Time to refinance your home loan!

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!