What is the latest Base Rate or Base Lending Rate?

With the recent adjustment of Overnight Policy Rate by Bank Negara Malaysia, banks had also adjusted their interest rate accordingly. Attached is the list published by BNM as on 14th June 2019.

Source:

http://www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=19&bb=file

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O.P.R Cut by 0.25%

Bank Negara announced cut by 25 basis point for OPR (Overnight Policy Rate) on 7th May 2019. In their statement:

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 3.00 percent. The ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25 percent and 2.75 percent respectively.

(ref: http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4850&lang=en)

OPR Cut - 2019

What is Overnight Policy Rate (O.P.R)?

The overnight policy rate (OPR) is the interest rate at which a depository institution lends immediately available funds (balances within the central bank) to another depository institution overnight.

(Quoted: https://en.wikipedia.org/wiki/Overnight_policy_rate)

When was the last adjustment? What was the adjustment?

The last adjustment was on 25th Jan 2018 with increase of 0.25%. For the full list of OPR movement since 2008, kindly refer to Bank Negara Malaysia website.

(http://www.bnm.gov.my/index.php?ch=mone&pg=mone_opr_stmt)

What does this has to do with me? 

The movement of OPR might trigger adjustment of interest rate for banks including fixed deposit, short-term or other long-term interest rate. And, if you have a Mortgage Loan, movement of OPR will trigger adjustment to your Base Lending Rate (BLR) or Base Rate (BR) which could affect your monthly instalment. In short, this shall followed by lower interest rate in both saving or loan products for banks.

What can I expect and what to do?

Since the adjustment will come in phases, if you have extra cash and decided to be deposited, you may want to log in longer and earlier. As you will expect the next deposit rate may be lower. At the same time, if you are looking for loan product with fixed interest rate such as Hire Purchase, Personal loan and etc, you might want to wait for the bank to make the adjustment.

Why does OPR set by Bank Negara?

In a simple way, it is used by Bank Negara as a way to either encourage spending or discourage spending. This is also one of the way to influence economy growth, inflation and even employment rate. Imagine, when saving interest rate is low, this will discourage public from deposit it with bank but to look for alternative such as capital market, bond or other investment opportunity. This will bring more money to the market to spur economy activities.

At the same time, when loan interest is low, it will also encourages borrowing activity that will stimulate economy. Businesses might take the opportunity for capital expenditure or business expansion since the cost is lower. This could also lead to more employment opportunity.

What is your view on the adjustment of OPR by Bank Negara Malaysia?

Feel free to share with us your view.

Fund My Home – A long awaited solution to own our dream house?

We heard this in the Budget Announcement and then we read the news of the Program Launch subsequently. It seems to be a solution long awaited to help us purchasing our dream home. Is it really the long awaited solution?

Highlights:

  • Purchaser pay 20% to own the property for 5 years.
  • No Monthly Instalment within 5 years.
  • The remaining 80% is not in the form of loan – No obligation.
  • Full Ownership within 5 years – Own Stay, Rent Out, etc..
  • After 5 years, choose to Own or Sell.

What is so great about this program? In order for us to find out, we compare it to a normal way for us to buy a house (10% Downpayment and 90% Mortgage Loan) : ~

Comparison

At a glance, the Fund My Home is indeed a good option for buyer that could not secure a mortgage loan. However, this is not a permanent solution as buyer is only owning the property for 5 years.

What happens after 5 years?! This is the most important portion that you must understand before making your decision to take up the program.

Proceed Distribution

The table above obtained from the FAQ section of Fund My Home website (https://fundmyhome.zendesk.com/hc/en-us/articles/360018733792-How-will-sale-proceeds-be-distributed-)

Looking at the table above:

There is only 2 possibilities after 5 years, owner buy the remaining 80% or sell off the whole property. It seems that the owner does not benefit from owning the property unless the property appreciate by more than 20%. It is not as what we assume earlier that the owner could have share on the appreciated value of the property.

Assuming owner is buying the remaining 80% of the property after 5 years with 20% appreciation in the price of the property, the owner need to finance RM300K (2nd Row Last Column). Which mean owner still need to pay in total RM 360K for the property (initially paid 60K and finally refinance 300K). This is one of the disappointment for this program.

