The margin of financing is also known as loan-to-value ratio. It is the home loan amount expressed as a percentage of your property’s value. The lower the margin, the more “equity” there is in the property. The margin of financing can go up to 95% of the value of property, and is assessed based on:
i. Age of borrower
ii. Income of borrower
iii. Type of property
iv. Location of property
Some mortgage lenders may impose an early settlement penalty if the loan is paid off in full within a lock-in period, including refinance the loan with another lender. However, it depends on the term & size of home loan, the charge can be quite significant.
There are a number of related costs such as professional fees and government charges that you would have to pay when you get a home loan. Some common fees and charges you would expect to pay include:
i. Stamp Duties Fees: Sale & Purchase Agreement – ranged from 0.5% to 1.0%, Loan Agreement – 0.5% and Transfer of Title (MOT) – ranged from 1.0% to 2.0%
ii. Disbursement Fees: vary by state, land office and property type. Includes land search and bankruptcy search
iii. Processing Fees: one off charge by the lenders (can be up to a few hundred ringgit).
For retirees, it is best to live with cash. Wherever possible, try to pay with cash. Normally, a loan is taken to finance something that you cannot afford. So, for the retirees who do not have a steady income should avoid this kind of situation.
Sometimes, unforeseen events or emergencies may compel you to borrow. For example, an offspring may encounter financial problems and most of the parent may find it difficult to support. Or may be you start a business or invest in properties. It’s not surprising to find them applying for business or personal loans to finance their desire path. Apart from that, they might need to get housing loans from bank if they are quite active in the property market which encourages them perform buy and sell.
Most of the retiree nowadays will take loans to buy new cars or refinance their homes. Some of them may prefer to get a loan when purchasing big ticket items although they can afford them. This is because they think that they will be audited by the Lembaga Hasil Dalam Negeri (LHDN) if the items are paid in cash.
Generally, financial institutions deny loans to those who are not earning an income. Here are few tips to increase your chances of getting a loan before retirement age:
I received a call from a banker last week, offering me a low interest personal loan of RM RM27,000 at 4.88% per year, with 3 or 5 years repayment terms. The idea put forth to me was that I could use this RM 27,000 to do some investment which probably can generate more than 8% return. Do you think it is a good idea to take up the loan?
However, I found that I would need to pay much higher interest as it’s based on a flat interest rate. For the flat interest rate calculation, you will be charged on the original principal amount, no matter how much you have paid off. So, it’s totally not same with our home loan interest in which it’s calculated based on monthly reducing balance, and you’ll be charged only on the outstanding amount.
Consequently, the effective interest rate (EIR) is higher than the normal flat rate. As a result, a 4.88% personal loan would roughly equal to a monthly reducing balance interest rate of 9-10%. So, be aware of the personal loan attractive offer next time!
I have done a simple calculation to illustrate the total interest that I would have to pay on this RM 27,000 based on flat rate loan of 4.88%. See below: