One of the major concerns among all the home buyers is the "how much loan can I borrow?". I believe the answer would eventually become the guide in helping the buyers to target the right property which within financial capacity.
Putting your initial budget aside, the main question here would be "how much loan you might be able to get from a bank?". From the view point of a bank, their concerns are simple. It is just whether you do have sufficient stable income to pay for the installment. Base on s simple rule of thumb, the banks would be comfortable to give you a loan if your new loan installment does not exceed 40% of your current gross income while your total monthly commitment shall not exceed 50% of your gross income, thus, you could roughly project the property price which within your capacity with the calculation below.
Calculating based on your monthly income & commitment
Step 1. Gross Monthly Income / 2 = A
Step 2. A - Total Monthly Commitment = B
(Total Monthly Commitment inclusive of Hire Purchase, Home Loan, Personal Loan, Credit Cards, Overdraft & other Term Loans)
Step 3. B = Remaining Capacity for a mortgage
For a general reference, if B is equivalent to
(i) RM 500, Loan amount eligible should be RM 105,000, property that you targeted should be priced around RM 116,000
(i) RM 1000, Loan amount eligible should be RM 210,000, property that you targeted should be priced around RM 232,000
** Illustration above is generated based on a loan tenure of 30 years, margin of financing at 90%
However, it should be noted that the chance of getting a loan is still there if you are looking for a property which priced above the projected pricing but it would be a harder approval.
For example,
Your current gross income is RM 3000, Total Monthly Commitment at RM 1000, thus,
Step 1. A = 1500
Step 2. B = 500
Thus, the property price you should look for is around +/- RM 116,000
However, please be noted that there isn't any perfect answer for this kind of question as this is a generalization of estimation & guidelines are varying across the banks, thus the final outcomes might be deviated from the illustration above.
8 March 2011, Chris
Showing posts with label Article. Show all posts
Showing posts with label Article. Show all posts
Monday, March 7, 2011
Friday, January 14, 2011
The Islamic Mortgage - The fundamentals of BBA loan (Pembiayaan Bai Bithaman Ajil)
Article Under construction.
As the element of interest (or known as "riba) earning from lending monies is prohibited from the Islamic context, one of the arrangement for mortgage, "deferred payment sales" (Bai Bithaman Ajil) is utilized to deliver the mortgage service to loan applicants who
The fundamental of BBA concept is indeed very simple. From the initial point of time, the bank would purchase the property from the buyer and resell it at a profit margin to the buyer (or, the loan applicant) while the buyer will repay the new purchasing price on a regular installment basis.
Simple BBA process flow
1. Buyer make the booking of property with developer / vendor
2. Buyer pays the deposit and sign the Sales & Purchase Agreement
3. Buyer applies mortgages from banks
4. Banks evaluate and approve the loan.
5. Proceed with documentation after the acceptance of offer
6. Bank purchase the property from the buyer at Purchase Price (as in the SPA)
7. Bank pays the developer / vendor
8. Bank sell the property to buyer at Selling price (computed based on profit rate)
9. Buyer pays the Selling price by installments
Major concerns of BBA
1. The calculation of Selling price
The standard computation of Selling price is based on the formula as below:
Selling price : Monthly installment X tenure (in months) + grace period profit (if applicable)
in which,
Monthly installment is computed based on the agreed profit rate on a constant rate of return, monthly rest;
Grace period profit is charged during the construction period for under construction properties
2. Profit rates in determining the Selling price
The profit rate which specified in a package can be either (i) fixed rate (will based on the highest of the multi-tiered rates for multi-tier package), or (ii) floating rate (fluctuate in tandem with the movement of a given indicator such as BFR)
The use of (i) in calculating the selling price is indeed straight forward as the monthly installment will be calculated based on the fixed rate, however for (ii), selling price is based on a predefined rate (ie. BFR + 4% or 10% whichever is higher, in which we name it as the "capping profit rate") which is higher than the rate which prescribed in the offer letter (ie. BFR - 1.8%)
Questions always raised for the usage of (ii) in calculating the selling price. The major concern is, as the buyers are paying the installment which calculated based on a capping profit rate which is higher than the profit rate stated in the offer letter, indefinitely, buyers are paying more than what they should pay during the whole tenure (assuming the floating profit rate does not exceed the capping profit rate during the whole tenure). Taking the example above, the rate differential accounts to 5.8% p.a. which is a significant amount throughout the whole tenure. Common inquiry is, what exactly happen to the additional payment / shortfall upon the settlement of loan?
Generally, the differences between the actual profit rate and selling price will be rebated / discounted upon settlement.
Assuming that a loan of RM 100,000 is taken up with variable rate BBA features, BFR - 2% and a monthly installment is calculated based on a fixed 12% profit rate p.a., thus, a simple calculation, RM 12,000 is payable annually. Consider that current BFR = 6.3%, the effective rate for 1st year should be 4.3% instead of 12%. Although clients are stilling paying RM 12,000, the effective payment should be around RM 4,300. The positive balance of RM 7,700 will be accumulated and come in the form of rebate to client when the loan is settled.