Further to that another major disappointment for the program is when the property actually depreciated. Just like appreciation, up to 20% depreciation will be fully paid by Owner rather than the loss being shared with the investor as well. When property depreciate by 20% to RM 240K, owner is the only one that making the loss (refer to 6th row of the table above)

In short, owner does not benefit from appreciation of the property price unless it is more that 20%; Further to that, the owner only get the share of 20% from any amount in excess of the 20%. And at the same time, when the property depreciate, owner will be the only one absorbing the loss up to depreciation of 20%.

So, it seems like this is only a last option when you want to own a house now but you can not secure a mortgage loan. But after 5 years, you will be facing the same problem.

Maybe one should consider whether to defer your plan to own a house such as renting one for the moment..

We welcome any comment from anyone for this matter and feel free to contact us at ask@ethanteh.com or ethanteh@moneysense.com.my

Navigating Through Turbulence

What is Turbulence in Financial Management? Turbulence is disruption to your current plan (Example: during economy downturn), which may cause you to start worrying. It is indeed great that you are aware of the condition and start worrying. So, what should you do?

Airplane Turbulence

Normally during this time, you will see and hear that many pulling out from their investment as the investment is making lost.

Whenever we come to this situation, I always recall a story shared by Mr Appelles Poh many years ago:

Airplane in turbulence

A: Assuming you are on a plane and suddenly the plane going through turbulence, what will the crew or pilot ask you to do

B: Get back to our seat and fasten seat belt.

A: Would you follow the instruction?

B: OF COURSE!

A: What if there is a passenger who doesn’t follow instruction and run into the cockpit to take over the role of the pilot? Would you do that or allow that?

B: NO! NEVER! It is best left to the pilot.

A: Would you jump off the plane? Since it is going through turbulence?

B: NO! The chance is better to stay on the plane.

A: Finally, if the pilot says the plane will crash, would you jump with or without parachute?

B: Of course with parachute.

After going through this story, we can easily relate:

1. Discuss with your pilot for your financial plan.

2. Decide if it is still on track? Do you need a alternative plan? Or the disruption is just temporary and we shall navigate it through?

3. If you really need to terminate the plan, what is the risk mitigation plan (your parachute)?

2017 Coming to an End, have you found out about 2017 Tax Relief?

Malaysian will be required to file personal tax by end of April each year for employed person (Form BE) and by end of June for self employed/business owner (Form B), however the assessment period shall be from 1st Jan 2017 to 31st Dec 2017. Therefore, we should be prepared and foresee what are items that could benefit to us as Malaysian Tax Residents.

Before we discuss the relief available, we should first understand Tax Relief. Tax relief means it is deducted from you taxable income, which is different from Tax Rebate. Example, if your tax able income is RM 20,000, with tax Relief is RM 3,000, your taxable income will be RM 17,000. Tax Rebate will be the amount deducted from the amount of tax you supposed to pay to LHDN. Let’s say your final calculated tax payable is RM 1,200, and when you are given a Tax Rebate of RM 400, then you only need to pay RM 800. Therefore amount of saving from Tax Relief will depend on the Tax Bracket of individuals.

There are some changes to our tax relief as announced during National Budget in year 2016, let us recap how we could fully benefited from it:

  1. Full Medical Check Up – If you have not carried out any medical check up and intended to do so, it is now the right time as you will be entitled to RM 500 tax relief.
  2. Lifestyle Relief – In year 2017, lifestyle relief included printed newspaper for reading material, tablet and smartphone and monthly subscription for internet. In year 2016 only personal computers are allowed (once every 3 years) and newspaper was not included for reading material relief. However the combined limit was lowered to RM 2,500 compared to RM3,000 for personal computers and RM 1,000 for reading materials earlier. However, it is still worth considering and keep a good record of your purchase or subscription.
  3. Savings in SSPN-i is a great point to consider as SSPN-i dividend for 2016 was 4% and individual are allowed up to RM 6,000 or tax relief. The dividend was better than savings in Fixed Deposit and considering the tax relief up to RM 6,000. If a person tax rate fell into 20% bracket, you could actually saved up to RM 1,200 besides receiving the dividend of 4%.
  4. Another important savings (or investment) is Private Retirement Scheme, tax relief up to RM 3,000 was allowed for investment with approved scheme. If one is planning to utilise Unit Trust as part of retirement planning, you should first invest in PRS since both are of the same concept and have some identical fund manager, but PRS allows tax relief up to RM 3,000. Adding onto that, any individual below 30 years old would be topped up with RM 1,000 from government as encouragement to invest in this scheme.

