Why floating rate mortgage can be a better choice now?

The days of long term fixed interest rate mortgage are virtually a thing of the past. We expect the rate of adjustable (floating) rate mortgage to be reviewed at least on an annual or even half-yearly basis during this period of economy crisis.

However, while the global economy looks gloomy, the adjustment of rate is normally in the investors’ favour. Malaysian Central Bank (BNM) has just lowered the base lending rate (BLR) by 0.25% to 6.5% since early of December 2008. This is the first interest rate cut in 5 years since BNM’s last cut in year 2003. We expect the rate to be adjusted gradually to a lower lever in the following years as a measure to boost Malaysia economy.

In fact when there is an interest rate hike, real estate investors should be happy about it because it means the economy is doing well and the government is concerned about inflation. Inflation is a friend of real estate investors – when the price of everything is rising, so are your rental income and property value!

Islamic Loan
If you are still uncomfortable with floating rate, you may consider Islamic mortgage loan. There is an overall cap on the mortgage or interest rate for Islamic loans. Now the cap of rate is between 8%-10%. Looking at the historical high in 1984 of which the BLR in Malaysia was 12.25%, this cap range is considered a natural hedge against any interest rate hike. (Please refer to the 25 year BLR historical chart below.)

But the current rate of Islamic loans is higher than floating rate mortgages. If the interest rate keeps dropping, you may not be able to fully benefit from the upcoming low interest rate.

From the 25 year BLR historical chart, you may notice that from year 1998 to year 2000, which was the post-crisis period of 1997 Asian currency crisis, BLR dropped from 10.61% to 6.4%!!! If this round of global economy crisis is worse than the Asian currency crisis as portrayed by most of the economists, BLR may drop to 4% within 2 years from now.

At this age of volatility, we see most banks still do not dare to offer more fixed rate mortgage loans, but in the near future, some banks are expected to aggressively promote more fixed rate packages. Reason being very simple: They want to lock the borrowers with higher rate now before the interest rate falls any further.

As a real estate investor, you should monitor the trend closely in order to benefit most from the trend. Our suggestion is: To take the lowest floating rate package now with minimum lock-in period (2-4 years), and to refinance to fixed rate package when the interest rate starts to bounce again in future.