Refinancing can do wonders when it comes to paying off your debts. In this article- How to pay off debts with refinancing, we share how refinancing can re-start your finances.

Years ago, refinancing helped me restructure my finances by paying off most of my debts. Now I am in a better position in handling my income, debts, and investing and growing my investment portfolio.

I don’t think I can get out of my pilling debts if not thanks to Refinancing.

Some people might feel Refinancing is transferring your existing debts to a new one. I could not agree more.

But, Refinancing doesn’t just stop there.

It is not just transferring your existing debts to a new one, but it also helps to reduce the monthly installment, and at the same time, you get better interest rates hence reducing the interest charged to you.

People with high debts always anxious, stressed all the time. They can’t get peace of mind and always get a call from the bank or debt collector. It can drain a person’s energy and soul.

Suppose you are living like this. It is time to take control of your life by facing your fear – Debts.

TYPE OF DEBTS

Let’s talk about the debts that available out there. The common few are Personal Loan, Credit Card, Home Loan, Car Loan et cetera.

The most burden among all is Credit Card and Personal Loan. This is because these two have the highest interest rates charged.

Credit Card interest rates are ranging from 15% to 18% per annum. At the same time, Personal Loan interest rates are 5%-10% per annum and based on flat rates.

Personal loan interest rates can be deceptive to the consumer’s eyes as the Personal loan product is always marketed as a flat rate, which shows a lower interest rate. Still, in actual when it is converted to effective rates (the actual rates), it shows a higher interest.

For example, a personal loan might offer a 3% per annum interest rate based on flat rates. But if these interest rates are converted to effective rates, that is about 5.50% per annum.

And wow! That’s almost double the difference.

I know what you think.

How deceptive!

Therefore, it is best to tackle these two debts first.

STORY

This is a story of a regular middle-income Malaysian household.

Ms. Elina is working with a bank as a bank officer. She is happily married and has two children under the age of twelve. Her husband, Mr. Bakar, is working with a manufacturing company as a supervisor.

Ms. Elina brings home a net income of RM4500 per month, while Mr. Bakar is getting a net income of RM4000 per month.

In total, their income is RM8500 per month.

HOUSEHOLD DEBTS

Like most Malaysian, they have pilling of debts.

Ms. Elina List of Debts.

Type of Debts Loan Outstanding Monthly Instalment
Credit Cards RM10,000 x 5% RM500
Personal Loan RM50,000 RM900
Home Loan (Joint) RM220,000 RM1300/2 = RM650
Total RM2050
Total (Without Home Loan) RM1400

Mr. Bakar List of Debts

Type of Debts Loan Outstanding Monthly Instalment
Credit Cards RM20,000 x 5% RM1000
Personal Loan RM50,000 RM900
Home Loan (Joint) RM220,000 RM1300/2 = RM650
Total RM2550
Total (Without Home Loan) RM1900

The total existing commitment for both is RM2050+RM2550= RM4600.

We need to minus out the existing home loan installment as they will apply for a new refinancing loan.

Therefore, the total existing commitment is RM1400+RM1900=RM3300.

Since the existing home loan will be converted to a new Refinancing home loan, we do not consider it as an existing commitment.

NEW REFINANCING HOME LOAN

Ms. Elina and Mr. Bakar are owning a house. The property’s existing market value is about RM500,000, and the house’s outstanding balance is RM220,000.

If both Ms. Elina and Mr. Bakar proceed with the refinancing, they will be getting a cash-out of RM180,000 from the house.

Property Market Value RM500,000
Maximum Refinancing Margin,80% RM500k x 80%= RM400,000
Less: Home Loan Outstanding RM220,000
Cash-Out RM180,000

We need to know preliminary if Ms. Elina and Mr. Bakar are entitled to get a loan. Therefore, we need to do this preliminary calculation.

Loan Amount Interest Rates* Tenure Instalment
Existing Home Loan Outstanding RM220,000 3.20% 35 years RM871
Cash Out portion RM180,000 3.20% 10 years RM1755
Total RM400,000 Total RM2626

*Interest rates are merely for reference only.

To calculate the new refinancing home loan eligibility, the bank will apply 10 years of tenure to calculate the cash-out portion installment. This merely for eligibility calculation only.

If the application is approved, in actual Ms. Elina and Mr. Bakar will be servicing an installment of RM1584 for 35 years tenure.

Loan Amount Interest Rates* Tenure Instalment
Existing Home Loan Outstanding+ Cash Out portion RM400,000 3.20% 35 years RM1584

ARE THEY ELIGIBLE FOR THE LOAN?

Let’s take a look if both of them eligible for the refinancing home loan.

Ms. Elina & Mr. Bakar Nett Income RM8500
Both Existing Commitments RM3300
New Refinance Home Loan RM2626
Total Commitments RM3300+RM2626= RM5926
Debt Service Ratio,

Total Commitments/Nett Income

RM5926/RM8500 = 69.71%

Preliminary, both Ms. Elina and Mr. Bakar are at the borderline of ideal approval. The ideal Debt Service Ratio will be in the range of 60-70%.

Usually, in this case, we will ask our client to try a few banks for the refinancing to compare for a better offer in terms of cash-out portion, interest rates, tenure, et cetera.

HOW TO PAY OFF DEBTS WITH REFINANCING?

Let assume Ms. Elina and Mr. Bakar’s refinancing home loan is approved, and the cash-out is RM180,000.

So, this is the list of debts that they can settle.

Loan Outstanding Instalment
Ms Elina – Credit Cards RM10,000 RM500
Ms Elina- Personal Loan RM50,000 RM900
Mr. Bakar- Credit Card RM20,000 RM1000
Mr. Bakar- Personal Loan RM50,000 RM900
Total RM130,000 RM3300

After paying off the debts, they still have additional RM180,000-RM130,000 = RM50,000 balance cash.

They have a few options on how to manage the balance cash.

  1. They can grow the money by putting it into a good return investment account like Amanah Saham Berhad (ASB), stocks, or any good return investment.
  2. They can also put it back to the home loan account to save the interest on the home loan. But it only works if they opted for a Full Flexi and Semi-Flexi home loan.

AFTER REFINANCE

BEFORE AFTER
Ms. Elina – Credit Card RM500 RM0
Ms. Elina – Personal Loan RM900 RM0
MS Elina – Home Loan RM1300/2=RM650 RM1584/2=RM792
Total Commitment RM2050 RM792
BEFORE AFTER
Mr. Bakar – Credit Card RM1000 RM0
Mr. Bakar – Personal Loan RM900 RM0
Mr. Bakar – Home Loan RM1300/2=RM650 RM1584/2=RM792
Total Commitment RM2550 RM792

Now, Ms. Elina and Mr. Bakar only need to focus on one debt only – Home Loan.

And with a combined income of RM8500 per month and only paying a Home Loan installment of RM1584, now they both can have peace of mind without worrying so much about their debts.

This is the magic of Refinancing and how it can help to re-start your life again. I hope you enjoy reading my article – HOW TO PAY OFF DEBTS WITH REFINANCING.

If you are interested in re-starting your financial journey and still do not know how to do it, maybe you should come and talk to us at +6012-6946746 (Mr. David).

I hope you like my write-up and take this opportunity to read my other articles.

How To Refinance My House Malaysia?

See you in my next article!

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