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

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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.

Fixed Rate Mortgage Loan – Is this the RIGHT time?

Recently in my sharing session, audiences may find that I’m promoting Fixed Rate Housing Loan. While some knew about it, many still unaware that in Malaysia’s housing loan market, there is a choice of Fixed Rate. The question now, is this the time to take fixed rate? Why I choose to promote this at this time? (In fact, I’ve been promoting this since end of 2014)

Fixed Rate

Before we discuss further, we should first clarify some confusions with fixed rate housing loan. (If you already know, kindly skip this paragraph) First, the interest rate is fixed through out the tenure and the maximum tenure is also 35 years or up to age of 70 years. Does this means the interest calculation works like our hire purchase loan? No, the loan is still calculated on daily basis. For any early prepayment or full settlement, client need to only pay the outstanding principal (plus any administrative cost-if any). Secondly, is the loan locked through out the loan tenure? No – You can settle the loan at any time you wish.

Whenever I talk about fixed rate, as usual, the first question is :

1. What is the interest rate?

The rate is currently around 4.99%. The respond that I will receive is : SO HIGH!. Yes, it is higher than most of the commercial bank rate out there. When I told audiences a year ago, the rate is 4.65% (promotional) and 4.85%(normal), client also told me: SO HIGH!. Some chosen to believe when I share what I’m going to discuss later in this article. Today average commercial bank rate has reached 4.7% and some of the purchaser have not even got their house key from the developer. Many will still wait and say ~So HIGH!

2. Why is the rate for Fixed Rate Housing Loan higher that variable rate?

Actually, Fixed Rate is not always higher than variable rate. When interest rate is on high side, fixed rate will be lower than average market rate. Why? Fixed Rate will always be closer to average rate over long span of time. Currently 30 years average is about 7%, therefore fixed rate is nearer to average and higher than variable rate. When variable rate were around 14% during 90’s, fixed rate is also around 7% and much lower than market rate. Fixed Rate need to take into consideration of long term rather than short term market rate. Honestly, fixed rate is actually still very low currently. This was due to stiff competition over the past few years.

3. Will Fixed Rate increase?

Yes, definitely fixed rate will increase when market interest rate increased. However, at this specific moment, if you locked it, it will not increase for your loan no matter what happens.

4. I want the lowest! 

Just like when we were buying stocks in share market, I want to buy at lowest point and sell at highest point. But, how many investors really bought at lowest point? Everyone expect it to be lowest until the price rebounded and start to increase. And we know that the rate has just rebounded over the past one year.

5. Where the loan money come from? Bank’s share holders or public?

The fund definitely comes from the public. Let’s look at deposit rate; is it in the increasing trend or decreasing trend? From any marketing materials by banks, anyone of us would sense that the interest is in the increasing trend. If the cost of fund got higher, how do financial institution get their profit? Should they increase the lending rate?

6. Who control Base Rate and Base Lending Rate?

Bank Negara Malaysia (BNM)? Wrong! It’s is controlled by banks. Recently few banks had adjusted their Base Rate (BR) and Base Lending Rate (BLR). I’ve no intention to  discuss this as the information can be easily obtained.

Please do not get me wrong, we are independent mortgage advisers. We do provide consultation and assist our client for mortgage loan applications to few major banks. Our intention is only to share our view with the public for everyone’s benefit.

If you would like to know more, feel free to contact us: email to ask@ethanteh.com

We also provide training/sharing/seminar session in matters regarding to Mortgage Loan.

 

How Anyone Can Calculate Property Loan Repayment, for FREE!

Have you wonder how can you make your own calculation for Property Loan repayment? One of the easiest way is download a free application – Karl’s Mortgage Calculator (from google play). Below I attached a simple tutorial – How to use the calculator?

Karl's Mortgage Calculator

Thank you for watching.

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