With the recent drop in interest rates, including the base lending rate (BLR), most home loans in the market has fallen drastically. At the same time, the home loan market has become increasingly competitive. Banks are trying to outdo each other in offering lower and lower rates for their home loans. At last check, some banks are offering up to BLR-2.3% with flexible repayment and daily interest rest.
If you have a home loan charging you a fixed interest rate or BLR plus margin (instead of BLR minus), then it may be worthwhile to consider refinancing. In most cases I have seen, even with additional costs involved when refinancing, it is still worthwhile to do it.
However, you need to be fully aware of various other factors besides interest rates when considering the refinancing of your existing home loan. Here are some of the factors.
Firstly, any additional legal costs involved. While most banks offer zero-moving costs refinancing, it usually comes with a higher interest rate for your loan. Evaluate if it is better to take a higher loan amount to pay for the legal costs, pay for it from your pocket or pay higher interest rate by taking the zero-moving costs loan.
Secondly, check for early settlement penalty both on your existing loan and the new loan. This is basically the penalty the bank will charge you for settling your loan before the maturity date. Normally, the banks will have a certain "lock-in" period; beyond that, there will be no penalty. Check the offer letter from the bank and look out for the lock-in period. Not only is the lock-in period important for the existing loan, but equally important on the new loan. If you have plans to sell your house in the not-too-distant-future, you should consider loan offers which have the shortest lock-in period.
Thirdly, any additional costs associated with your mortgage reducing term assurance (MRTA). If you are lucky, your insurer will allow you to transfer your MRTA to the new loan, subject to certain conditions but don't count on this. The most common scenario is you will get a slight refund on your existing MRTA; but you will need to buy a new MRTA. Surely you are now older than you were since taking on the first loan, so the premium for your MRTA will also increase with your age.
Fourthly, does the new loan allow flexible repayment with daily rest interest calculation? This means you are allowed to make any amount of extra repayment without having to first give notice to the bank and/or incur a penalty. Daily rest interest calculation means any extra repayment made will be deducted from your outstanding principal immediately and the interest is computed based on the reduced outstanding principal from the day the extra payment is made (on the other hand, monthly rest means whatever payment made will only take effect at the end of the month).
Another point to note is that if the loan allows you to make any additional payment without penalty, then the tenure will not make any difference on the overall financing costs. In this case, I would advise you to extend the loan as long as possible but pay the instalment amount as if the loan is of shorter tenure. This will give you more flexibility in case you wish to take on more loans to buy a second home or second car in the future. For example, if for the same loan amount and interest rate, a 20-year loan has an instalment of RM1,300 while a 30-year loan has an instalment of RM1,000, take the 30-year loan but pay RM1,300 every month (try this out in the spreadsheet below).
I have created a spreadsheet to help you decide if refinancing your home loan will help you save in the overall financing of your home. The spreadsheet takes into consideration all additional costs involved and look at the overall financing rate for your home over the whole financing period, i.e., from the start of your existing loan to the end of the refinancing loan. You can also make assumptions about additional payments at any point in time (but the spreadsheet assumes monthly rest interest calculation) and see how it affects your overall financing costs.
Click here to download.
Good luck!
27 June 2009
06 April 2009
Bonus for 2008 or 2009?
Just an update on my previous post. Besides the additional tax relief you get if you are receiving various benefits from your employer such as transport, mobile phone, etc., there is another change that may interest you.
For those of us who receive last year's performance bonus this year, there is a slight difference in the treatment from assessment year 2009 onwards (affect your tax returns next year, not this time round). In your BE Form, you will see this section called "Pendapatan Tahun Kebelakangan Yang Belum Dilaporkan". For this year, we will put in our performance bonus for 2007, which was only paid to us in early 2008. The Inland Revenue Board (IRB) will then take out your old file and recompute the tax payable for 2007.
For some reasons known only to the IRB, there is no column for PCB (Potongan Cukai Berjadual) under the "Pendapatan Tahun Kebelakangan Yang Belum Dilaporkan" section. So, IRB will only add your income to the previous year's tax computations, ignoring all tax deductions by your employer when your bonuses are paid. IRB will then send you an overstated Borang JA requesting that you pay up taxes which you had already pay.