Main Advantages
1. As the Selling price is determined within the offer letter during the initial time, clients are certain that the cost of the loan will not go beyond that price in regardless of any changes in the market environment.
2. As the financing is based on Selling price, any additional or "hidden" cost will not be charged to customers without their awareness. Common practice in conventional loan is that any additional charges might go into your outstanding loan amount and compounded but for Islamic loan, charges have to be paid in cash if applicable, thus, the risk of exacerbating the cost of charges is indeed very low.
3. No lock in period. Early settlement can be any time without any penalty. However, it should be noted that some banks might impose the clauses which impose certain amount of fee for early settlement.
Controversy
Controversies raised during the dawn of 2008 as BBA concept was commented by the Middle East scholars that the structure too closely resembles to interest-based financing. One of the issue is the calculation of selling price. The simple formula in calculating the selling price post a major challenges in its identicalness to interest based financing. Consider that,
Selling price : Monthly installment X tenure (in months) + grace period profit (if applicable)
Question is, how do we compute the monthly installment prior the computation of selling price?
To make our example simple, we have a BBA loan of RM 100,000 with variable rate of BFR - 2.1% with capping profit rate at BFR + 4%, tenure 30 years, current BFR at 6.3%.
Apparently, the computation of monthly installment has to base on the traditional amortization formula:
in which the I, Monthly Interest has to be replaced with the capping profit rate, in this case, BFR + 4% (10.3%) in the calculation instead of 4.2% which offered by conventional housing loan (assume that the conventional package can be offered at BLR -2.1%, BLR = 6.3%).
With all of these, effective interest rate at 10.3%, loan amount of RM 100,000, tenure 30 years, the projected installment is around RM 900, thus the selling price should be RM 324,000. In other word, the effective profit margin for the banks is 224% prior any rebate or discount for the clients upon the settlement if no prepayment during the whole tenure.
You should be able to notice a problem now. Throughout the whole calculation and framework is indeed identical to the interest based finance with only one major difference, the rate that used in calculating the installment.
Although the arrangements are different for both (we have a loan agreement for conventional loan but a sales & purchase agreement for Islamic loan), questions and challenges are always encountered on BBA concept in mortgages as clients found that the effective costs of loan are identical among BBA loan and conventional loan with only differences in terminologies and arrangement as the banks would have to maintain at least same level of profitability for both.
Another concern would be the uncertainty over the actual cost of Islamic mortgages. As differences which generated from the gap of the actual rate and monthly installment is calculated and accumulated over time prior the finalization of rebate to the clients upon the settlement, it would be very hard to determine the actual cost of an Islamic loan when time value of money is taken into consideration.
As an effort in promoting the popularity of Islamic financing tools, the government had made their move in waiving the stamp duty for the conversion of conventional loan to Islamic and 20% discount on stamp duty of new Islamic loan to secure the advantageous position of the tools. Thus, lowering the cost of Islamic loan in relative to conventional.
Besides that, in effort of adopting global accepted sharia principles, some of the banks (RHB Islamic, Bank Muamalat) had made their move in diversifying their Islamic mortgage portfolio to musharaka mutanaqisah (MM) concept based Islamic mortgages.
As the element of interest (or known as "riba) earning from lending monies is prohibited from the Islamic context, one of the arrangement for mortgage, "deferred payment sales" (Bai Bithaman Ajil) is utilized to deliver the mortgage service to loan applicants who
The fundamental of BBA concept is indeed very simple. From the initial point of time, the bank would purchase the property from the buyer and resell it at a profit margin to the buyer (or, the loan applicant) while the buyer will repay the new purchasing price on a regular installment basis.
Simple BBA process flow
1. Buyer make the booking of property with developer / vendor
2. Buyer pays the deposit and sign the Sales & Purchase Agreement
3. Buyer applies mortgages from banks
4. Banks evaluate and approve the loan.
5. Proceed with documentation after the acceptance of offer
6. Bank purchase the property from the buyer at Purchase Price (as in the SPA)
7. Bank pays the developer / vendor
8. Bank sell the property to buyer at Selling price (computed based on profit rate)
9. Buyer pays the Selling price by installments
Major concerns of BBA
1. The calculation of Selling price
The standard computation of Selling price is based on the formula as below:
Selling price : Monthly installment X tenure (in months) + grace period profit (if applicable)
in which,
Monthly installment is computed based on the agreed profit rate on a constant rate of return, monthly rest;
Grace period profit is charged during the construction period for under construction properties
2. Profit rates in determining the Selling price
The profit rate which specified in a package can be either (i) fixed rate (will based on the highest of the multi-tiered rates for multi-tier package), or (ii) floating rate (fluctuate in tandem with the movement of a given indicator such as BFR)
The use of (i) in calculating the selling price is indeed straight forward as the monthly installment will be calculated based on the fixed rate, however for (ii), selling price is based on a predefined rate (ie. BFR + 4% or 10% whichever is higher, in which we name it as the "capping profit rate") which is higher than the rate which prescribed in the offer letter (ie. BFR - 1.8%)
Questions always raised for the usage of (ii) in calculating the selling price. The major concern is, as the buyers are paying the installment which calculated based on a capping profit rate which is higher than the profit rate stated in the offer letter, indefinitely, buyers are paying more than what they should pay during the whole tenure (assuming the floating profit rate does not exceed the capping profit rate during the whole tenure). Taking the example above, the rate differential accounts to 5.8% p.a. which is a significant amount throughout the whole tenure. Common inquiry is, what exactly happen to the additional payment / shortfall upon the settlement of loan?
