High time to refinance your loan?

With lending rates at historical low levels, the obvious question to ask is – should one refinance their home loans? The answer is simple – if there are net savings to be enjoyed by refinancing the existing loan, then yes. If the impact is neutral, then there’s little point going through all that hassle.

Two years ago, banks were charging home buyers base lending rate (BLR) “plus” interest rates for their housing loans.

Today, the BLR for mortgages has fallen to a “minus” level. In addition, then, the average BLR was about 6.75% which was later adjusted to about 5.55% currently.


The fall in lending rates followed the unprecedented cut in overnight policy rate (OPR) by Bank Negara Malaysia since November last year by 150 basis points to 2% as it stands now.

Over the week, the central bank paused on its rate cut, leaving the OPR unchanged.

This has led some economists to predict that there will be no more OPR cuts for the rest of 2009 and 2010 which may give borrowers a reason to lock in their interest rates for housing loans at current low levels.

If the economy stabilises by next year, analysts expect interest rates to rise. But the views are mixed as there are also analysts who feel that if the situation worsens, Bank Negara could further cut the OPR.

Dr Choong Kwai Fatt, tax consultant and associate professor at the Faculty of Business and Accountancy, Universiti Malaya, opines that now may be a good time to refinance home loans.

“For refinancing, we recommend customers to change to Flexi loan, which allows them to make additional repayment and draw balance at any time with convenience of automated teller machine cards and cheque books. In addition, any amount in the current account is used to reduce the outstanding loan amount, hence there are interest savings,” he says.

AmResearch deputy head of research Fiona Leong concurs. She says banks are proactively trying to retain their customers from changing to other banks during this period as they scout for better packages.

“Customer retention is the name of the game for mortgage loan,” she says, quoting Hong Leong Bank Bhd’s statement.

In view of economic uncertainty, Leong says most economists expect some downward revision in BLR but none expect them to be sustantial.

Home owner Ang, 42, is planning to refinance his outstanding loan of RM153,000 given the prevailing low interest rates.

He’s not sure whether to do so with his existing bank or switch to another but it all depends on which one will offer more savings.

He took a RM200,000 10-year loan with current BLR plus 0.25% from a local bank three years ago and he has seven years remaining to service his outstanding loan.

By refinancing with his existing bank, he will be able to avoid the penalty fees of RM4,590 (imposed on those who switch banks) but the lending rate may be higher than what other banks could offer him for the rest of the loan tenure.

If he were to refinance, Ang says his monthly instalment will reduce to RM2,120 from RM2,240 per month.

Another option is for him to maintain the monthly instalment but reduce his loan tenure.

Hoping to take advantage of the situation by wooing customers, some banks such as EON Bank is offering packages that partially absorbs customers’ early settlement and legal fees but with slightly higher interest rates.

Public Bank Bhd is offering BLR minus 1.8% to 2.0% but the bank will not absorb penalty charges incurred by customers for switching bank during the lock in period.

Typically, banks’ lock in period is about five years; customers who switch banks before this period ends will have to fork out a penalty fee which comprises 3% of total loan amount or loan outstanding or a minimum penalty of RM5,000-RM10,000.

The fees however vary from bank to bank. There are other costs involved in switching lenders as well such as search fees, inspection fees, stamp duty and loan legal fees (usually costs less than 3% of total loan).

It is important to note that all rates and terms and conditions are negotiable, and hence, vary on a case by case basis.

By The Star (by K.C. Law)