There are many reasons to start saving early. But sometimes, we need that extra cash, be it for children’s education, old age, a rainy day or investments. If you’ve purchased a property, you could make the most of your property’s equity through reverse mortgage, refinancing or selling.
Whether you are going for a reverse mortgage scheme, refinancing or selling your property – all three are major decisions and in order to help you make the right decision, iProperty spoke to Jonathan Ng, mortgage specialist from Smart Choice Solution Sdn Bhd, a mortgage consultancy company based in Damansara Intan, Petaling Jaya, for further insights.
So, learn more about them before deciding on a financial solution to address your situation.
|Reverse Mortgage (Skim Saraan Bercagar)||Refinancing||Selling House|
|How does it work?||Get fixed monthly pay-outs during retirement without sacrificing home ownership||Replacing a current loan with a new one||Disposing owned property|
|Property ownership||Continue staying in your home without repayment during your lifetime||Continue staying in or renting out the property||Belongs to the buyer upon successful property transfer|
|Payment terms||Only requires settlement upon the demise of the borrower or joint borrower, whichever occurs later.
Any residual balance will go towards your estate.
Interest rate is 5.50% per annum effective 12 July 2022.
|Based on new terms agreed upon with the financial institution||None|
|Key eligibility criteria||55 and above
Property must be fully paid up
Currently, for Klang Valley residents only
|Calculate your DSR
Know your credit score
Current income / financial stability
|Well, you must be the legal owner of the property.|
|How long does it take?||About 6 months. Additional 1 to 2 months for leasehold properties.||About 3 months for freehold properties.
Up to 6 months for leasehold properties.
|3 months onwards|
The first reverse mortgage scheme in Malaysia, Skim Saraan Bercagar (SSB), is launched by Cagamas Bhd. Essentially, reverse mortgage is for Malaysian retirees who own a completely paid-up home.
With SSB, the bank pays the borrower and when the borrower dies or moves out, the house is sold. The proceeds of the sale will be used to repay the bank. Any balance will be returned to the deceased’s estate or given back to the borrower.
The eligibility criteria for SSB are as follows:
Ng also pointed out that the current interest rate for SSB is 5.5% per annum throughout the lifetime, which is relatively higher than most refinancing loans.
As for the application process, it takes about 5 to 6 weeks to process the SSB application, upon completion of appointment with EPF and assessment by AKPK. Then, the lawyer needs 3 to 4 months for the loan documentation.
For an applicant with a freehold property, it could take about 6 months to complete the application and for loan disbursement. For an applicant with a leasehold property, it will take an extra 1 to 2 months to attain the state’s consent.
There are some expenses that will be incurred by the borrower, such as these upfront expenses:
|Applicant receives a fixed monthly sum for the rest of his/her life||Only applicable to properties in the Klang Valley|
|Borrower still owns the property and can stay in the property during his/her lifetime||Only for unencumbered or mortgage-free property|
|Property jointly owned by a senior couple, the payments continue to be made until both of them pass away||Leasehold property owners need to pay additional cost to renew lease terms (leasehold properties at least 90 years of lease remaining or at least 60 years of lease remaining after deducting remaining expected life of the borrower)|
|Settlement only required after the borrower or joint-borrower passes away|
|The next-of-kin will not be responsible for any shortfall if the property sells for less than the loan amount|
SSB reverse mortgage scheme is suitable for retirees looking for fixed monthly income, said Ng, adding that this scheme can end in 3 scenarios.
1) When the borrower passes away
The next-of-kin has the option to buy back the property by settling the loan or Cagamas will sell the property to settle the loan.
If there’s any surplus after settling the loan, the money will be distributed to the next-of-kin. If there’s any shortfall after Cagamas sold the property, the next-of-kin will not be responsible for it.
2) When the borrower applies for a loan to refinance SSB
When asked further on how to refinance a reverse mortgage, Ng shared, “The borrower can refinance the reverse mortgage by giving one month’s notice to Cagamas. The purpose of SSB is to have a steady monthly income stream after retirement. If the borrower refinanced the reverse mortgage, they will lose their monthly payout.
If the borrower is looking for early termination of SSB, he/she can also apply to refinance a normal mortgage loan to settle SSB, if the mortgage loan application is approved with the consideration of age, income, loan tenure, debt service ratio, and minimum living expenses.
He also shared, “Inheritors cannot refinance the property which is pledged to the reverse mortgage, while the borrower is still alive. They can only apply for a loan to settle the loan after the borrower’s passing and buy the property back from Cagamas.”
3) When husband and wife divorces
When spouses jointly applied for SSB, and subsequently get divorced, the owner of the property (either husband or wife) needs to apply for a mortgage loan to settle SSB, or Cagamas will sell the property and settle the loan.
Home refinancing refers to borrowers taking on a new loan on a property that is still tied to an existing mortgage. The new loan will be used to settle the current loan and will be based on the current value of the property. You’ll then pay the monthly instalment based on the new loan’s terms.
A financial institution will review each application just like a new loan application, where they will evaluate your current income, financial stability, and credit score (debt repayment behaviour).
Do note that there are moving costs involved such as bank processing fees, legal fees, stamp duty, disbursement fees, stamp duty, disbursements fees, new insurance, and Sale and Purchase Agreement (SPA) fees. So, be sure that the refinancing benefits exceed the cost.
Refinancing is a good way to cash out without having to move out and look for buyers. It’s also a way to get cash without having to dispose of a property you want to keep. Cash-out refinancing allows you to borrow 90% on your current property’s value.
For example*, a property that you purchased at RM300,000 a decade ago is now valued at RM500,000. The maximum loan margin you’re allowed to refinance is 90% of RM500,000, which is RM450,000. You can use that money for investments or reduce other high interest debts.