Generally, the differences between the actual profit rate and selling price will be rebated / discounted upon settlement.
Assuming that a loan of RM 100,000 is taken up with variable rate BBA features, BFR - 2% and a monthly installment is calculated based on a fixed 12% profit rate p.a., thus, a simple calculation, RM 12,000 is payable annually. Consider that current BFR = 6.3%, the effective rate for 1st year should be 4.3% instead of 12%. Although clients are stilling paying RM 12,000, the effective payment should be around RM 4,300. The positive balance of RM 7,700 will be accumulated and come in the form of rebate to client when the loan is settled.
Main Advantages
1. As the Selling price is determined within the offer letter during the initial time, clients are certain that the cost of the loan will not go beyond that price in regardless of any changes in the market environment.
2. As the financing is based on Selling price, any additional or "hidden" cost will not be charged to customers without their awareness. Common practice in conventional loan is that any additional charges might go into your outstanding loan amount and compounded but for Islamic loan, charges have to be paid in cash if applicable, thus, the risk of exacerbating the cost of charges is indeed very low.
3. No lock in period. Early settlement can be any time without any penalty. However, it should be noted that some banks might impose the clauses which impose certain amount of fee for early settlement.
Controversy
Controversies raised during the dawn of 2008 as BBA concept was commented by the Middle East scholars that the structure too closely resembles to interest-based financing. One of the issue is the calculation of selling price. The simple formula in calculating the selling price post a major challenges in its identicalness to interest based financing. Consider that,
Selling price : Monthly installment X tenure (in months) + grace period profit (if applicable)
Question is, how do we compute the monthly installment prior the computation of selling price?
To make our example simple, we have a BBA loan of RM 100,000 with variable rate of BFR - 2.1% with capping profit rate at BFR + 4%, tenure 30 years, current BFR at 6.3%.
Apparently, the computation of monthly installment has to base on the traditional amortization formula:
in which the I, Monthly Interest has to be replaced with the capping profit rate, in this case, BFR + 4% (10.3%) in the calculation instead of 4.2% which offered by conventional housing loan (assume that the conventional package can be offered at BLR -2.1%, BLR = 6.3%).
With all of these, effective interest rate at 10.3%, loan amount of RM 100,000, tenure 30 years, the projected installment is around RM 900, thus the selling price should be RM 324,000. In other word, the effective profit margin for the banks is 224% prior any rebate or discount for the clients upon the settlement if no prepayment during the whole tenure.
You should be able to notice a problem now. Throughout the whole calculation and framework is indeed identical to the interest based finance with only one major difference, the rate that used in calculating the installment.
Although the arrangements are different for both (we have a loan agreement for conventional loan but a sales & purchase agreement for Islamic loan), questions and challenges are always encountered on BBA concept in mortgages as clients found that the effective costs of loan are identical among BBA loan and conventional loan with only differences in terminologies and arrangement as the banks would have to maintain at least same level of profitability for both.
Another concern would be the uncertainty over the actual cost of Islamic mortgages. As differences which generated from the gap of the actual rate and monthly installment is calculated and accumulated over time prior the finalization of rebate to the clients upon the settlement, it would be very hard to determine the actual cost of an Islamic loan when time value of money is taken into consideration.
As an effort in promoting the popularity of Islamic financing tools, the government had made their move in waiving the stamp duty for the conversion of conventional loan to Islamic and 20% discount on stamp duty of new Islamic loan to secure the advantageous position of the tools. Thus, lowering the cost of Islamic loan in relative to conventional.
Besides that, in effort of adopting global accepted sharia principles, some of the banks (RHB Islamic, Bank Muamalat) had made their move in diversifying their Islamic mortgage portfolio to musharaka mutanaqisah (MM) concept based Islamic mortgages.
Tuesday, December 21, 2010
AIA & ING – The No Lock Penalty - How does it differ from banks?
There are significant differences between the fixed rate packages which offered by the banks and insurance institutions. One of the major concerns over the features which offered by the insurance companies, is there will be no penalty to be imposed if the loan is being settled by cash or sales of property within the lock-in period (except refinancing) and they offer for both under-con & completed properties as well. For banks, no-lock-in feature is subjected to their discretions (and normally they won't grant it unless you are willing to accept a higher-than-market interest rate) and common practice is that the fixed rate packages won't offer to any under-con properties (including Islamic fixed rate packages). Fixed rate packages from insurance companies are indeed a good choice if our clients are:
(i) high risk aversion, and plan to settle the loan without any intention to refinance the property in future; OR
(ii) investors, particularly for those who purchase under-con properties and intend to sell them off without any penalty to be imposed and certainty of profitability being insured.
