Managing Your Housing Loan Many people are often stuck with their housing loan for years as they do not realise the actual cost of buying a home. The government is aiming for Malaysia to become a high-income nation with a per capita income of about RM48,000 or US$15,000 by 2020, based on the World Bank’s current definition of high-income. Specific attention will be paid to lift the household income of the bottom 40%, with a target of increasing the monthly mean income of this group from RM1,440 in 2009 to RM2,300 in 2015, as stated in the 10th Malaysia Plan. The government’s high-income objective is not just a quantitative target. It is also about making Malaysia an advanced, developed nation with an economy possessing the characteristics of a high-income economy, such as a thriving services sector, a balance between private consumption and investment, as well as productivity levels that are similar to those of regional leaders. We cannot deny that the shortage of food and raw material supply for our daily needs such as oil & gas, building material, rubber, etc, are resulting in many of us incurring a high expenditure in our daily lives. In addition, we also face great challenges from the implementation of the Goods and Services Tax (GST), reducing subsidies from the government and the introduction of minimum wages for both local and foreign labour. A substantial expenditure budget plan needs to be established in order to maintain our living standards. This is a fundamental task, especially for the middle to lower income group. At the same time, many Malaysians are facing crucial challenges in managing their housing loan. Why is this so? Young Malaysians are increasingly moving out and living on their own. This mean they will either rent or buy their own property. They may rent to start with, but have the intention to buy a house of their own later on. It is a huge decision, one that impacts your career, family, lifestyle and even the economy. Others are buying more than one property to generate an investment income. In Malaysia, awareness on the rights and responsibilities of homebuyers and borrowers is relatively low. I have observed that, in the past six years, 90% of them do not fully grasp the sale and purchase procedure or financing process. Homebuyers are advised to engage a legal advisor as this helps safeguard your purchase and prevent any fraud. By not doing so, the buyer ends up bearing all the risk and costs, such as having to service a loan that is released to an abandoned property, or paying unnecessary costs to sign documents with terms and clauses favouring the vendor or financier. The homebuyer may have to exercise the contract according to the unfavourable or unfair terms. If your property is purchased with a mortgage, it is not your property until you have fully paid off your loan to discharge the charge. Only after you have done so do you become the official house owner. Nowadays, the loan amount is huge and the loan tenure is relatively long due to our repayment affordability. In fact, many of us work long hours to repay a 30- or 40-year loan. Unfortunately, I believe many of the middle to lower income homebuyers will have difficulty owning their own home. They could be too busy working on repaying their debts and trying to deal with the ever increasing household expenses, that they overlook their rights and responsibilities as a borrower. Firstly, many of them do not check and understand their loan account statement. Secondly, they do not update their repayment accordingly. Our loan repayment is generally tied to the Base Lending Rate (BLR), which is reviewed by the Monetary Policy Meeting from Bank Negara Malaysia on a quarterly basis. BLR is now at 6.6% per annum, and it had been adjusted four times since 2009, when it was only 5.55% per annum. How many housing loan borrowers are aware of the increases of the BLR? What impact does it have on our housing loan? In my article entitled ‘BLR Management: A Must Know Subject in Property Investment’, which was published in the September 2012 issue, I mentioned that one’s housing loan repayment could be never ending if they fail to deal with the BLR fluctuation. So What Is The Actual Cost? Assuming the BLR remains at 6.6% for the balance of the loan tenure, for every loan with an outstanding amount of RM100,000, one has to pay an additional RM16,620 for 30 years. An outstanding loan of RM500,000 increases the interest by another RM83,100, so this means incurring a higher purchase cost for the property. If you do not update your repayment accordingly, the monthly shortfall will be compounded by the effective interest rate. For example, in the case of a letter of offer that is dated 2009 for a loan amounting to RM500,000 with a 30-year repayment tenure and an effective rate of 3.35% (BLR – 2.2%; BLR = 5.55%), the repayment is RM2,204 per month. Upon the loan’s full release in June 2011, and following the commencement of the first repayment in July 2011, the BLR had increased to 6.6% per annum while the effective rate had been revised to 4.4%, so the right repayment should be RM2,504 per month. If you make repayments according to the letter of offer, the monthly shortfall will compound continuously with the effective rate. Compound Interest Compound interest is when interest is added to the principal, and the interest that has been added also earns interest. Through the power of compound interest, the loan will result in an additional payable interest of RM293,284 and the tenure is prolonged to 487 months. You need to put a stop to this by making the right payment. Failure to do so means you will spend your whole life servicing the loan, or worse, surrender the property to the end financier when you can no longer afford the monthly repayment. The most effective way of putting a stop to this is by making accurate payments. You can do so by customising your loan tenure depending on your repayment affordability. One should review the effective interest rate regularly and, if necessary, re-adjust the repayment amount for optimised savings on interest and loan tenure. There is also a need to increase the public’s awareness on the impact of BLR fluctuation on the interest payable and loan tenure. Since the housing loan is usually the biggest debt for most households in Malaysia, we have to find the best way to own a house. This article is contributed by AceScube, which provides training in loan calculation, banking and finance knowledge and other business and communications know-how for entrepreneurs. For more information on starting a business with them, you may drop them an email at [email protected] to find out more about BLR Management.
Posted on: Fri, 02 Aug 2013 13:52:28 +0000
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