Saturday, September 18, 2010

The mind boggling maths of mortgages

To learn mathematics is one of the core priority at school, and rightly so. You are bound to use your head to calculate whenever you make any purchases. The all-important gift to your love ones, the nasi bungkus for your lunch, the spanking new car parked at the porch, down to mortgages. The more expensive the item is, the more difference of 1% makes out to be!

Recognizing the fact that yours truly is not equipped with any advanced math or financial know-hows, I pore over the net for 2 nights trying to absorb as much as I can regarding mortgage. From MRTA vs MLTA, fixed rate VS floating rate, flexi VS non flexi, prepayment, early settlement penalty and other mortgage jargons to crucial questions to ask when meeting the loan officers. So as to appear less ignorant and dimwitted :P

If you are looking for the ideal housing loan, these are some of the points you might want to consider. Low interest rate is just one end of the whole spectrum. There are numerous articles online but this is sort of a summary I drawn from them.

Interest to be calculated based on daily rest
Most banks nowadays should offer daily rest instead of monthly rest. Daily rest means your total loan amount is deducted everyday, each time you made fresh installment or extra payment. As such you get to save on interest payment.

Allow to pay as much as you like (above minimal installment)
Its good to be able to pay more than the minimal required each month if you have extra cash and dont know where to put. You get to save on total interest paid or shorten your overall tenure. Alternately, you can just deposit into my account too! :P

Some banks offer housing loan paired with a current account. So you get to redraw your extra money anytime you like for your other commitments or emergencies. Also, it helps to offset part of your interest incurred. But some banks will charge RM 10 every month for  the current account. Always ask for the fine details!

Allow to pay as often as you like
Goes without saying the more often you put in money, the faster you settle your loan and save on interest.

No hidden charges or fees
Ask whether any additional charges apply. Need to pay bank loan processing fee or not. Several banks I asked offer redrawal facilities that will charge you RM50 per transaction.

Low interest rate
Obviously.. see latest BLR of Malaysian banks here

Minimal lock-in period
Lock in period means the number of years your loan is being 'lock' to the bank. Most banks offer lock-in period of 3 years currently, but Maybank is 5 years. If you choose to fully settle your loan within the 3 or 5 years, you will be faced with early settlement penalty, ranging from 2-4% of your total loan. Most banks current penalty rate is 3%. Of course the shorter the lock-in period the better.

Also, demand the lock in period commencement on the first draw down date (the first time the bank disburses the payment to the developer for property under-construction.
So beware.

Easy accessibility and online payment
Must be easy to find the bank outlets, preferably with option of online payment. Surely you dont enjoy the hassle of spending time looking for parking, paying your parking ticket, risk getting summons just to pay the bank!

Competent and reliable customer service
First impression counts, at least for me. There is this petite lady from C**B bank who rattles abit on her housing loan interest rate, maximum loan amount/tenure then straight to documents required to apply loan. Either she is too desperate to go for lunch rather than explaining her product to me or she just can't be bothered. Well, i can't be bothered to ask more too, in view of unattractive rates and atrocious customer service :)

Well, thats about all I could gather on the ideal housing loan. Do share more if you have ideas or your experience!

Also, thanks to Koala for pointing out about fixed housing loan vs floating rate. BLR is currently at all time low and thus floating rate offers lower interest compare to fixed for now. Last I checked, its roughly 4.1% floating VS 4.85% Fixed. There is some discussion about the rising BLR which makes fixed loan much more attractive than before and the benefit is you know exactly how much you got to pay each month, rather than relying on BLR-X.

Historical BLR rates 1980 to 2005

So as you can see, there is a risk of you paying mortgage rate in excess of 10% when the BLR hits 12%. Over the last 20 years, there were 2 periods when the BLR peaks. Once during the 80s economic depression where lots of people "jump aeroplane" (going abroad to work due to unemployment) and the 1998 financial crisis. They dont happen very often but im not god so I cant predict how the trend will go from now. Personally I think the BLR will rise but probably not exponentially in the very near future given the uncertainty in our present economic climate. 

So the question is Fixed or Floating? Frankly I don't know. It really depends on what you are planning to do with the house. Also, if you feel the interest rates are going up for most the time of your entire loan tenure, the fixed would be more suitable. My uneducated opinion is that:

If the house is for own stay and plan to settle the loan long term, saying 20-30 years. Go for fixed now to lock the lower interest offered currently.

If the house is for investment, go for floating. Take advantage of the 0% interest 1st year perks etc. Then sell it off shortly for a profit.

If the house is for own stay but you plan to settle loan within 10 years, then it doesn't make much difference between floating or fixed. But i would prefer floating for the sheer flexibility.

Just my humble opinion. What you think? Happy weekend from Bluey!! 


Legolas said...

I just gone through all that horror when I bought my house. It's like a nightmare really.

SynchingZincInc said...

Thanks for the entry :D

Koala Express said...

so now u got a better pic yeah. :) happy weekend to u too. actually, preferably, one shud save up 1st for at least 20% of the purchase price bcos the rate is lower when u lend 80% or below. do lookout for banks offering free legal fees which is quite a lot too.

Gratitude said...

I think you would make a fine loans officer should you ever leave the medical line. ;)

[SK] said...

thank you so much for the info, it's indeed very useful.. :)

blue said...

@legolas: Yes, i was tearing my hair away lor. This or that? A says this better, B says otherwise. haha.. but with a roof over the head, its worth the trouble :)

@SynchingZincInc: just sharing what I managed to dig up on the topic. Ur welcomed.

blue said...

@koala: oh rate lower if borrow less than 80%? I really didnt know that. I think you mean Zero Moving Cost about the free legal fees. I surveyed Public, CIMB, Hong Leong, EON and Maybank but so far none offer it. Just that they allow financing into the loan.

@anton: where got so next time im not in this line, you wanna hire me? LOL

@SK: you are welcomed. I just thought better to write it down before I forgot everything :P

pikey said...

Wow~!! Your article really helps me alot on planning what to do next with my current housing loan~

blue said...

thanks pikey! I assume you mean refinancing your current home loan. Refinancing is another topic altogether. You have to calculate how much you actually able to save from the new loan and compare with the cost of refinancing to see if the effort is worthwhile. Its good if you are nearing the end of your current loan, instead of at the beginning part, due to the lockin period and penalty fees.

shane said...

argh difficult topic lol

blue said...

haha... shane ur gonna go through this hell in few years time!

Chris said...

wa!! very complicated calculations.. Dun understand. :p

blue said...

rich "hong zhong siew yeh" like Chris doesnt need to know these complex maths because you can afford it anyway...haha..

Xjion89 said...

wow, even though it will be a long time for me to buy my own house, you really offer good tips here^^

and followed ur blog^^keep in touch~~

blue said...

thanks xjion9. Lately been busy to update.haha...