How to buy additional properties with mortgage refinancing?

In our previous article Where to find sources of start-up capital? we discussed that refinancing real estate can be one of the sources of start-up capital for your real estate investment.

The following article is contributed by Fauzi from Life In Me explaining in detail about how to buy a new property for yourself by refinancing your existing real estate. Fauzi is a blogger who shares his experience and insight of life on his blog. (Original article: Mortgage Refinancing ~ Buying Additional Property)

What subprime crisis?  Affordable houses are everywhere.
Creative Commons License photo credit: woodleywonderworks

Buying a house is not to be a sole shelter anymore. It could be one of the best investment opportunities..

How about this.. Say 5 years ago someone bought a property at RM152k and now its value jumped to RM210k.. 5 years back, interest rate at 7% (6.75%+0.25%). 30 years 90% loan had cost him an installment of ~RM1k per month.

Now many banks offered very good rate, for instance BLR minus up to 1.85%.. If he refinanced the property with flexible home loan with an option of free moving cost (FMC), and he gets 90% loan of RM210k house value, his installment will be at ~RM900 a month.

And he will get roughly RM60-70k nett considering his full settlement with previous bank at RM130k-140k. That is a handsome sum.. Forget about he will prolong his house repayment period at the flip side.. That is why he should look for flexible loan which will enable him to make pre-payment at any time..

Definitely his income will be increase in future. If he maintained his lifestyle or increase it by a little bit only, he could channel all his salary increment into the home equity and lessen its repayment period.. Brilliant strategy rite..?

Now, what he can do next..???? Precisely…., buying the next property…

Say, buying a condo or service apartment in good location, he will need at most RM15-20k as a down payment.. And he still have a balance of RM40-50k which he could spare it as an additional fund to repay the new housing loan at least for 3-4 years…

Again, his income will increase in conjunction of first 5 years… So, he should not worry of being unable to pay the installment… And that second property will increase in value in the next 5 years for another refinancing exercise.. 🙂

Indeed, he can rent it out as well.. If fully furnished condo/ service apartment at prime location, someone will be able to rent it out up to 2k a month.. See, he is making money out of it…

 

About The Author

ongkl

Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore - a conurbation with 6.49 million still fast growing population - since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.

8 Comments

  • Jacques

    Reply Reply February 19, 2009

    The exact same reasoning US home owner had since 2000
    We saw where it lead them….

    Instead of piling up properties and loans, why not diversify and max out a good fixed deposit and/or invest in regional index tracking funds?

  • Fauzi

    Reply Reply February 19, 2009

    For a start, this could be one of the option. Obviously, this should only ‘safely’ applied if some one had measured the risk involved, particularly their nett take home pay, potential rental opportunity and list of ‘what if’, i.e loosing a job, no rental income in future etc etc..

  • KCLau

    Reply Reply February 19, 2009

    Obviously, there are risks in every investment. I think it should be safe if the investor know what he is doing.

    • ongkl

      Reply Reply February 20, 2009

      Yes, refinancing has its problem. In fact, to be exact, it is the people who uses this financial tool indiscriminately that creates the problem.

      To further explain the potential problem of mortgage refinancing, we have to understand an important ration – the housing debt to equity ratio (also called loan to value). This is the ratio of the mortgage debt to the value of the underlying property; it measures financial leverage.

      This ratio increases when homeowners refinance and tap into their home equity through a second mortgage or home equity loan. A ratio of 1 means 100% leverage; higher than 1 means negative equity.

      The advisable maximum range of the ratio is normally between 0.80-0.90. That’s why the maximum housing loan margin offered by most banks is 90%.

      As of 2006, several areas of the world such as US are considered by some to be in a housing bubble state. Major causes of the bubble include overvaluation and excessive borrowing based on those overvaluations, which increased the debt to equity ratio of most houses rapidly.

      Eventually when the bubble bursts, and house value drops, the debt to equity ratio of most houses become negative. This triggered a dramatic rise in mortgage delinquencies and foreclosures in the United States, and then the well-known subprime mortgage crisis, with major adverse consequences for banks and financial markets around the globe. The crisis became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system.

      WY has beed posting several articles on his blog which further discuss the on-going financial crisis with its causes and policy issues together with the current effort of G30 in reforming the global financial system through a more stable financial framework.

      We hope can see more readers to share with us their views about the pros and cons of mortgage refinancing here.

      Cheers

  • Jess

    Reply Reply March 9, 2009

    It may sound like a bed roses now to take up re-financing regardless for houseowners or for property investors RIGHT NOW. I’m not too sure that the adverse effect is going to bring the optimism to the houseowner or property investors if the interest rate is going to hike up in the future. Let’s say taking a loan of 90% with a tenure of 30 years now, may sound very promising with the low interest rate with low montly installment. What if there’s a time the interest rate is rising and will continue to rise? Then the monthly installment will continue to rise as well and definitely impact on the monthly cost to hold onto the property? If the investors have more than one property, then it might be even more for him or her to hold on to all the properties. I would love to hear your opinion or suggestions on this on how to handle the properties differently when there’s a time the interest rate is on a going up trend. Thank you.

    • ongkl

      Reply Reply March 12, 2009

      Hi Jess,

      If interest rate is going to hike, that means the economy is doing good and government is concerned about inflation. When that happens, it should be a good news to real estate investors because their properties’ value and rent is going up. We have discussed this in our previous article Inflation may come back soon (or it has never left?)

      If by that time the property can be refinanced again to a fixed rate mortgage, investor should be able to take back some tax-free profit from the appreciation of property value. Otherwise the rent should be revised to reflect the latest market condition.

      However, whenever inflation strikes, cost of living becomes higher and higher, including the price of a new house, monthly installment of new housing loan, maintenance of house, utililty and other household expenses. Unlike property investors who can benefit from higher rental income and property prices, home buyers don’t earn income from their houses, they have to rely on their existing sources of income to cover the increased home-related expenses. They should quickly refinance to a fixed rate mortgage before interest rate is getting higher.

      Cheers

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