However, you’ll need to take note of the below.
While you’ve more cash to invest, your monthly instalments will increase. So you’ll need to budget more on your monthly spend. It’s advisable to consult with a financial advisor on how cash-out refinancing may affect you in the long run.
*Disclaimer: The calculation is purely an example, and the figures are an approximation for easy understanding only. For the exact rate and sum, refer to your preferred financial institutions.
An alternative to refinancing is the top-up loan. It’s an additional loan on top of the current mortgage’s outstanding amount.
The loan amount will be based on the appreciated market value of the property, your current income and other commitments. This is quicker as the money could be disbursed within a month or two if it’s with the same lending bank.
|Reduce home loan interest and/or monthly payments, if borrower gets a better interest rate or longer loan tenure||Majority of loan repayment goes toward interest in the initial stage. If a borrower frequently refinances the home loan, he/she might pay more loan interest in the end.|
|Convert to a different mortgage product type (fixed term, flexi, semi-flexi, Islamic)||Moving cost incurred; same process as buying a house including paying for property valuation|
|Opportunity to shorten mortgage loan tenure||Approval depend on current income and credit score|
|Leverage on property’s capital appreciation to finance other investments||Penalty charges may be incurred for early settlement|
|Consolidate debt to save on interest||Value of previous payments lost if the loan is almost settled|
|Lower interest rate compared to personal loan||Using the cash on non-essential or non-urgent personal spending, instead of clearing debts or putting yourself in a better financial standing|
|Lump sum cash disbursement||Need to pay monthly instalment|
|Borrower still owns the property and can stay in the property during his/her lifetime||Takes longer to get the cash compared to selling the property|
According to Ng, the SSB reverse mortgage scheme is more suitable for retirees looking for fixed monthly income, while refinancing will be a better choice for borrowers looking for cash with lower interest compared to overdraft, personal loan or credit card.
Ng also opined that reverse mortgage is more suitable for freehold property owners as leasehold property owners need to pay additional cost to renew the lease terms.
Leasehold properties need at least 90 years of lease remaining or at least 60 years of lease remaining after deducting remaining expected life of the borrower.
The renewal premium for Selangor and KL are as below.
|Formula for calculating renewal premium in Selangor||Formula for calculating renewal premium in Kuala Lumpur|
|1/4 x 1/100 x Market Value of Land (RM/sq ft) x (term of new lease – balance of existing lease) x Land Area||1/4 x 1/99 x Market Value of Land (RM/sq ft) x (term of new lease – balance of existing lease) x Land Area|
|Based on the example, it is:
1/4 x 1/100 x RM500 x (99 years – 50 years) x 2,500 = RM153,125
|Based on the example, it is:
1/4 x 1/99 x RM500 x (99 years – 50 years) x 2,500 = RM154,672
Example provided by Smart Choice Solution Sdn Bhd
In contrast, refinance has no restrictions regarding the property’s tenure (freehold or leasehold), as long as the remaining lease is more than 30 years after deducting the loan tenure.
READ: Freehold vs Leasehold title in Malaysia: What property buyers should know
Ng said, “Overall, SSB has no risk. The borrower doesn’t need to pay any interest or instalment during their lifetime. If their property is worth RM1 million, and Cagamas has already disbursed RM1 million over a period of time, Cagamas will continue to pay the monthly amount as long as the borrower is still alive.”
“Settlement only occurs after the borrower passes away and the next-of-kin will not be responsible if the property is sold less than the loan amount,” he added.
It’s a hard decision when one has to sell their one-and-only property. Be it for clearing debts or cashing it to invest elsewhere, it’s a decision that has to be made with caution, followed by wise usage of that cash.
When asked whether selling a property should be considered as a last resort in asset liquidation exercises, Ng shared, “We can cash out from refinance or reverse mortgage, and still keep the ownership. Selling a property can be considered if the applicant can’t get the refinance or reverse mortgage approved.”
Also, this is an option that is more suitable for those seeking cash, without wanting to pay any interest.
For those who’ve decided to sell, you’d need to consider the costs of selling your property. It includes:
How fast the seller would receive the cash would depend on several factors. Upon signing the Sale and Purchase Agreement (SPA), the remaining percentage of the money (deduct percentage of down payment) will be paid to the seller through the bank within 90 days after the SPA date or after the state authority approves the consent to transfer.
The transfer period depends on the complexity of your case and your property title. Here is an estimated timeline for your reference:
READ: Strata title vs master title vs individual title: Know the differences
|Cash to reinvest or clear debts||One less asset|
|Avoid having bad credit score or foreclosure, if unable to pay monthly instalments||Rental cost, if renting a property to live in|
|Lump sum cash disbursement||Lose ownership of the property|
|Get the cash quicker, compared to refinance|
|No need to pay instalments, insurance, taxes, expenses, or maintenance|
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In most cases, a reverse mortgage is best when you don’t have enough savings, investments and income. There are no monthly instalment payments required. While for refinancing, you need to pay monthly instalments, provided the bank approves the loan.
If you’re no longer earning an income or aren’t financially stable, then the chances of getting your property refinanced are greatly reduced. In both instances, the borrower still retains ownership of the property while enjoying cash.
If a property owner decides to sell instead of choosing a reverse mortgage scheme or refinance, would the cash be sufficient to finance the owner’s golden years, or would the investments turn profitable and lead to an increase in overall net worth? Therefore, it’s important to weigh the pros and cons to ensure that the decision for selling is sound and calculated.
Whichever you choose, there are many considerations as there are implications for every choice. Alternatively, you may consult professional advisers like Ng to help sort out your situation.
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