Refinancing your home – Why and when should you do it?

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Many Malaysians felt the pinch when the pandemic hit and a lot have been looking into refinancing their properties. This is seen as a way to free up some funds since a lot of people are in need of cash due to the situation.

Take careful steps and precaution

On paper, it sounds like a good time to refinance your property. This is because interest rates are currently very low and you can get some extra cash when you refinance. You might need money to stay afloat or you might just need to have cash flow. At the end of the day, it is not an easy decision and one which must be heavily considered before you decide.

Important questions to ask

It is therefore very crucial to understand the effects and consequences when you refinance your property (or home). Questions that you need to ask yourself include how much are you actually saving and how long will it take before you get your principal amount back.

Typically, you are looking at replacing your current home loan with a new one. This means you are subjected to whole new terms and conditions and agreement on both sides. In other words, you are applying to get a loan to pay off what you still owe. So, that means you are borrowing money to pay whatever you still owe for this property and then prolonging the term.

The interest rate is very critical here. As a rule of thumb, you should only consider this if the current interest rate is 1% lower than what you are paying in your current loan. Anything more than that would not be a good return. Since the pandemic hit, Malaysia’s BLR has been at an all-time low. In July 2020, the OPR (Overnight Policy Rate) was at 1.75% and it has never been this low for more than 10 years now.

You should only refinance your home if:

  • It will reduce your interest – As mentioned, you only do this if you can get a lower interest rate and that will help to reduce your monthly installment.
  • Benefits your repayment system – If possible, the loan period should accommodate what you are looking for like refinancing in order to finish paying off earlier.
  • Helps in other areas – Refinancing should help you to free up some cash so that you can clear off some other expenses (with higher interest).
  • Debts consolidation – One of the biggest problems that Malaysians are facing is mounting debts. Refinancing your property should be a way to consolidate all your payments so that you can manage your finances better.

Always remember not to refinance if it is going to cost you more. It is not a good option for those who are already financially tight. If you are already having a debt problem and given the option to refinance your property so that you have extra cash, it might not be the most viable option. There is no reason to get extra cash to spend now only to prolong your debt repayment.

 

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