity of any contract of sale for the sale and purchase of a housing accommodation entered into after the commencement of the Housing Development (Control and Licensing, Amended) Act 2007 [Act A1289] but before the date of the coming into operation of these Regulations and such contract shall continue to have full force and effect notwithstanding anything inconsistent with or contrary to any provisions in these Regulations.

(2)Where on the date of coming into operation of these Regulations, a contract of sale for the sale and purchase of a housing accommodation has been signed in any phase of housing development, the contract of sale of the principal Regulations shall continue to apply to all housing accommodations in the said phase of housing development as if the principal Regulations have not been amended by these Regulations until all the housing accommodations in the said phase of housing development have been sold.”

Completion of particulars in sales contracts

Previously, house buyers have often been confused when certain portions of the prescribed forms of contract of sales have been left blank by the developers.

Fret no more.  The amended Act has included a new regulation – Regulation 11B - Incomplete contract of sale – which imposes a fine “not exceeding ten thousand ringgit” upon conviction for any developer who executes a contract of sale in which any particulars required in the prescribed form of contract of sale is not filled in or incomplete.

Salient features of the new prescribed contract of sales

  • Undertaking to refund loan sum

The end-financier can require the developer to undertake to refund the loan amount, in the event the Memorandum of Transfer of the property cannot be registered in favour of the purchaser, for any reason not caused by the purchaser upon receipt by the developer of an unconditional undertaking from the end-financier.

  • Certificate of Completion and Compliance

The delivery of vacant possession has to be supported by a Certificate of Completion and Compliance (CCC) issued by the project’s Principal Submitting Person who is either an accredited  architect, certified engineer or a registered building draughtsman recognised by the Architects Act.  The CCC is a certificate given or granted under the Street, Drainage and Building Act 1974 and any by-laws made under that Act certifying that the housing unit has been completed and is safe and fit for occupation but does not include partial CCC.  This means that the buyer can occupy his or her property upon vacant possession delivery; unless there are major defects affecting the property. 

  • Defect liability period

The developer has to repair or make good any defect, shrinkage or other faults which becomes apparent within a period of twenty-four (24) months from the date of the vacant possession, upon receiving written notice from the purchaser.  The developer’s architect has to sign a certificate to certify that the defect, shrinkage or other faults have been repaired and make prepare the relevant sum – in advance – to be held by the developer’s stakeholder lawyers, which can then be released to the developer accordingly.

  • Completion of common facilities

In Schedule H, the developer’s architect has to certify the date of completion of the common facilities.

  • Build-then-sell contracts – Schedule I & J

These types of contracts’ forms are for developments marketed as ‘build-then-sell’ or  the ‘10:90’ concept.  There are only two progressive payments – 10% of the purchase price upon the signing of the sale and purchase agreement and the remaining 90% balance of the purchase price upon the issuance of the CCC.

Remember; you are in charge

Does it still sound complicated?

Here are some suggestions.  First, get yourself a copy of the Housing Development (Control & Licensing), Act 1966 which contains the latest amendments, including the amendments on the Housing Development (Control and Licensing) Regulations, 1989. The prescribed contracts of sales are within the Regulations part. Read the contract that applies to your intended purchase until you thoroughly understand each provision.

If you are still in doubt, the volunteers at HBA will be able to assist you on the types of contracts’ forms at our Advice Centre on Saturdays between 1 p.m. to 5 p.m.  For more information, visit our website at www.hba.org.my.

Remember; it’s your house and your money – so you are in charge.  Good luck!

 

The National House Buyers Association (HBA) is a voluntary, non-governmental organization manned by unpaid volunteers. For more information, check out their website at http://www.hba.org.my