AIA and ING offer fixed rate mortgages to the public, ING did provide a promotional rate which can goes to 4.85% p.a. while AIA can goes to 4.99% (however, ING with relatively more T&Cs) Whereby, both institutions do stated that getting a home insurance from them is compulsory if you intend to get a loan from them. And, one of the interesting facts is that, insurance companies prefer smaller amount of loan instead of greater loan size which is totally different from the banks. (Most of the time, banks prefer you to borrow more but they are not).
You can find out more from the links below:
AIA fixed rate packages - FAQs
AIA fixed rate packages - T&C
Hotline contact: 03-2056 3333
ING fixed rate packages - FAQs
ING fixed rate brochures
ING NZEC & ZEC packages
Hotline contact: 1800-88-0303
Please bear in mind that the lowest rate that stated or shown in any advertisement is only the lowest rate that ever being proposed. However, the effective rate that applicable to each individuals is subjected to requirements and conditions that must be fulfilled by applicants. If you do need help in getting a fixed rate loan in regardless of purpose, you can always go for our consultants for assistance and we would be please to help out.
Points to add for insurance companies's fixed rate packages:
(i) Only for PRIME residential areas, i.e. Klang Valley, Penang.
(ii) Margin of finance depends on kinds of property. Non-landed and without individual titles will put you in disadvantage.
(i) high risk aversion, and plan to settle the loan without any intention to refinance the property in future; OR
(ii) investors, particularly for those who purchase under-con properties and intend to sell them off without any penalty to be imposed and certainty of profitability being insured.
AIA and ING offer fixed rate mortgages to the public, ING did provide a promotional rate which can goes to 4.85% p.a. while AIA can goes to 4.99% (however, ING with relatively more T&Cs) Whereby, both institutions do stated that getting a home insurance from them is compulsory if you intend to get a loan from them. And, one of the interesting facts is that, insurance companies prefer smaller amount of loan instead of greater loan size which is totally different from the banks. (Most of the time, banks prefer you to borrow more but they are not).
You can find out more from the links below:
AIA fixed rate packages - FAQs
AIA fixed rate packages - T&C
Hotline contact: 03-2056 3333
ING fixed rate packages - FAQs
ING fixed rate brochures
ING NZEC & ZEC packages
Hotline contact: 1800-88-0303
Please bear in mind that the lowest rate that stated or shown in any advertisement is only the lowest rate that ever being proposed. However, the effective rate that applicable to each individuals is subjected to requirements and conditions that must be fulfilled by applicants. If you do need help in getting a fixed rate loan in regardless of purpose, you can always go for our consultants for assistance and we would be please to help out.
Points to add for insurance companies's fixed rate packages:
(i) Only for PRIME residential areas, i.e. Klang Valley, Penang.
(ii) Margin of finance depends on kinds of property. Non-landed and without individual titles will put you in disadvantage.
Maybank – Understand the concept behind “Pay half, Pay Less, Pay Later” – The fundamental of Balloon Payment & Longer Tenure
The Idea
The monthly installment of a traditional home loan is computed based on a total reducing principal basis, whereby each of the payment will consist of interest and principal. The interest portion will make up majority of piece in a repayment during the beginning of loan tenure and it will diminish when the time move on and a bigger portion of payment will turn to knock off the principal. This is the concept which we often known as amortization.
While, the idea of 3P of Maybank’s Maxihome special feature is based on the concept of balloon payment (or known as bullet payment). The concept itself is not new in the market. Historically, balloon payment mortgages were first introduced in 1934 in U.S. along with the loan programs by the Federal Housing Administration (FHA) in boosting the ownership of properties. In those day, balloon payment loans were usually to be short termed, ranged from 3 years ~ 5 years and people will convert (or, refinancing) their loan into traditional term loan. The popularity of balloon payment mortgages gained during 1980s and peaked at 1990s when interest rate crept high. The balloon payment option made the monthly repayment lower and more affordable in short term.
Fundamental Mechanism
The monthly installment of a balloon payment mortgage is being segmented into 2 portions, in which:
(i) a portion of the total loan has its monthly installment calculated based on a reducing principal, while:
(ii) the other portion has its monthly installment calculated based on definite and stagnant principal
By the end of the tenure, portion (i) will be reduced to zero balance while portion (ii) will remain the same balance as the beginning of tenure and has to be settled in a lump sum payment.
Visualization and Example
Consider Mr A plans to take up a home loan of RM 500k, tenure 30 yrs, interest is priced at BLR -2.3% (BLR = 6.3%, effective interest rate at 4%).
Traditional Home Loan
Monthly Installment: RM2,387.08
The home loan has its interest calculated based on the previous day outstanding balance. When the outstanding being reduced, the interest due will be reduced in proportion as well.
