Refinancing is a quiet, misunderstood dark horse that people tend to shy away from.
However, upon getting to know it, you’ll find that you can gain extra cash to reinvest or use as emergency savings while still maintaining manageable financial commitments.
How does refinancing really work? Read on for the ultimate guide to refinancing!
What is refinancing?
Refinancing a home loan means that you are replacing your old loan with a new one to improve your finances.
Such a situation mainly occurs when you find better benefits in refinancing the loan rather than continuing the old one.
However, refinancing home loans does not mean your original loan balance is eliminated. The only thing that changes is the terms and conditions of your loan, either with your existing bank or a new bank that you chose to refinance with.
Why do people refinance?
The cash flow you gain from refinancing your property can be used for a variety of reasons, according to your priorities.
This includes taking advantage of the current buyer’s market situation and using the excess cash to purchase an investment property, investing in yourself through education, or increasing your home’s value through renovation.
Using it to go on an expensive vacation, for example, would be a regrettable life decision.
How does it work?
You cannot reduce or eliminate your loan amount in any condition, but you can get cash by increasing your debt under the refinanced term.
Take this scenario, as an example: you currently have a home loan worth RM300,000. However, you also need some extra money for emergency savings or other personal reasons. This means that you can opt to refinance.
When you refinance your home loan, you can add another RM50,000, making the total loan amount RM350,000.
After deducting the instalments you have paid so far, the remainder of your earlier loan together with the additional amount will be adjusted under the refinanced home loan by your bank.
Alternatively, you can also choose cash-out refinancing if the value of your property has increased. Here’s an illustration of how it works:
When is the best time to refinance?
If done right, refinancing not only improves your cash flow but also saves money for you in the long run. Here are some scenarios:
- Lower interest rate
Malaysia’s lending rate depends upon the Overnight Policy Rate (OPR) determined by the central bank, Bank Negara Malaysia (BNM). Whenever OPR decreases, the banks lower the Base Lending Rate (BLR). As a result, lenders can borrow at a reduced interest rate.
To counter the economic impact of the pandemic, BNM has cut the OPR to a record low of 1.75% to encourage people to take loans. This can be highly beneficial as refinancing the loan under reduced interest means reduced monthly payments and tons of savings!
- Change in repayment method
A home loan is a long-term commitment, and your financial capacity is likely to have changed since you first took the loan. If you are in a better financial condition and the refinance term offers you a shorter payment period, you can pay off your debt faster.
On the other hand, your commitments may also increase over the years. If you need a few more years to pay your loan comfortably, you may be able to find a refinancing term that allows you to do so.
- Shift from fixed interest rate to variable interest rate (or vice versa)
Fixed interest rate offers the same consistent interest throughout the duration of your loan whereas variable interest rate changes based on the market conditions. If you feel it will be more beneficial for you to transfer from one type of interest rate to the other, you can choose to refinance your loan to make the change.
How do I apply for refinancing?
Like regular loans, refinancing is offered by many financial institutions in Malaysia.
Similarly, the different rates and packages are very competitive, so you’ll have to survey your options and see which bank offers the best refinancing terms and features.
Be aware of the processing fees and charges to refinance your loan, and the time required for it to take effect.
Some banks may offer additional perks like waiving legal fees, while others may have a more attractive rate.
If refinancing puts you in a better financial position than before, then prepare the necessary documents, and maintain a healthy credit score for a smooth application!
This article was contributed by PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.