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> Refinancing your property for cash

wild_card_my
post Oct 9 2015, 07:17 AM, updated 2y ago

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Refinancing your property for cash

Let me spell it out for you. You have a house valued at RM400,000. The house is mortgaged to the bank and the outstanding balance for that loan is RM100,000. You need some cash for your business, or that your first child is dying to continue his studies in Australia, or that your wife would like you to buy a new BMW to rival that of your neighbour’s Audi (bad financial decision to refinance your house to buy a car but I will let that one slip for this example). So to generate some cash, you go to the bank, and ask for a refinancing plan. The loan amount will be based on the current market value of the house (RM400,000). If your loan is approved, you will receive the cash minus the outstanding balance with the bank from your original mortgage (RM100,000), thus leaving you with RM300,000 as cash. But at the same time, you have a new RM400,000 mortgage under your name.

Note: Throughout this article, for the purpose of simplicity, the margin-of-finance for taking up the new loan is 100% as opposed to the typical 90%.

Borrowing with collateral

One of the many ways to get money when you don’t have them is to borrow more money. There are two very basic types of borrowing:

a) With collateral
b) Without collateral

To know more about the differences between borrowing with and without collateral and their pros and cons, please visit: Borrowing with and without collateral

Ahmad Jamal needs some cash

Now, in the example above, you are going to sell the house to yourself. So in this instance, there are 2 of you. Let’s call the first you AHMAD and the other you JAMAL. AHMAD has a house under his name; the Sales and Purchase Agreement (S&P) has AHMAD’s name on it. The mortgage agreement is also under AHMAD’s name. So essentially, AHMAD has a house that is mortgaged to the bank. His asset is RM400,000, and his liability is RM100,000, if we disregard his other possessions and treasures such as his life and his clothing, his net worth is RM300,000.

Keep in mind that AHMAD and JAMAL are the same persons and these two imaginary same persons are in the process of refinancing their house.

Now let’s look at JAMAL. JAMAL has nothing, except for his salary. To proceed with refinancing the house, JAMAL needs to buy the house from AHMAD, at the price of RM400,000. JAMAL has nothing, no cash nor any asset whatsoever, but he has a salary. So JAMAL approached a banker to ask for a loan. JAMAL uses his salary as proof that he can repay the mortgage that he is about to take. His mortgage application is approved, and he is given RM400,000 in cash to pay to AHMAD. Now JAMAL has a house worth RM400,000 and a new mortgage with an outstanding balance of RM400,000. His net worth is exactly nil.

Let’s go back to AHMAD. He now has no house since he has sold it to JAMAL. Earlier it is said that he has RM100,000 outstanding balance for his mortgage, so he has to use the cash he has received from JAMAL to pay off the mortgage. So let’s take RM100,000 away from the RM400,000 he has received from JAMAL. Now he has RM300,000 in cash! Now, since AHMAD and JAMAL are two same persons, we can combine the two, along with their assets and liabilities.

AHMAD’s asset: RM300,000 cash
AHMAD’s liability: nil
JAMAL’s asset: A house worth RM400,000
JAMALs liability: Mortgage outstanding balance of RM400,000

Prior to his refinancing, he has a house worth RM400,000, and an outstanding balance of RM100,000. His net worth was RM300,000.

After refinancing his house, AHMAD JAMAL has a total asset of RM700,000 and a total liability of RM400,000. He has RM300,000 in cash that he can play around with, but at the same time, his house is mortgaged to the bank. His net worth now is STILL RM300,000.

Note: This is assuming that there was no legal cost such as the Legal Agreement (LA)and stamp duty fees involved, for the purpose of simpler explanation of the concept

Final thoughts

On a single glance, refinancing yields no changes to one’s finances, but this can’t be further from the truth. Refinancing for cash can be viewed as a way to liberate your fixed asset and allowing the current asset to work for you. The cash can be used as the down payment for another property that will yield returns. For the Bumiputras, the Amanah Saham Bumiputra yield higher rate of return than the interest charged on the outstanding balance of the mortgage. Refinancing is a financial tool to move your money around according to your financial strategies. I highly recommend refinancing your properties if you do have a sound plan to reinvest the cash received from refinancing.

Related articles

Financial Faiz's Mortgage Series Ep.1, Debt-service ratio (DSR)
Financial Faiz's Mortgage Series Ep.2, Choosing your SPA/S&P and LA Lawyers
Financial Faiz's Mortgage Series Ep.3, Refinancing your property for cash

This post has been edited by wild_card_my: Apr 20 2017, 05:24 PM
b00n
post Oct 9 2015, 08:18 PM

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Again for Refinancing of an encumbered property, pls note that the refinance portion of which additional cash out is to be made is to be assessed with 10 years repayments for DSR qualification.