1st Month: Out of RM2,387, RM 1,666.67 is the interest due based on the outstanding amount of 500k while the remaining RM 720.41 will be used to knock off the principal.
Note: 500k X 4% X 30/360 days = 1666.67
Balloon Payment Mortgage:
Consider Mr A decided he is going to settle 50% of his total loan in a lump sum by the end of the tenure, thus loan amount will be:
Portion (i): 250k
Portion (ii): 250k
Total: 500k
The monthly repayment calculated based on balloon payment is RM 2,026.87, which is RM 360.21 lower than standard monthly installment
How does it work? Portion (i) will have its monthly installment calculated based on amortization method:
Thus, portion (i) will have a monthly installment of RM 1,193.54.
1st month: Monthly installment consists of RM833.33 interest due and RM 360.21 to knock off the principal.
Note: 250k x 4% x 30/360 Days = 833.33
While portion (ii) will have a definite non-reducing principal loan of 250k. Each of the months, only interest will be served. Interest due for each month:
250k x 4% x 30/360 Days = 833.33
Thus your total monthly payment is 1,193.54+833.33 = 2,026.87
It is clear that every payment will only serve interest incurred in portions (i) & (ii) and principal of portion (i) while principal in portion(ii) will not be served.
Outcome:
1. Month repayment of a balloon payment mortgage will be lower than traditional mortgage.
Based on rule of thumb, repayment will be lower by:
15% - if portion (ii) is 50% of total loan amount
12% - if portion (ii) is 40% of total loan amount
9% - if portion (ii) is 30% of total loan amount
6% - if portion (ii) is 20% of total loan amount
3% - if portion (ii) is 10% of total loan amount
2. Interest cost will be higher with balloon payment mortgage, (if no refinancing and no additional payment)
Based on rule of thumb, total interest cost will be higher by:
30% - if portion (ii) is 50% of total loan amount
24% - if portion (ii) is 40% of total loan amount
18% - if portion (ii) is 30% of total loan amount
12% - if portion (ii) is 20% of total loan amount
6% - if portion (ii) is 10% of total loan amount
Usage:
Balloon payment is used to be a short term arrangement as it lowers the monthly installment at the cost of increasing interest cost throughout the tenure. Normally, investors and those homebuyers who look for better cash flow position in short term will look for this option.
Calculator:
Available at Main Menu.
The monthly installment of a traditional home loan is computed based on a total reducing principal basis, whereby each of the payment will consist of interest and principal. The interest portion will make up majority of piece in a repayment during the beginning of loan tenure and it will diminish when the time move on and a bigger portion of payment will turn to knock off the principal. This is the concept which we often known as amortization.
While, the idea of 3P of Maybank’s Maxihome special feature is based on the concept of balloon payment (or known as bullet payment). The concept itself is not new in the market. Historically, balloon payment mortgages were first introduced in 1934 in U.S. along with the loan programs by the Federal Housing Administration (FHA) in boosting the ownership of properties. In those day, balloon payment loans were usually to be short termed, ranged from 3 years ~ 5 years and people will convert (or, refinancing) their loan into traditional term loan. The popularity of balloon payment mortgages gained during 1980s and peaked at 1990s when interest rate crept high. The balloon payment option made the monthly repayment lower and more affordable in short term.
Fundamental Mechanism
The monthly installment of a balloon payment mortgage is being segmented into 2 portions, in which:
(i) a portion of the total loan has its monthly installment calculated based on a reducing principal, while:
(ii) the other portion has its monthly installment calculated based on definite and stagnant principal
By the end of the tenure, portion (i) will be reduced to zero balance while portion (ii) will remain the same balance as the beginning of tenure and has to be settled in a lump sum payment.
Visualization and Example
Consider Mr A plans to take up a home loan of RM 500k, tenure 30 yrs, interest is priced at BLR -2.3% (BLR = 6.3%, effective interest rate at 4%).
Traditional Home Loan
Monthly Installment: RM2,387.08
The home loan has its interest calculated based on the previous day outstanding balance. When the outstanding being reduced, the interest due will be reduced in proportion as well.
1st Month: Out of RM2,387, RM 1,666.67 is the interest due based on the outstanding amount of 500k while the remaining RM 720.41 will be used to knock off the principal.
Note: 500k X 4% X 30/360 days = 1666.67
Balloon Payment Mortgage:
Consider Mr A decided he is going to settle 50% of his total loan in a lump sum by the end of the tenure, thus loan amount will be:
Portion (i): 250k
Portion (ii): 250k
Total: 500k
The monthly repayment calculated based on balloon payment is RM 2,026.87, which is RM 360.21 lower than standard monthly installment
How does it work? Portion (i) will have its monthly installment calculated based on amortization method:
Thus, portion (i) will have a monthly installment of RM 1,193.54.
1st month: Monthly installment consists of RM833.33 interest due and RM 360.21 to knock off the principal.
