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.

 

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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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2 Financial Quick Rules

The first rule to be discussed is related to mortgage loan. After practising and repeatedly making calculation for mortgage loan upon enquiry, I observed that anyone could quickly make a simple calculation base on this rule. A mortgage loan with tenure of 35 years (max) and effective interest of around 5%, the monthly instalment will be about 0.5% of the loan amount. Example, if you are about to get a loan of RM 500,000, the monthly instalment is about Rm2,500 per month. Not too sure if there’s any name for this, for easy of reference, I would like to call it as Rule of 1/200 (equivalent to 0.5%).

How can anyone do a quick check using this rule?

  • Decide on affordability of repayment prior to purchase of property. Simply divide the loan amount by 200 and that will be your monthly repayment amount. Decide whether you are comfortable with the repayment amount or not.
  • Prior to looking for a property, decide how much monthly repayment you are willing to pay. For example, if you decided to pay RM 2,000, multiply it by 200, and you will end up with RM 400,000. Since maximum loan margin for residential is 90%, you could look for a property around RM 450,000.

The Second Rule – Rule of 72. Many write up available for this Rule of 72, but many seems to have not really look into this quick reference. For me, most of the time, this will be used for estimating the viability of a investment. What does this mean?

Divide 72 with the return rate offered, that would easily estimate the time for your initial investment is doubled. I would like to use one of the simplest example, Fixed Deposit Saving. If you save RM 100,000 in a FD account with 3.6% interest rate, with the interest received added back into principal, your saving will be RM 200,000 in approximately 20 years. We get the answer 20 by dividing 72 with 3.6.

You can also use this to estimate your rate of return for investment. Example, my investment doubled in 10 years, therefore my rate of return will be approximately 7.2%.

2 simple rules for quick check. Perhaps with advancement of electronic devices, many will not find these rules helpful, I still like it the old way for quick check.

Understand YOUR Mortgage Loan & Save thousands of Ringgit !

During 3 years in my financial services industry, one of our major business is in Mortgage/Property loan, one of the important information that we will tell our customer is how the Mortgage Loan repayment schedule work and how is interest being calculated by Bank. 2015-05 Amortization Recently my newly joined colleague came to me again regarding a “Advanced Software” that was sold for few thousands Ringgit to help Borrower save their interests. An argument also roused by National House Buyer Association recently regarding interest calculation of Mortgage Loan. I determined to pass this information to as many as possible. Why should we let Bank earn more and why should we let some to take advantage on the lack of information passed to mortgage loan borrower? Two (2) important concept we need to understand about Mortgage Loan in Malaysia:

  1. Daily Rest

Daily Rest means Interest is calculated daily – a term that sounds simple but how many of us really think seriously about this? It basically means that if you pay your monthly instalment 1 day earlier, will save you 1 day interest of the principal amount. If your loan was RM 500,000-00 at 4.65% a year 1 day interest = 4.65/100 x 500,000-00 x 1/365 = RM 63.70/day. Therefore, if someone show you if you pay one week earlier each month, you will save on your interest, it’s extremely true. But why do you need to pay to being told to do this?

2.  Amortization

The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

Quoted from below: Read more: http://www.investopedia.com/terms/a/amortization.asp#ixzz3ZQrVOZOu Follow us: @Investopedia on Twitter

Hence, any extra payment made each instalment will definitely save you interest in long run as more will be paid to principal and will immediately reduce your interest on the next business day.

I’ve done a simple example to explain on how significant extra payment can save you thousands of Ringgit on your mortgage loan.

Scenario: If X is having a mortgage loan of RM 500,000.00 and the repayment period of 30 years. The packaged offered was BR + 0.65% with BR at 4%. We assumed that BR maintained at 4% through out the loan tenure of 30 years. Summary TableYou would have observed that there’s a Extra Payment Box where RM 100 was added every month

Extra Payment

We can observe that, we will save RM 38,083.42 and shorten our loan by 2.3 years. Many might doubt about this, but it is really as simple as this. The more you pay extra, the larger the amount you can save.

Feel free to contact us at : ask@ethanteh.com

Why Base Rate (BR) instead of Base Lending Rate (BLR)?

With year 2015 approaching, many were concerned about the implementation of new interest reference rate for mortgage loan; Base Rate (BR) which is replacing Base Lending Rate (BLR). Many started to worry about their existing mortgage loan and more were advised to expedite their application of mortgage loan in order to secure a “BLR Minus” package as the new package after the introduction of BR will be “BR Plus”.

BRBLR

While this is true, there’s no need for panic and we believe many were actually confused and misled by many in the industry including bank’s salesperson. BR was meant to be more transparent and let borrowers know the actual profit banks are making and more reflective of market condition from time to time.

One of the question that I loved to ask most : “Who/Which institution set the BLR?”. The most common answer that you will get is? – “Bank Negara Malaysia (BNM)”. And this is one of the most common misunderstood fact even among mortgage salespersons. In reality, since 2004, BNM removed the control of ceiling rate for BLR set by bank and also the ceiling for interest spread. This enabled bank to determine the BLR and their offered package to their client based on their finance and operating cost. (refer to: http://www.bnm.gov.my/files/publication/ar/en/2004/cp05_002_whitebox.pdf)

This led to a situation that most if not all major banks set the same BLR which doesn’t really reflect their finance cost and then compete among each other by giving “BLR Minus” package. Next question –

If Base Lending Rate (BLR) is the base, how can bank offer a “BLR Minus” package which is below their base lending rate?

The answer to this question will be the BLR isn’t really their base rate.

Eventually, this provided a perception to the public that they are getting a loan at a discounted rate. Imagine this, there are housing loans out there offered with BLR -1.7 package which brought the effective rate to 5.15% (Current BLR: 6.85%). Client would generally perceives that they are still getting discounted rate but only the discount is not as great as those getting larger loan who are offered with BLR – 2.45 (effective 4.4%). But with the introduction of BR which, let us assumed at 4%, about 0.75% above Overnight Policy Rate (OPR) and is now offered with a package of BR + 1.15 (effective 5.15%) compared to a client offered with BR + 0.4 (effective 4.4%), client will definitely started to question why his/her loan was loaded with 0.7% higher than another client.

We believe that the purpose of BNM to restructure the Lending Interest Rate system is to rectify this situation and require banks to set a BR which reflect their fund cost and operation cost. Therefore, introduction of BR should be very much welcomed and there’s no need for worries.

While with BR, the package will be “BR Plus”, the BR will not be equivalent to BLR which is 6.85% at this moment (Dec 2014). We strongly believe that the after the introduction of BR, the effective rate will still be almost the same as current BLR system.

*This article is solely based on our own opinion and for general reading purpose only.

Feel free to contact us at ask@ethanteh.com for more details or any mortgage loan enquiries.