If you have any opinion or suggestion, please feel free to leave a comment or email to ask@ethanteh.com

Reference: http://www.hasil.gov.my/bt_goindex.php?bt_kump=5&bt_skum=1&bt_posi=3&bt_unit=1&bt_sequ=1&bt_lgv=2

SPEF (Flexible Financing Scheme for PR1MA) – DREAM Solution for purchaser?

speffb

PR1MA launched SPEF (Skim Pembiayaan Fleksibel/Flexible Financing Scheme) with the hope to increase loan approval for PR1MA house buyer. It is understood that many qualified purchasers of PR1MA scheme are unable to secure a housing loan, hence could not own their home even with PR1MA. How does SPEF actually work?

How does SPEF works?

First of all, it allows only paying interests for the first 5 years. Is this something special? This is actually as any of our property bought from developer. During construction period, most borrowers are paying only interest during the period of time based on amount drawn down by developers. In this case SPEF could be viewed as extra 2-3 years extension of interest paying only as currently our standard construction period is 2 years for landed and 3 years for high rise residential.

By paying interest only during the first 5 years means if you are serving 35 years loan, your 35 years begin when you start to pay full instalment (the 6th year). Further to that, you are paying highest amount of interest during the first 5 years since no reduce in principal amount. The cost impact is illustrated by The Edge Malaysia as below.

new-doc-39 *Source : The Edge Malaysia, 20th-26th Feb 2017, page 8, “Housing loans are not always productive debt”

How does SPEF increase the chance of approval for Housing Loan?

As known to most of us, Debt Service Ratio (DSR) is one of the major consideration in housing loan approval especially in determining the amount of loan eligible. Most of the banks allow DSR ratio up to 70% or 85%. Therefore, an increase or RM 100 a month in repayment ability could actually increase about RM 20,000 in loan amount. SPEF Step Up allows borrowers to justify repayment by taking into consideration monthly EPF contribution by both employer & employee into EPF Account 2. Using example below, referring to RM 216 of example one is derived from 30% of (RM 3000 x 24% (11% employee + 13% employer). By additional amount of RM 216, one could actually arrives at extra loan amount of near to RM 45000 (total loan – approx. RM 232,300). This is considered as level one step up loan under SPEF.

Example below is illustration of Step Up Level 2 as borrowers would also agree to use the accumulated amount in account 2 of EPF to pay instalment. (for the terms & condition, kindly refer to www.pr1ma.my) In this illustration, it is assumed that loan amount eligibility is based on instalment ability of borrowers in the first 5 years which is paying interest only. (RM 283,300 x 4.75%/12 = RM 1121). However, we have doubt over this assumption as banks would need to determine further how much amount has actually been accumulated in EPF Account 2, many might not have accumulated a lot, especially those looking for first house might comprised of many who has just started work for not long ago.

As of this time of this article, we have yet to gather enough information from participating banks (Maybank, CIMB, RHB & Ambank) in regards to this matter.

new-doc-40

*Source : The Edge Malaysia, 20th-26th Feb 2017, page 8, “Housing loans are not always productive debt”

Points to consider for PR1MA buyer?

  1. EPF always allow members to withdraw amount from EPF Acc 2 as down payment for purchasing first house. Should you have sufficient amount in Acc 2, you may consider to make EPF withdrawal and pay higher down payment, which resulting lower loan amount, hence, lower monthly instalment and subsequently lower DSR. Many may not be aware that, one is allowed to withdraw a total amount (Property Price – Loan Amount) + 10%. This means that you can actually withdraw 30% of property price from EPF account 2 if you are taking only 80% loan.
  2. Have you done your credit management? The extra repayment ability by taking EPF monthly contribution as discussed above can easily being cancelled off by your other loan commitment. For example, an outstanding amount of RM 3000 in your credit card account would have been considered as RM 150 monthly expenses. Or you might have a personal loan /  hire purchase loan that is about to complete in few months time. We would advise you to talk to a mortgage advisor to understand you own situation prior to make any decision.
  3. Are you ready to utilise your retirement fund for owning your house? Typically Malaysian doesn’t save enough for retirement. By fully utilising EPF Account 2 might further reduce our saving for retirement. Further to that, we can not do any other withdrawal even for Medical in the event of emergency until the loan is fully paid up.