Note: 250k x 4% x 30/360 Days = 833.33
While portion (ii) will have a definite non-reducing principal loan of 250k. Each of the months, only interest will be served. Interest due for each month:
250k x 4% x 30/360 Days = 833.33
Thus your total monthly payment is 1,193.54+833.33 = 2,026.87
It is clear that every payment will only serve interest incurred in portions (i) & (ii) and principal of portion (i) while principal in portion(ii) will not be served.
Outcome:
1. Month repayment of a balloon payment mortgage will be lower than traditional mortgage.
Based on rule of thumb, repayment will be lower by:
15% - if portion (ii) is 50% of total loan amount
12% - if portion (ii) is 40% of total loan amount
9% - if portion (ii) is 30% of total loan amount
6% - if portion (ii) is 20% of total loan amount
3% - if portion (ii) is 10% of total loan amount
2. Interest cost will be higher with balloon payment mortgage, (if no refinancing and no additional payment)
Based on rule of thumb, total interest cost will be higher by:
30% - if portion (ii) is 50% of total loan amount
24% - if portion (ii) is 40% of total loan amount
18% - if portion (ii) is 30% of total loan amount
12% - if portion (ii) is 20% of total loan amount
6% - if portion (ii) is 10% of total loan amount
Usage:
Balloon payment is used to be a short term arrangement as it lowers the monthly installment at the cost of increasing interest cost throughout the tenure. Normally, investors and those homebuyers who look for better cash flow position in short term will look for this option.
Calculator:
Available at Main Menu.
Monday, December 20, 2010
Understanding the policy: 70% of MOF for 3rd property or mortgage?
Effectively, 03Nov2010 onward, the 70% MOA for 3rd property onward will take effect after compliance guideline which has been announced by Governor of BNM to all banks and to implement with immediate effect. However, due to information restriction of CCRIS, the practice of banks will be:
(i) In the absence of BNM's detail and proper guidance, majority of the banks interpret the instruction to be imposed on residential properties.
(ii) Due to information which obtained from CCRIS is rather restrictive, previous joint loan application will affect both applicants in future loan applications.
ie. A couple took 2 loans in joint, for 3rd loan, in regardless the loan is solely under 1 person's name or joint, the loan itself will subjected to the cap of 70% MOA.
(iii) Housing loan which fully settled will be removed from the count (CCRIS problem as well). ie. If you do have 10 properties in hand, 9 out of 10 are fully settled and do not appear in CCRIS, 70% MOA capping will not be applied to you as you only have 1 existing active home loan. Banks won't know how many properties you are holding, they just know how many home loans are with you. So, instead of saying "70% MOA for 3rd property onward", it should be better interpreted as "70% MOA for 3rd home loan onward"
The sharing above is reasonable & acceptable as per 20 Nov 2010. Statements above might not be applicable when detail guidance being issued by BNM.
(i) In the absence of BNM's detail and proper guidance, majority of the banks interpret the instruction to be imposed on residential properties.
(ii) Due to information which obtained from CCRIS is rather restrictive, previous joint loan application will affect both applicants in future loan applications.
ie. A couple took 2 loans in joint, for 3rd loan, in regardless the loan is solely under 1 person's name or joint, the loan itself will subjected to the cap of 70% MOA.
(iii) Housing loan which fully settled will be removed from the count (CCRIS problem as well). ie. If you do have 10 properties in hand, 9 out of 10 are fully settled and do not appear in CCRIS, 70% MOA capping will not be applied to you as you only have 1 existing active home loan. Banks won't know how many properties you are holding, they just know how many home loans are with you. So, instead of saying "70% MOA for 3rd property onward", it should be better interpreted as "70% MOA for 3rd home loan onward"
The sharing above is reasonable & acceptable as per 20 Nov 2010. Statements above might not be applicable when detail guidance being issued by BNM.
Understanding the terminology: "Daily Rest" & "Monthly Rest" - Implication on your interest cost
If anyone of you read through your loan doc or letter of offer thoroughly, majority of our current conventional home loans are calculated on a daily rest basis while for couple years ago, home loans are mainly calculated on a monthly rest basis. The major differences between monthly rest and daily rest are as below:
MONTHLY REST BASIS
Interest of a loan for a particular month will be calculated based on the previous month’s outstanding balance (Outstanding balance will include both principal and accrued interest, if any).
Consider current BLR at 6.3%
ie. Loan Amount RM 500k at BLR -2.3% p.a. (effective interest rate will be 4%), tenure 30 yrs. Monthly installment is projected to be RM2,387.08, payable on 15th of each month.
1st Month(30days):
Outstanding balance: RM 500k
Interest Due: RM 500k X 4% X 1/12 = RM 1,666.67
Monthly principal repayment: RM 2,387.08 - RM 1,666.67 = RM 720.41
Outstanding balance of 2nd Month: RM 500k - RM 720.41 = RM 499,279.59
So, how about Daily Rest Basis?
DAILY REST BASIS
Interest of loan will be calculated based on the previous day's outstanding balance.
