When you want to take up a loan for your real estate investment, you may be confused by different loan packages offered to you. However, the 3 major factors that will affect the return of your investment are loan amount, tenure and interest rate.
Making decision to finance your real estate investment through a mortgage loan can be as simple as answering the following 3 questions.
How much should I finance?
If your real estate investment is worth borrowing, go for the maximum loan amount available to you; otherwise do not borrow to invest.
If a real estate investment is worth borrowing, the more you borrow, the higher the return, and the sooner you will take back all your capital. See our previous article “Why you want to take up a loan for your real estate investment?” for such real case in Johor Bahru. (If you’re not already a subscriber to Real Estate Investment in Johor Bahru, enter your email address in the box beside this article and subscribe to receive our FREE latest update via email.)
How long the tenure should I choose?
Try to get the longest tenure available to you when you apply for a mortgage loan for your real estate investment. Why? Simply put, to minimise your holding cost – monthly loan repayment.
By selecting the longest tenure you enjoy the lowest monthly repayment. In other words, you will be able to save more money every month. You can save these monies for rainy day and earn interest from savings or fixed-deposit accounts, or invest them in other places.
The best thing is you still can repay the outstanding loan amount anytime with the extra cash you saved. And when you reduce your outstanding loan amount, you still can choose to shorten the tenure or reduce the amount of monthly repayment. This is because mortgage loan interest is calculated based on the outstanding loan amount.
Since the longer the tenure the lower the monthly repayment, invest in real estate while you are young. This is not quite a fair game for elders. Monthly repayment for a man at age 55 years can be double of the monthly repayment for a man at age 35 years!
Which interest rate package should I choose?
You may think this should be the easiest question to answer – just take the lowest interest rate of course. Yes, if you are talking about the lowest interest rate within the lock-in period of your loan.
Nowadays you will find almost every loan package offered by banks comes with a condition of lock-in period. All banks want to lock you in for a certain period of time before you can repay the full loan amount. You are required to pay a penalty fee of around 3% of the total loan amount if you want to repay the balance loan amount or sell your property within the lock-in period.
You may want to sell away your property within the lock-in period when the price is right. So make sure you factor in the penalty fee as part of your selling costs.
Some bank like Maybank offers lower interest rate in the first few years of repayment. Ask banks to give you quotations of different interest rate packages with the maximum loan amount and tenure available to you. Select the package with the minimum monthly repayment within the lock-in period.
In short, in order to get the maximum return from your real estate investment which is worth borrowing,
- Choose the maximum loan amount – for the highest return
- Select the longest tenure – for the minimum holding cost
- Select the interest rate package with the lowest monthly repayment within its lock-in period – for the minimum holding cost
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Hi OngKL,
Last time, there are fixed interest rate home loan package available. But nowadays, this kind of offer is getting less.
Some investors pointed out that it is safer to use a fixed rate mortgage because we don’t have to worry about interest rate hike in the future, which might affect the monthly instalment amount.
What do you think about this?
Thank you for your comment, KC.
Yes, there is virtually no more fixed interest rate mortgage in the market now. But no worry, it can be a good thing for real estate investors and home buyers to choose floating interest rate in this period of time of economy crisis.
I will post an article tomorrow to discuss this issue.
Just fyi, ING is currently offering 4.85% fixed rate home loans.
Is it good point to take loan as long period year as possible?
Hi Liew,
Yes, one should go for the longest period of tenure for a loan in order to minimise the major monthly cost – monthly installment, so that his/her monthly cash flow will be maximised. With the maximum cash flow, extra cash can be accumulated and used to repay the loan anytime in future with the flexibility to manipulate the cash on hand.
Cheers
Hi, pls give comment.
setia indah-22×70 double storey terrace house with dwnpayment +95%loan, free legal fee, but rebate RM8888 is the best offer they could give us. The location is nice and the building is nice too, key handover soon by October 2009. Im considering it to Desa Tebrau Corner lot with selling price at RM288K only ! Which gave a better investment value at this period? Can I afford to pay monthly installment with monthly income of RM 6000? If the loan % is going to increase by next year, which means I need to pay monthly (3.5% now = RM 1310) even higher?
Hi Sarah,
You can loan up to the limit that the monthly installment shall not exceed 30% of your monthly income. With a monthly income of RM6000, you can afford loan(s) with monthly installment of RM1800. This amount is the alloweable total monthly installment of all loans if you are applying for more than one loans.
For a 95% loan of RM288k property, tenure 30 years, interest 3.5%, montly installment is RM1228.59.
We need more details about these two properties like purchase prices, intention of investment (for rent or for own staying), expected rental income (if any) and other costs such as budget for renovation and furnishing work (if any), in order to evaluate which one is better. Location wise both are located in good areas.
Cheers
Hi OngKL,
Just would like your opinion regarding interest rate. Currently, bank interest rate for housing loan at its’ lowest and should not be a problem if we could take a loan of 90% to 95% of the purchase price. What happens when the interest rate rise and cause our property investment to become negative in cashflow whereas the current rental are on the high side and might be difficult to increase the rental further? I would like to know what is your comment or action to be taken when such situation arises? Please comment.
Thank you.
Hi Jess,
As discssed in our previous article “Inflation may come back soon (or it has never left?)”, if the inflation is comng back which causes interest rate to go up, your cash flow from rental property should increase also.
However, in order to have a healthy cash flow from your investment regardless of economy condition, we encourage for each investment property, monthly installment should not exceed 60% of the income (rental) generated. For example, if you collect RM1000 every month from a rental apartment, keep your monthly installment below RM600, which should be equivalent to a loan amount of RM130k with interest rate 3.75% and tenure 30 years.
This is to give some room to maintain a positive cash flow should the bank revise interest rate to even double of the existing rate.
Cheers
Hi OngKL,
Thanks for the clarification and comment. However, I’m interested to know how does the 90% financing which you have mentioned in your previous articles incorporate to what have been mentioned here about monthly installment should not exceed 60% of the rental income? I find both ideas are a bit contradictory. Hope you could clarify further on that.
Once again, thank you in advance for your guidance.
Hi Jess,
If you look at our apartment in Tampoi (“How to increase the return of an investment property to more than 20%?”), we did follow the guideline of monthly installment being less than 60% of rental income.
However, if you look at the latest case study from our reader in Penang (“How to turn a property to become worth borrowing/leveraging?”), the main objective was to turn the property to become worth borrowing. There is always a trade-off. Sometime we just can’t have the best of both worlds unless we do it right in the beginning. In this case, because the rent was low (RM600), if the reader loaned 90% she couldn’t keep the monthly installment below 60% of the rental income.
That’s why we suggested the reader in the article to loan just RM40k (or 38%) only in order keep her monthly installment at RM184 only.
Cheers
Hi OngKL,
Thank you for the clarification. You have made things clearer by elaborating with further explanation.
Thank you very much for sharing with all of us.