I can’t think a better time than NOW to do a Refinancing. People will tell you the home loan interest rates are super low and attractive.
How low you say?
The government servant is paying 4% interest rates for their government home loan.
Commercial banks are now offering a home loan interest rate as low as 3.80% to 4% . This is not something we can often see, even not in a decade.
Especially when we are entering a pre-recession stage, or maybe we’re in the recession. Who knows since the data and statistic always deliver a few months later.
People usually refinance a house that still has a mortgage on it. Occasionally, we’d have cases that a home is fully paid up.
Honestly, I always admired people who fully paid up their debts. It’s a good habit, don’t you think?
HOW TO REFINANCE A FULLY PAID HOUSE?
Refinance a fully paid house, and a house with a mortgage is almost similar. But, there are a few tips and things that you need to know.
Before we dive into those tips, let us guide you through the Refinance process in the shorter possible way.
You can start by engaging with a bank or mortgage consultant (like us) and tell your story.
If you come to us, we will hear your story, doing a financial check, calculate loan eligibility, explaining the process, advising the refinance cost, recommend some bankers, etc.
Then, the banker or our banker will check the property market value. If the market value is okay with you, then move on to the next step.
You’ll prepare some documents for the bankers and get home loan approval.
Once approved, you go through the bank letter offer and sign with one of them.
You’ll sign a bank loan agreement with a bank appointed law firm about one to two weeks later.
Meanwhile, you might also hear from the bank’s valuer to inspect the refinance house.
After that, the bank lawyer will need a couple of months to complete the Refinance transaction. It all depending on the property land status- Individual, Master title, Freehold, or Leasehold.
Usually, Freehold property doesn’t require state consent. So, it will take an estimate of 1.50-2 months.
While Leasehold property need a state consent, it takes an estimate of 4-5 months.
The bank lawyer will advise the bank for disbursement. This is when you’ll receive your cash out.
THE DIFFERENCE BETWEEN REFINANCE FULLY PAID HOUSE VS REFINANCE MORTGAGE HOUSE
Earlier, I mentioned some dissimilarity between refinancing a fully paid house versus refinancing a home with a mortgage.
So, let’s talk about it here.
DEBT SERVICE RATIO (DSR) CALCULATION
The DSR calculation is crucial to determine an applicant qualifies for a loan. If an applicant is within the ideal guidelines, the loan will be quickly approved and vice versa.
A couple of years ago, 10 years refinancing guideline was introduced by Bank Negara. In short, this guideline implements to stringent the bank DSR calculation.
Since then, the guideline has been widely used in the banks. Let me explain here how the 10 years refinancing guidelines works.
EXAMPLE 1: HOUSE WITH MORTGAGES
Let said; the current property market value is RM500,000.
The outstanding bank loan is RM250,000.
The maximun margin a new bank can give, let said 80% x RM500,000 = RM400,000
The cash out portion is RM400,000 – RM250,000 = RM150,000.
The installment for the cash-out portion- RM150,000 will be calculated based on ten years tenure.
For instance, using 3.30% interest, 10 years tenure, and RM150,000 loan amount, we’ll get INSTALMENT RM1470.00.
The home loan outstanding RM250,000 will be calculated based on maximum tenure that an applicant is entitled to, usually 35 years of the term.
Using 3.30% interest, 35 years tenure, and RM250,000 loan amount, we’ll get INSTALMENT RM1005.00.
The total installment amount is RM1470+RM1005= RM2475.
If using 3.30% interest, 35 years tenure, and RM400,000 loan amount, we’ll get INSTALMENT RM1608.
It is an increase of RM2475-RM1608= RM867.
You can see the difference when a bank uses 10 years versus 35 years to calculate the installment from the calculation.
When the TENURE is shortened, the installment will be too high. That will require an applicant to have a higher income to qualify for the loan.
And that will eliminate a weak income applicant to do a refinance.
EXAMPLE 2: FULLY PAID HOUSE
For a HOUSE WITH MORTGAGES and FULLY PAID HOUSE, the difference lies in the split out portion.
The fully paid house doesn’t have any loan; therefore, if the applicant is entitled to an RM400,000 home loan, the whole loan will be a cash-out portion.
Also, it means the whole RM400,000 cash-out portion will be based on 10 years of refinancing guidelines.
If using 3.30% interest, 10 years tenure, and RM400,000 loan amount, we’ll get INSTALMENT RM3919.
In this case, it requires a strong income applicant to get the loan to approve.
It’s never easy to fulfill the 10 years of refinancing guidelines with one applicant. Therefore we can see two or more applicants will come forward.
There is one important thing to remember.
Despite the calculation as such, it is used for Debt service calculation or loan eligibility calculation only.
In reality, an applicant is paying a maximum tenure installment and NOT 10 years installment.
HOME LOAN DISBURSEMENT
For a fully paid house, the bank will be releasing the refinancing fund only one time.
Unlike property with a mortgage, there will be two necessary disbursements. One will be to the existing bank, and the second will be to the applicant.
Since the fully paid property doesn’t have an existing home loan, therefore the disbursement will be straight forward to the applicant.
THE COMPLETION OF REFINANCING
The process of Refinance a fully paid house is faster compare to Refinance a home with a mortgage.
The reason is a fully paid house doesn’t involving the existing bank. And this saves almost half of the time.
If the normal refinance requires 3-4 months to complete, a fully paid house will only require 1.50 to 2 months.
Okay, so those are our refinancing tips for the fully paid house in Malaysia. I hope it gives you new insight- especially if you’re new to Refinancing. AND I also want to take this opportunity to invite you to read up my article about the Cost of Refinancing Malaysia.
If you have any questions about the home loan or refinancing, don’t forget to reach us at 012-6946746.
Do you have any refinancing story? Share in the comment section.
Hi, I'm Melissa. The co-founder of the website, cum the editor. I want to thank you for checking out our article. If you're looking to buy a new house, refinancing, applying for a home loan or looking to transfer your property, you are at the right place. We can help you. We have more than 15 years of experience in the industry. So, why not let the expert like us handle it for you? Or at least talk to us first. You can reach our consultant, Mr. David, at +6012-6946746. Hope to hear from you soon.