So, every year, I am faced with the pain of having to write to IRB and explain that a huge chunk of my bonus had been deducted and repatriated to IRB under the PCB scheme.
For those of you who did not bother to dig out your old files and recompute the taxable amount to reconcile with the Borang JA, guess what? You have probably been paying double the tax every year!
Nevertheless, going forward you will not face this problem any more, at least we hope not! From assessment year 2009 onwards, all bonuses will be accounted for in the year it was paid, not in respect of which year it was paid for. To put it simply, your bonus for 2008, if paid in 2009, will not be part of your tax returns for 2008. To put it simpler still, it means as long as you receive the cash in 2009, it will taxed under assessment year 2009.
The implications? You will have a lower effective tax rate for 2008 as compared to other previous years because there will be no bonus impact (assuming, you are lucky enough to receive a bonus for 2008 and that bonus is paid in year 2009).
For those of us who receive last year's performance bonus this year, there is a slight difference in the treatment from assessment year 2009 onwards (affect your tax returns next year, not this time round). In your BE Form, you will see this section called "Pendapatan Tahun Kebelakangan Yang Belum Dilaporkan". For this year, we will put in our performance bonus for 2007, which was only paid to us in early 2008. The Inland Revenue Board (IRB) will then take out your old file and recompute the tax payable for 2007.
For some reasons known only to the IRB, there is no column for PCB (Potongan Cukai Berjadual) under the "Pendapatan Tahun Kebelakangan Yang Belum Dilaporkan" section. So, IRB will only add your income to the previous year's tax computations, ignoring all tax deductions by your employer when your bonuses are paid. IRB will then send you an overstated Borang JA requesting that you pay up taxes which you had already pay.
So, every year, I am faced with the pain of having to write to IRB and explain that a huge chunk of my bonus had been deducted and repatriated to IRB under the PCB scheme.
For those of you who did not bother to dig out your old files and recompute the taxable amount to reconcile with the Borang JA, guess what? You have probably been paying double the tax every year!
Nevertheless, going forward you will not face this problem any more, at least we hope not! From assessment year 2009 onwards, all bonuses will be accounted for in the year it was paid, not in respect of which year it was paid for. To put it simply, your bonus for 2008, if paid in 2009, will not be part of your tax returns for 2008. To put it simpler still, it means as long as you receive the cash in 2009, it will taxed under assessment year 2009.
The implications? You will have a lower effective tax rate for 2008 as compared to other previous years because there will be no bonus impact (assuming, you are lucky enough to receive a bonus for 2008 and that bonus is paid in year 2009).
23 March 2009
Tax-ing time again!
It’s that time of the year again when we all scramble to meet the deadline for our annual income tax submission.
I’m sure everyone has heard about the “goodies” in store for us this year as announced under Budget 2008. For those of you who have started digging out your old phone bills and petrol receipts, planning to claim tax relief with them, stop and read on. If you think that’s silly, ask around. I’ve heard from quite a number of people that they are claiming tax relief for their mobile phone bills and expenses to travel to work!
The “goodies” are only for those of you who are entitled to the stated benefits under your employment. In the past, your employer will list down all these benefits on top of your gross salary in the EA Form, such as mobile phone benefits, car allowances, etc. If you are one of the lucky ones who receives such benefits from your employer, then you can exclude them in the declaration of your income. But chances are your employer would have already started excluding them in the EA Form for 2008.
Anyway, to help you complete your assessment form, here’s an electronic version of the form. Click here to download. Have fun!
I’m sure everyone has heard about the “goodies” in store for us this year as announced under Budget 2008. For those of you who have started digging out your old phone bills and petrol receipts, planning to claim tax relief with them, stop and read on. If you think that’s silly, ask around. I’ve heard from quite a number of people that they are claiming tax relief for their mobile phone bills and expenses to travel to work!
