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.)

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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.

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.

14 Comments

  • Raymond

    Reply Reply December 15, 2008

    Hi,

    Is now a good timing for buying a house in JB since BLR dropped? We are looking for a house near Tampoi area.

    Please advise.

    • ongkl

      Reply Reply December 15, 2008

      Hi Raymond,

      Generally speaking, compared to months or years ago, yes, we would say now we can find more good bargains in JB. From what we have seen in the past few months since Aug, the attitude of most sellers (home owners/developers/agents) have changed to become “softened”. And we discovered that more developers are throwing in those units they previously held (to jack up selling price) into the market. We will post another article to discuss our latest finding about JB property market later.

      Also, now we can get better offer from banks in terms of interest rate and other terms. For example, Maybank now offers shorter lock-in period (2 years) for non-zero entry cost mortgage (previously 3 years before Dec). But according to bankers, however, loan approving rate has dropped nearly 50% since Sep due to more stringent policy adopted by banks. They are trying to secure more ‘quality’ borrowers by promoting more attractive packages.

      Specifically for housing estates near Tampoi, we have yet to look into this market. However, the area is classified as one of the prime suburban areas by JB town councils. Most of the residential lands for apartments/condominiums there are lease hold mainly because of its location as the nearest industrial area to town and better traffic system. The other area that deserves such status is Larkin, but you may find less choices for house there.

      Cheers.

  • KCLau

    Reply Reply December 15, 2008

    @Raymond,
    I think you will have more bargaining power when negotiating to buy a property. Low interest rate is on your side. Tighten credit approval is also on your side. Demand will be low. You will have more choice!

  • Keith Low

    Reply Reply December 16, 2008

    Hi,

    First time visit! Nice blog you have there. I would like to send a private mail to you.

    May I know your email address?

    • ongkl

      Reply Reply December 17, 2008

      Thank you, Keith.
      You can send it through our “Contact” page.

      Cheers

  • timothy

    Reply Reply February 21, 2009

    hey guys….. need a professional advise. This is my situation: I want to purchase a completed Condo, freehold property in KL and do not know where to start as to getting housing loan. Am 39 years old. Earning rm 3500. Hoping to take either 15 or 20 years loan. I might have extra $$$ in future, so can dump in to my loam payment. Please advise which bank offer the best…

  • timothy

    Reply Reply February 21, 2009

    btw, the property price is rm190K…

    • ongkl

      Reply Reply February 21, 2009

      Hi Timothy,

      You should check the housing loan packages offered by several banks first.
      According to our mortgage broker, Standard Chartered Bank is now offering quite competitive housing loan packages at Base Lending Rate (BLR) minus 2.2%, which is 3.75%. You may want to check the latest Base Lending Rate (BLR) offered by banks at http://www.meshio.com/base-lending-rate/.

      You can check the monthly installment required by each package with banks, or use our special property investment evaluation spreadsheet (which you can download it free after you subscribe to our newsletter) to calculate the monthly installment.

      From the spreadsheet, we calculated if you loan 90% of RM190k for a tenure of 20 years with 3.75% interest rate, your monthly installment will be RM1013.84.

      Cheers

  • Andrew

    Reply Reply January 23, 2013

    Hi, Guys,

    I need some professional advices from you all which I consider very expect already. At the moment, I’m taking loan of RM150k in 2006 with fixed interest of 5.95% if I’m not mistaken. And I’ve been paying RM1000 every month since then, until now I’m still owing them RM132k which I think ridiculous. That means I’ve paid about RM72k and I only managed to reduce my loan by mere RM18k, and we have been paying the interest of RM54k!!!

    I’m considering of refinancing the rest of loan with another bank which is offering BLR-2.2%. Now, I need your advices whether I should do the refinancing of Not? And what do we see………..will the BLR rise any sooner? Please help, appreciate your feedbacks. Thanks

    • Mahsk

      Reply Reply January 28, 2013

      Andrew, in times of global economies struggling to recover, and debt laden developed world trying to get out of its credit debt mess, increase of interest rate will not be likely. I foresee increase will not be likely for the next 5 years.

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