Thursday, April 02, 2009

Mortgage Loan- Term Loan and Flexi Loan

The interest rate of mortgage loan in 5 or 6 years ago was at around 6.75% to 7.75% (BLR + 0.25 to 0.5%, BLR at 6.5%) depending on loan amount and bank. Since the financial crisis in year 2008, the interest rate gone down to around 3.5% to 4.0% (BLR -1.5 to 2.5%, BLR at 5.55%).

Thus, it is the right timing now for house owners to refinance the mortgage loan to enjoy better interest rate. The benefits would be either one of the below:
1. Shorten the repayment period if you maintain the repayment amount.
2. Ease the monthly repayment commitment by maintaining the repayment period.

Generally, they are 2 types of mortgage loans in the market.

1. Term Loan
(It is a traditional mortgage loan account where the repayment period and repayment amount is determined and changes is allowed with some administrative charges if any.)

2. Flexi Loan
(It is an all-in-one account with the integration of current account allowing one to withdraw money from it. Even though the repayment amount and loan period is pre-determined, the account owner could either opt to pay more or less in accordance to the financial situation. In short, the flexi loan account has the overdraft facility in it.)

The question now is which account is suite you?

Take myself as an example, I have opt for term loan instead of flexi loan as the refinancing package due to the rationals as below:

1. There is no reason for banks to offer flexi loan packages without hoping to make more out of you. If you are not discipline enough in controlling your expenses, you will ended up utilizing the overdraft facility and paying the minimum repayment. (I believe this is the ultimate objective of the bank.) In result, you will need to extend your mortgage loan repayment period. (Do you notice that the mortgage sales officers always value your house at the maximum market price and ask you to take up as much loan as possible with the highest repayment period that they can offer?)

2. The interest rate of the term loan is normally 0.15-0.20% lower.

3. The repayment period and commitment is certain. Certainty is something that very important to me.

Believe it or not, more and more people will ended up in financial dilemma with the so-called flexi home loan package. Let me draw up a scenario as such.

House value: RM 300,000

The mortgage sales officer will advise you to loan to the maximum RM300,000. Even that you said RM 250,000 is enough for you, they will ask you to park RM50,000 at the account where it is interest free. (By this, you have already have RM50,000 overdraft facility in the account.)

In 2-5 years time, very high chances you will have already utilise part of the RM50,000 for reasons like renovation, new furniture, new car, share market and stuff like that. Hence, instead of owing the bank RM250,000, you may have already in debt of RM300,000 with them.

Very soon after that, the locking period of your mortgage loan is up, the existing bank or another banks will call you up for refinancing purpose. What do you think they will tell you then? They will happily inform you that your house value has appreciated, now you can refinance it at RM320,000 + RM50,000 overdraft facility.

Hope you got my message. Happy refinancing!

1 comment:

spBlogger said...

Refinancing == more debt??


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