Illustration (again with 100% financing):

Scenario 1 - Clean property (i.e. no mortgage on the property)
Property price = RM1 million / loan RM1 million with tenor of 30 years
For calculation of loan commitment on that loan (later to be added to total customer's loan commitment) is RM1 million divided by 30 years (assuming no interest), monthly installment/commitment will be RM2,777

Scenario 2 - Property with mortgage loan in Bank A
Property price = RM1 million / loan RM1 million with tenor of 30 years (however, the loan outstanding with Bank A is RM400k)

Under this scenario, loan needed to redeem the loan from Bank A is RM400k, which means customer will get the benefit of RM600k as cash (hence the term cash out).

For calculation of loan commitment on that loan (later to be added to total customer's loan commitment) is no longer RM1 million divided by 30 years.
It will be RM400k divided by 30 years = RM1,111 plus RM600k divided by 10 years = RM5,000.
Therefore total commitment for DSR assessment becomes RM6,111. Although customer still is borrowing for 30 years with a monthly commitment of RM2,777.

That is why since late 2013 and early 2014, many people are complaining refinancing with additional cash out is no longer that easy to qualify.
koinibler
post Oct 12 2015, 04:55 PM

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how about refinance from 2 name loan&snp into 1 name?
Its do able?
wild_card_my
post Oct 12 2015, 05:22 PM

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QUOTE(koinibler @ Oct 12 2015, 04:55 PM)
how about refinance from 2 name loan&snp into 1 name?
Its do able?
*
Yes it is, like I mentioned in the other thread, many banks can do this loan arrangement that is being referred to as third-party loan.

Bonus information

user posted image
GS.Andy
post Oct 13 2015, 02:34 PM

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QUOTE(wild_card_my @ Oct 12 2015, 05:22 PM)
Yes it is, like I mentioned in the other thread, many banks can do this loan arrangement that is being referred to as third-party loan.

Bonus information

user posted image
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Hi Sir.

Is Ali, Jamal and Samsiah must have family relationship? Is friend relationship can use this practice ?
wild_card_my
post Oct 13 2015, 03:11 PM

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QUOTE(GS.Andy @ Oct 13 2015, 02:34 PM)
Hi Sir.

Is Ali, Jamal and Samsiah must have family relationship? Is friend relationship can use this practice ?
*
By right, have to be related: siblings, spouses, parents, children - close relationships.

Some banks consider "in-laws" as acceptable relationship.

I "do not" condone cheating the bank, but if you claim that you and your friends to be "in-laws" and I have done the due diligence and know-your-customers (KYC) what else can I do but to take your word? tongue.gif

If the bank have any suspicions they can always ask for some documents to prove your links (marriage certificates, and birth certificates) but I have NEVER come across that.

So yes, in short, the relationship has be that of a family, but us banks have no real way of determining the truth. And asking nonsense documents can be detrimental to their sales force.

linmac
post Oct 26 2015, 04:43 PM

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QUOTE(b00n @ Oct 9 2015, 08:18 PM)
Again for Refinancing of an encumbered property, pls note that the refinance portion of which additional cash out is to be made is to be assessed with 10 years repayments for DSR qualification.

Illustration (again with 100% financing):

Scenario 1 - Clean property (i.e. no mortgage on the property)
Property price = RM1 million / loan RM1 million with tenor of 30 years
For calculation of loan commitment on that loan (later to be added to total customer's loan commitment) is RM1 million divided by 30 years (assuming no interest), monthly  installment/commitment  will be RM2,777

Scenario 2 - Property with mortgage loan in Bank A
Property price = RM1 million / loan RM1 million with tenor of 30 years (however, the loan outstanding with Bank A is RM400k)

Under this scenario, loan needed to redeem the loan from Bank A is RM400k, which means customer will get the benefit of RM600k as cash (hence the term cash out).

For calculation of loan commitment on that loan (later to be added to total customer's loan commitment) is no longer RM1 million divided by 30 years.
It will be RM400k divided by 30 years = RM1,111 plus RM600k divided by 10 years = RM5,000.
Therefore total commitment for DSR assessment becomes RM6,111. Although customer still is borrowing for 30 years with a monthly commitment of RM2,777.

That is why since late 2013 and early 2014, many people are complaining refinancing with additional cash out is no longer that easy to qualify.
*
1 - The monthly Installment will be RM6,111 or RM2,777 ?
2 - All banks doing this now?

Thanks

fahrur_07
post Nov 3 2015, 03:44 PM

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Im currently have home loan with Alliance bank (interest rate 4.65%, outstanding amount RM 136,737.75)

im planning to do re-finance
can help me?

012-6997059 (razi)

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