The “goodies” are only for those of you who are entitled to the stated benefits under your employment. In the past, your employer will list down all these benefits on top of your gross salary in the EA Form, such as mobile phone benefits, car allowances, etc. If you are one of the lucky ones who receives such benefits from your employer, then you can exclude them in the declaration of your income. But chances are your employer would have already started excluding them in the EA Form for 2008.
Anyway, to help you complete your assessment form, here’s an electronic version of the form. Click here to download. Have fun!
16 January 2009
Unit trust: hold or exit
The Kuala Lumpur Composite Index has fallen by 39 per cent year-on-year in 2008. Bond markets did not fare much better. Going forward, things are not looking too rosy as well.
As a result of the general economic downturn, affecting both the equity and bond markets, 2008 is probably a year all unit trust managers would like to forget. As an example, here are the performance of some Malaysian balanced funds (a combination of equity and fixed income investment):
Source: http://www.signalinvest.com/personal/funds/price/
For those of you who invest in unit trusts, you may perhaps be wondering if you should exit your investment, i.e., sell your units. Some may even believe it may be a good idea to sell now and buy back later when the unit prices have gone down even lower. But what should you do?
Basics of Unit Trust
Before we go on further, let’s try to understand the basics of investing in unit trusts. We’ll start with an example. Let’s say you invested RM1,000 in a balanced fund unit trust in December 2006. The purchase price at that time was RM0.50 per unit, thus giving you a total investment of 2,000 units.
One year later, in December 2007, the fund paid out a distribution (or dividend income) of RM0.10 per unit. Based on your initial holdings of 2,000 units, you will be entitled to RM200 of distribution. However, at the time of investment, you have stated that you would like to reinvest any distribution income. If the price of the unit trust in December 2007 was, say, RM0.60, you would receive your distribution in the form of additional 333 units (RM200 distribution income/RM0.60 per unit). As such, your total investment as at December 2007 was 2,333 units.
In December 2008, in line with the market conditions, the funds did not fare that well. No distribution income was declared for that year and the price has fallen from RM0.60 to RM0.45. If you decide to sell your units, you will receive RM1,049.85 (2,333 units x RM0.45 per unit). In this scenario, you will still get a total return of RM49.85 over 2 years, which translates to about 5%. However, on an annualised basis, the return is only 2.46% p.a. Effectively, this means you are better off putting you money in a 12 month fixed deposit earning you about 3.5% p.a. (which will gives you a total savings of RM1,071.22 at the end of two years).
To sell or to hold
Back to the question on whether you should sell your unit trust now since the outlook for 2009 is not too great. There is no hard and fast rules about this but in general, I personally think it’s too late to sell now. The market has fallen drastically in 2008 and the unit trust prices are at their lows now. Depending on the price you have bought your units, you are likely to suffer losses or much lower annualised returns (perhaps even lower than FD rates as illustrated in the example above). In other words, the damage has been done, if you sell now, you are simply recognising the losses immediately.
Another factor to consider is what type of funds you have invested in. Typically, unit trusts are designed for medium to long-term investments. This means the investment is for at least 3 to 5 years. You can find these basic information about the fund’s investment objectives and benchmarks in the prospectus, annual report or website. The fund managers generally take a strategy to buy and sell for the funds they manage. Over time, the returns and losses may smoothen out to give the long-term investors some form of return close to its stated objectives and benchmarks. If you bail out too soon, you are simply absorbing the short-term losses.
Continuing from the above example, let’s assume if the price of the unit trust has recovered to RM0.55 in December 2009. Holding on to your investment (instead of selling them in December 2008) means your investment will be worth RM1,283.15 (2,333 units x RM0.55 per unit) by then. This will give you an annualised return of 8.67%!
What about adopting the strategy of selling now and buying in later when the price of the unit trust has fallen further? This idea of selling high and buying low later is only great if the prices are still consider “high” at this point. Both the equity and bond markets had suffered significant losses last year that the prices of your unit trusts are more likely than not at their lows now. Nobody knows where the market is heading. Some are talking about a rally in 2009, others expect the market to get worse. If the market does not get worse, you will end up in a situation of selling low now and buying high later.