Using the same example:
1st Month(30days):
Outstanding balance: RM 500k
Daily interest charged until payment on 15th: RM500k X 4% X 15/365 Days = RM 821.92
Principal repayment on 15th: RM 2387.08 - RM 821.92 = RM 1565.16
Outstanding balance after 15th: RM 500k - RM 1565.16 = RM 498,434.83
Daily interest charged until end of 30th: RM 498,434.83 X 4% X 15/365 Days = RM 819.34
Thus, total interest incurred during 1st month = RM 1,641.26
Look at the interest incurred for both cases then you know what I want to point out.
The interest savings = 1666.67 - 1641.26 =25.41, it might looks insignificant in short run but make a huge difference for a tenure of 30 yrs as this amount will serve as additional principal repayment which further reduce the interest incurred in 2nd month and so on.
COMMENTS:
Basically, if a daily rest loan is utilized correctly, it should provide significant interest saving impact to your loan. The savings will be more obvious and more significant if you make a lot of prepayments other than your regular monthly installments, often attractive to those who have high cash flow and bunch of idle fund. The only problem with daily rest is when you default or miss any installment. The accrued interest will be calculated on a daily basis as well and you might end up paying more if you try to delay your payments.
For monthly rest, the advantage will be you do not have to worry about additional interest incurred (or no need to consider the interest savings impact) when you make an installment at a certain date, as long as you did not miss any of them.
MONTHLY REST BASIS
Interest of a loan for a particular month will be calculated based on the previous month’s outstanding balance (Outstanding balance will include both principal and accrued interest, if any).
Consider current BLR at 6.3%
ie. Loan Amount RM 500k at BLR -2.3% p.a. (effective interest rate will be 4%), tenure 30 yrs. Monthly installment is projected to be RM2,387.08, payable on 15th of each month.
1st Month(30days):
Outstanding balance: RM 500k
Interest Due: RM 500k X 4% X 1/12 = RM 1,666.67
Monthly principal repayment: RM 2,387.08 - RM 1,666.67 = RM 720.41
Outstanding balance of 2nd Month: RM 500k - RM 720.41 = RM 499,279.59
So, how about Daily Rest Basis?
DAILY REST BASIS
Interest of loan will be calculated based on the previous day's outstanding balance.
Using the same example:
1st Month(30days):
Outstanding balance: RM 500k
Daily interest charged until payment on 15th: RM500k X 4% X 15/365 Days = RM 821.92
Principal repayment on 15th: RM 2387.08 - RM 821.92 = RM 1565.16
Outstanding balance after 15th: RM 500k - RM 1565.16 = RM 498,434.83
Daily interest charged until end of 30th: RM 498,434.83 X 4% X 15/365 Days = RM 819.34
Thus, total interest incurred during 1st month = RM 1,641.26
Look at the interest incurred for both cases then you know what I want to point out.
The interest savings = 1666.67 - 1641.26 =25.41, it might looks insignificant in short run but make a huge difference for a tenure of 30 yrs as this amount will serve as additional principal repayment which further reduce the interest incurred in 2nd month and so on.
COMMENTS:
Basically, if a daily rest loan is utilized correctly, it should provide significant interest saving impact to your loan. The savings will be more obvious and more significant if you make a lot of prepayments other than your regular monthly installments, often attractive to those who have high cash flow and bunch of idle fund. The only problem with daily rest is when you default or miss any installment. The accrued interest will be calculated on a daily basis as well and you might end up paying more if you try to delay your payments.
For monthly rest, the advantage will be you do not have to worry about additional interest incurred (or no need to consider the interest savings impact) when you make an installment at a certain date, as long as you did not miss any of them.
Is BLR is going to rise? - Past, current and future
Answer for question about "Is BLR going to rise?" is indeed very subjective. Let's make it statistically and intuitionally.
Statistically, since 1989 till current 2010, BLR hit its peak at 12.27% in Year 1998 and touch its floor at 5.55% in Year 2009. Based on simple averaging, the number is 8.1%. Is it going to rise? Well... statistically, it might be.
Chart of historical BLR (1989 - 2010)
Intuitionally, BLR is a minimum interest rate calculated by banking institutions based on a formula which takes into account the institutions’ cost of funds and other administrative costs. And, BLR adjustment is quite dependent on the Overnight Policy Rate (OPR) from Bank Negara Malaysia and it is solely managed by individual banks, thus, BLR of each banks might differ from the others. Correlation between OPR and money market is positive and indirectly, BLR is positively correlated with money market. In a simpler manner, when the market is good, BLR is going to rise. Concern over here is that, how are we going to define market is good? Psychology of economics may be a good reference in this point, whereby, it tells us that market expectation will form the future market trend. In other words, if the whole Malaysian economy think we are going to be better and do it well, the possibility that BLR is going to rise might have a greater place.
The "common agreed" BLR is quoted at BLR = 6.3% for majority of commercial banks in M'sia, except for (1) Bank of Tokyo-Mitsubishi UFJ (Malaysia), (2) J.P. Morgan Chase and (3) The Royal Bank of Scotland Berhad. Attached image is the full list of BLR which quoted by individual banks as per end of Nov.
