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5 things to consider when you refinance your property loan
Since the beginning of 2018, Bank Negara Malaysia (BNM) has kept interest rates on a slightly declining trend1. With global economic headwinds still present in 2020, most central banks around the world have been reducing interest rates2 to stimulate the economy, and BNM is widely expected to follow next year3. With economic conditions putting downward pressure on interest rates, it may be a good time as an SME to refinance your property. Lower interest rates mean businesses may be able to enjoy lower monthly payments, improved loan tenures, and even additional capital through cash outs. Here are five things for SMEs to consider when refinancing a property.
#1: What interest rates can I get on my refinancing?
The first aspect to consider is the interest rate you will be able to get if you refinance your property. In Malaysia, BNM requires banks to publish both the pre-2015 Base Lending Rate (BLR) and the new Base Rate (BR) – the reference interest rates banks use to determine applicable mortgage rates – so that customers can make more informed decisions4. It makes sense to refinance if you can get a lower effective interest rate than the one you are currently paying. UOB’s BizProperty offers highly competitive interest rates on both new mortgages and refinancings.
#2: Should I choose fixed or flexible interest rate loan structures?
Consider the benefits of fixed and flexible interest rate loan structures. When interest rates are rising, fixed structures are better; when interest rates are falling, flexible structures will benefit you more. When interest rates are rising, fixed rates will allow you to lock in a lower rate, whereas when interest rates are falling, flexible rates will decrease in tandem.
In the current economic climate, it might make more sense to opt for a flexible loan structure so you can benefit from falling interest rates by saving on interest or shortening your loan tenure. So, if you previously obtained financing on a fixed-rate basis at a higher rate, you may want to consider refinancing your property at a flexi-rate as a next step.
#3: What remaining loan tenure would I prefer?
Refinancing your property can result in improved loan tenures. However, improved loan tenures can be either shorter or longer – it depends on your preference and business needs. For instance, you might want to pay off the loan in a shorter time, in which case refinancing at a lower rate but maintaining the same monthly payment as before can result in a significant reduction in the remaining loan tenure.
On the other hand, you may prefer to use that cash for something else. In that case, you can refinance at a lower rate and extend your loan tenure at the same time. For example, if you have a remaining loan tenure of 15 years, you could refinance that at a tenure of 30 years – effectively increasing your loan tenure by 15 years. Again, there is no ‘best’ option in this case; it depends on your own business needs.
#4: Do I need any additional capital for my business?
If your property has appreciated in value over the years and you have paid off some of the initial principal, you may qualify for an additional cash out upon refinancing. Essentially, you are leveraging your property’s additional equity (its value minus the outstanding mortgage) to obtain additional cashflow. You can use these funds to purchase additional properties or for other business needs. This is an optional feature that UOB BizProperty offers to qualifying applicants.
#5: What are the applicable refinancing fees?
The most common fees you will incur when you refinance a property include processing fees, valuation fees, legal fees, and stamp duties. However, stamp duties can be waived if you switch from a conventional loan to an Islamic one if you refinance through.
Don’t forget to check whether your current mortgage has any restrictions, such as prepayment penalties, exit fees, or lock-up periods (a period during which you cannot make any prepayments without incurring penalties). Such restrictions can make a seemingly advantageous refinancing become a loss. Make sure you factor in such restrictions and all applicable fees before making your decision. If you obtain a loan through UOB BizProperty Islamic, UOB will waive all such prepayment restrictions, and you can make extra or early payments at any time.