In conclusion, my advice is to hold on to your investment for now. If it makes you feel better, check the annualised return of your investment if you sell now. If you feel comfortable with the return and you think you have given up hope on your unit trust, then sell. Otherwise, if the return is already bad, what can you lose by holding on for a couple of years more? Most unit trusts are for long term anyway.
As a result of the general economic downturn, affecting both the equity and bond markets, 2008 is probably a year all unit trust managers would like to forget. As an example, here are the performance of some Malaysian balanced funds (a combination of equity and fixed income investment):
Source: http://www.signalinvest.com/personal/funds/price/For those of you who invest in unit trusts, you may perhaps be wondering if you should exit your investment, i.e., sell your units. Some may even believe it may be a good idea to sell now and buy back later when the unit prices have gone down even lower. But what should you do?
Basics of Unit Trust
Before we go on further, let’s try to understand the basics of investing in unit trusts. We’ll start with an example. Let’s say you invested RM1,000 in a balanced fund unit trust in December 2006. The purchase price at that time was RM0.50 per unit, thus giving you a total investment of 2,000 units.
One year later, in December 2007, the fund paid out a distribution (or dividend income) of RM0.10 per unit. Based on your initial holdings of 2,000 units, you will be entitled to RM200 of distribution. However, at the time of investment, you have stated that you would like to reinvest any distribution income. If the price of the unit trust in December 2007 was, say, RM0.60, you would receive your distribution in the form of additional 333 units (RM200 distribution income/RM0.60 per unit). As such, your total investment as at December 2007 was 2,333 units.
In December 2008, in line with the market conditions, the funds did not fare that well. No distribution income was declared for that year and the price has fallen from RM0.60 to RM0.45. If you decide to sell your units, you will receive RM1,049.85 (2,333 units x RM0.45 per unit). In this scenario, you will still get a total return of RM49.85 over 2 years, which translates to about 5%. However, on an annualised basis, the return is only 2.46% p.a. Effectively, this means you are better off putting you money in a 12 month fixed deposit earning you about 3.5% p.a. (which will gives you a total savings of RM1,071.22 at the end of two years).
To sell or to hold
Back to the question on whether you should sell your unit trust now since the outlook for 2009 is not too great. There is no hard and fast rules about this but in general, I personally think it’s too late to sell now. The market has fallen drastically in 2008 and the unit trust prices are at their lows now. Depending on the price you have bought your units, you are likely to suffer losses or much lower annualised returns (perhaps even lower than FD rates as illustrated in the example above). In other words, the damage has been done, if you sell now, you are simply recognising the losses immediately.
Another factor to consider is what type of funds you have invested in. Typically, unit trusts are designed for medium to long-term investments. This means the investment is for at least 3 to 5 years. You can find these basic information about the fund’s investment objectives and benchmarks in the prospectus, annual report or website. The fund managers generally take a strategy to buy and sell for the funds they manage. Over time, the returns and losses may smoothen out to give the long-term investors some form of return close to its stated objectives and benchmarks. If you bail out too soon, you are simply absorbing the short-term losses.
Continuing from the above example, let’s assume if the price of the unit trust has recovered to RM0.55 in December 2009. Holding on to your investment (instead of selling them in December 2008) means your investment will be worth RM1,283.15 (2,333 units x RM0.55 per unit) by then. This will give you an annualised return of 8.67%!
What about adopting the strategy of selling now and buying in later when the price of the unit trust has fallen further? This idea of selling high and buying low later is only great if the prices are still consider “high” at this point. Both the equity and bond markets had suffered significant losses last year that the prices of your unit trusts are more likely than not at their lows now. Nobody knows where the market is heading. Some are talking about a rally in 2009, others expect the market to get worse. If the market does not get worse, you will end up in a situation of selling low now and buying high later.
In conclusion, my advice is to hold on to your investment for now. If it makes you feel better, check the annualised return of your investment if you sell now. If you feel comfortable with the return and you think you have given up hope on your unit trust, then sell. Otherwise, if the return is already bad, what can you lose by holding on for a couple of years more? Most unit trusts are for long term anyway.
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