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Posted Date: May 01, 2006 12:00:00 AM
Frequently Asked Questions on Home Loans
How much can I afford?
This depends on your income and other financial obligations. As a rule of thumb, most house buyers buy houses that cost 1.5 and 2.5 times their annual income. For example a house buyer earning RM40,000 a year would buy a house between RM60,000 and RM100,000. Furthermore, the monthly loan repayment should not exceed about 1/3 of your gross monthly income. In assessing your repayment capability, the financial institution would also take into account your other debt repayments such as car loan, personal loan and credit cards.
How much can I borrow?
This will depend on the value of your property, your income and your repayment capability. Margin of financing can go as high as 95% (inclusive of MRTA). The higher the margin, the higher you will have to pay per instalment. Also, at a given rate, a shorter tenure will require you to pay higher instalment.
How long does it take to process a loan?
It usually takes about one to two weeks for your loan application to be approved from the time you supply full documentation. You should ask the financial institution for the checklist of documents required for the application to avoid any delay.
What is the difference between conventional financing and Islamic financing?
Under conventional financing, your outstanding loan consists of principal plus the interest charged on you. The interest is actually the financial institution's cost in obtaining the funds. Islamic financing works on the concept of buying and selling where the financial institution purchases the property and subsequently sells it to you above the purchase price.
Why do I need a valuation?
A valuation is required if you are buying a completed property. The financial institution requires a valuation to ascertain whether the property provides sufficient security for the loan given. It also provides an indication that the property is worth what you are paying for.
Do I need to appoint a lawyer? Can I choose my own lawyer?
Yes. You need to appoint a lawyer to draw up your loan documentation. Normally, the financial institution will provide a panel of lawyers who are familiar with their documentation requirements for you to choose from. If you prefer to engage your own lawyer, you should discuss this with your financial institution.
Who pays for the legal fees?
Generally, legal fees are borne by the buyer. However, certain developers and financial institutions may offer to pay the legal fees on the legal documentation as part of their marketing package. In addition, some financial institutions also extend financing for the loan documentation fees.
What if I run into financial difficulties and cannot meet my loan repayments?
If this happens, you should contact your financial institution to discuss a reasonable repayment program, which could include extending the tenure of the loan.
Can I pay off my loan in full earlier than the agreed loan tenure?
Normally there will be penalty charges for early loan settlement. Depending on the financial institution, penalty charges will range between 2-5% of the outstanding amount. The charges that are made will depend on the type of product you have chosen and when you decide to redeem your loan. Note that in some loan packages, there are certain minimum periods you need to observe before full settlement is allowed.
Is there any waiver of penalty fees for early loan settlement?
Any waiver of penalty fee is strictly at the discretion of the financial institution.
Why does my outstanding loan remain high at the initial stage despite the repayments made?
During the early years of the loan, a significant amount of your repayments will go towards the payment of interest. So if you make partial repayments to repay the principal sum outstanding, you make substantial savings in your interest payments and thus shorten your loan tenure.
Can I make extra payments other than the monthly contractual repayments?
This depends on the terms and conditions stated in your loan agreement. By paying in extra money each month or making an extra payment at the end of the year, you can speed up the process of paying off the loan. When you pay extra money, be sure to indicate that the excess payment is to be applied to the principal. However, if you make a lump sum payment or partial repayments to your principal loan, you must give notice to your financial institution. The notice period ranges from 1 to 3 months.
Do I need a guarantor for a loan facility?
This is at the financial institution's discretion and depends on the credit standing of the borrower.
Does the financial institution have the right to charge my loan account for any miscellaneous charges incurred by them such as late payment charges, legal costs, insurance, etc?
The financial institution's power to impose charges on your account is normally indicated in the Terms and Conditions of the loan.
How long is the grace period for payment of my monthly instalment/interest?
Generally, the financial institution gives a grace period of 7-14 days for you to repay your instalment payment. Any payment received after the grace period will be subjected to late payment charges.
When does the financial institution release the loan to the seller/developer?
For houses under construction, the financial institution will release the progressive payment to the developer based on the claim made upon completion of each construction stage as certified by the Architect's Certificate. For completed properties, the loan will be released upon completion of legal documentation or when all relevant approvals, such as the approval of the state government have been obtained.
Can I purchase a house under joint names and apply for the housing loan only under my name?
The financial institution will consider such applications on the merits of each case, under the following circumstances:
  • The co-owners are related as husband and wife, and one party is not working and the other party is solely responsible for the loan
  • The co-owners are related as father/mother and children, the parents are old and not working and the children will be responsible for the loan
However, the above is at the financial institution's discretion and they may also consider other circumstances.
If the developer abandons the project, am I still required to service my interest/instalment payments?
Yes. You are still obliged to service your loan based on the loan agreement signed between you and the financial institution. However, since the financial institution has vested interest in the property, you could discuss a repayment plan with your financial institution. You should also report the matter to the Ministry of Housing & Local Government. 
What happens when the loan is fully repaid?
When the loan is fully settled, the financial institution through its solicitors, will release its charge on the property. The financial institution (chargor) will uplift his claim on the property and the title to the property will be transferred to you.
What happens in the event of death of a borrower who has not bought insurance?
The deceased's survivor/next of kin can claim through the court the rights of the deceased's property. The person will have an option to either proceed to service the loan or redeem it. However, most financial institutions make it compulsory to insure (MRTA) against such an event.
What can the financial institution do if I do not make repayments?
If you fail to make three consecutive payments, the financial institution will take the necessary actions to recall the loan. In the worst case scenario, the financial institution will foreclose the property and sell it to settle the loan. The borrower would still be liable to pay the difference between the auction price and the loan amount outstanding.
What is the most convenient way to repay my loan?
Financial institutions offer a wide range of services to make banking easier for you. Some of the alternative ways of servicing a loan include:
  • Open a savings/current account and arrange for standing instructions with minimal charges (if you maintain deposit and loan accounts with the same bank, the charges may be waived)
  • Through an ATM transfer
  • Internet Banking
  • Telephone banking service
  • Deposit your cheque at the deposit machine or send your cheques direct to your financial institution
Should I consider refinancing my loan if I am offered a lower interest rate?
The main consideration in refinancing would be the costs involved. As you are clearly aware, you have incurred a substantial amount to pay for the necessary fees to obtain your first loan. For example, processing fees, legal fees, stamping and transfer fees. Refinancing means you would have to incur the same charges again. Before you decide to refinance, you should ensure that the savings from the lower interest rate is enough to compensate all the costs incurred associated with refinancing, including penalty charges, if any.
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