Thursday, October 3, 2013

Bank Negara New Rule - Capping "cash out" on Refinancing

In Q3 of 2013, Bank Negara Malaysia (BNM) issued new guidelines to banks regarding refinancing of mortgages. Prior to this, anyone could refinance their homes with repayment tenures up to 35 years. Under the new guidelines, any cash out amount from mortgage refinancing would be capped at 10 years tenure. 

Many people are now asking, how can you avoid it?

This guideline is part of Bank Negara’s efforts to reduce unnecessary household debt, and also cools any speculative activity in the property sector that is fuelled by lax home loan refinancing.

Effect of the guidelines

Before this, you could refinance your house up to 90% of its market value. The cash out amount can be used for any purpose. This includes investing in other properties, and is a common practice among serial property investors. Maximum loan tenure follows those of housing loans, which is 35 years.

Assuming the house is worth RM400,000, outstanding housing loan balance is RM150,000, interest rate is at 4.6% and Margin of Finance is at 90% of market value.

Example refinancing calculation under the old rules:

Amount to cover outstanding balance = RM150,000
Cash Out Amount = RM210,000
Total Refinance Amount = RM360,000
Tenure = Max 35 years
Total Monthly Installment = RM1,726

Example calculation under the new rules:

Amount to cover outstanding balance = RM150,000
Tenure = Max 35 years
Monthly Installment = RM719

Cash Out Amount = RM210,000
Tenure = Max 10 years
Monthly Installment = RM2,187

Total Refinance Amount = RM360,000

Total Monthly Installment
= RM719 + RM2,187
= RM2,906

That is a difference of RM1,180 per month! MANY people will NOT be qualified due to DSR exceed entitlement*.

Is there any way around it?

Likely no.

* DSR = Debt Service Ratio. Most people maximum entitlement is between 60% to 80%. Once installment amount increases, DSR increase accordingly.