Statistically, since 1989 till current 2010, BLR hit its peak at 12.27% in Year 1998 and touch its floor at 5.55% in Year 2009. Based on simple averaging, the number is 8.1%. Is it going to rise? Well... statistically, it might be.
Chart of historical BLR (1989 - 2010)
Intuitionally, BLR is a minimum interest rate calculated by banking institutions based on a formula which takes into account the institutions’ cost of funds and other administrative costs. And, BLR adjustment is quite dependent on the Overnight Policy Rate (OPR) from Bank Negara Malaysia and it is solely managed by individual banks, thus, BLR of each banks might differ from the others. Correlation between OPR and money market is positive and indirectly, BLR is positively correlated with money market. In a simpler manner, when the market is good, BLR is going to rise. Concern over here is that, how are we going to define market is good? Psychology of economics may be a good reference in this point, whereby, it tells us that market expectation will form the future market trend. In other words, if the whole Malaysian economy think we are going to be better and do it well, the possibility that BLR is going to rise might have a greater place.
The "common agreed" BLR is quoted at BLR = 6.3% for majority of commercial banks in M'sia, except for (1) Bank of Tokyo-Mitsubishi UFJ (Malaysia), (2) J.P. Morgan Chase and (3) The Royal Bank of Scotland Berhad. Attached image is the full list of BLR which quoted by individual banks as per end of Nov.
AIA & ING – The No Lock Penalty - How does it differ from banks?
There are significant differences between the fixed rate packages which offered by the banks and insurance institutions. One of the major concerns over the features which offered by the insurance companies, is there will be no penalty to be imposed if the loan is being settled by cash or sales of property within the lock-in period (except refinancing) and they offer for both under-con & completed properties as well. For banks, no-lock-in feature is subjected to their discretions (and normally they won't grant it unless you are willing to accept a higher-than-market interest rate) and common practice is that the fixed rate packages won't offer to any under-con properties (including Islamic fixed rate packages). Fixed rate packages from insurance companies are indeed a good choice if our clients are:
(i) high risk aversion, and plan to settle the loan without any intention to refinance the property in future; OR
(ii) investors, particularly for those who purchase under-con properties and intend to sell them off without any penalty to be imposed and certainty of profitability being insured.
AIA and ING offer fixed rate mortgages to the public, ING did provide a promotional rate which can goes to 4.85% p.a. while AIA can goes to 4.99% (however, ING with relatively more T&Cs) Whereby, both institutions do stated that getting a home insurance from them is compulsory if you intend to get a loan from them. And, one of the interesting facts is that, insurance companies prefer smaller amount of loan instead of greater loan size which is totally different from the banks. (Most of the time, banks prefer you to borrow more but they are not).
You can find out more from the links below:
AIA fixed rate packages - FAQs
AIA fixed rate packages - T&C
Hotline contact: 03-2056 3333
ING fixed rate packages - FAQs
ING fixed rate brochures
ING NZEC & ZEC packages
Hotline contact: 1800-88-0303
Please bear in mind that the lowest rate that stated or shown in any advertisement is only the lowest rate that ever being proposed. However, the effective rate that applicable to each individuals is subjected to requirements and conditions that must be fulfilled by applicants. If you do need help in getting a fixed rate loan in regardless of purpose, you can always go for our consultants for assistance and we would be please to help out.
Points to add for insurance companies's fixed rate packages:
(i) Only for PRIME residential areas, i.e. Klang Valley, Penang.
(ii) Margin of finance depends on kinds of property. Non-landed and without individual titles will put you in disadvantage.
(i) high risk aversion, and plan to settle the loan without any intention to refinance the property in future; OR
(ii) investors, particularly for those who purchase under-con properties and intend to sell them off without any penalty to be imposed and certainty of profitability being insured.
AIA and ING offer fixed rate mortgages to the public, ING did provide a promotional rate which can goes to 4.85% p.a. while AIA can goes to 4.99% (however, ING with relatively more T&Cs) Whereby, both institutions do stated that getting a home insurance from them is compulsory if you intend to get a loan from them. And, one of the interesting facts is that, insurance companies prefer smaller amount of loan instead of greater loan size which is totally different from the banks. (Most of the time, banks prefer you to borrow more but they are not).
You can find out more from the links below:
AIA fixed rate packages - FAQs
AIA fixed rate packages - T&C
Hotline contact: 03-2056 3333
ING fixed rate packages - FAQs
ING fixed rate brochures
ING NZEC & ZEC packages
Hotline contact: 1800-88-0303
Please bear in mind that the lowest rate that stated or shown in any advertisement is only the lowest rate that ever being proposed. However, the effective rate that applicable to each individuals is subjected to requirements and conditions that must be fulfilled by applicants. If you do need help in getting a fixed rate loan in regardless of purpose, you can always go for our consultants for assistance and we would be please to help out.
Points to add for insurance companies's fixed rate packages:
(i) Only for PRIME residential areas, i.e. Klang Valley, Penang.
(ii) Margin of finance depends on kinds of property. Non-landed and without individual titles will put you in disadvantage.
Subscribe to:
Posts (Atom)