Secret of house loan

My wife read an article regarding house loan from a magazine recently and she tried to discuss with me on this morning. I read the article and found that it was a good article for discussion especially those have house loan with bank. The writer is kind to write the article regarding house loan and share some useful information in the article.

In the article, the writer commented that banker took advantage from the loan owner such as us. They claimed that the banker will charge us 2.5 times interest of the actual loan we borrow. I can not deny that the banker is taking advantage from us and this is why some people say banker is “legal” loan shark.

What choice we have beside borrowed from bank? Never think about loan shark if you do not want trouble in your life. We can not buy a property with cash unless you have prepared such huge amount for the property. Buying a property is no cheap and the cheaper is the low cost house. The market of low cost house is around RM30,000 but recently I did a strata title at Shah Alam, some people want to sale their low cost house at RM70,000. RM70, 000 to get a low cost house, do you want to invest? Difference places have difference price. Price of property seldom decreases. Another reason why people rarely pay cash for the property is because to avoid income tax to check on you.

The role of Banker in house loan

Bank is a place where we can borrow money legally to purchase property. Nowadays, there are many loan package, you can either choice fix interest rate or BLR interest rate. What is main difference of these 2 (two) package?

What is fix interest rate house loan?

Basically, fix rate interest house loan is a rate agreed by loan owner to banker and this rate can not be changed even through the inflation is high. Let me describe in example; the concept of this package is loan owner only know one figure to be paid to the banker for a certain period, such as monthly installment RM800 for 30 years. If you select this package, what you need to do is pay RM800 every month without fail before you get the penalty from banker. The advantage of using fix interest rate know your monthly installment wellDo not need to crack your head to seek for additional money if the interest rate is increase such as BLR packageSuitable for those has limited income group. The package is assisting them in budget their source income.

The disadvantage of using fix interest rate

The disadvantage is per described by the writer as below example:-

1. Total loan is RM250,000
2. Period of loan is 30 yearsInterest rate is 7.5% ( this is the lower rate I seem until this moment)
3. Monthly payment is around RM1750
   

From the article, the write did a analysis for 3 stages

The first 12 years, the owner (refer to above total loan) need to pay RM250K and the owner still owe the banker 83% of the total loan.The following 10 years and there is 22 years of the loan period, the owner need to have this huge amount of money (RM462K). When can to this stage, the owner only settle for 50% of the total loan.Do you know how money to settle above loan? The answer is RM 630K.

I realize and agree with the above analysis from the writer where if we select fix interest rate package and we are going to pay the property such as 2.5 times of our initial loan.
I did check with the banker recently and they printed out a copy of how the fix interest rate system work. I just realize that the first three year, you will pay the banker interest rate and they only reduce a small amount of the total amount of loan. I should picture the graph for interest should decrease along the period and graph for loan increase along the period. You must be asking me what I try to tell you all. The interest amount is decreasing along the period means the initial stage of the loan period, the loan owner only pay interest amount rather than total loan. These 2 (two) amount will be equal after a period such as 22 years as what the writer try to tell us. This is the strategy by the banker. You will be regret if you select this option package because it happen to my wife also.

Leverage banker

Here is my personal view and perspective regarding the writer comment on above matter.
For those people buy a house to stay and fall into the banker’s “trap” then you should follow the writer recommendation. Discuss with the banker again or appoint a qualified financial consultant specialize in house loan to reduce your high interest rate.

However, if you are buying a property to rent then we can not follow above recommendation. In this case, you need to utilize banker as your leverage to own the property and generate income for you. Why I say like this?

As I mentioned earlier, seldom people will buy a property by cash. So, the alternative is using bank money to generate money for you. How to do it?

Normally, we need to prepare 10% down payment for the property. Say the property is RM100,000 then 10% equal to RM10,000. You need such amount for property investment. After that, the next 90% should get bank loan to settle for you. Another advantages of using bank loan is the package usually come with the insurance. Subsequently, your property will be protected.

For property investment, I refer fix interest rate so that I can know how much I need to rent out my property. A basic guideline to generate income by property.

Now, let us see how the system works to generate income by borrow bank money.
Say you are paying RM200 per month for your house loan until 30 years and you are able to rent the property by RM150. This is telling you that the person rent your property is paying your house loan indirectly. This example you still need to top up another RM50. How about after 10 years, I can guarantee that your rent rate will increase according to growth of our nation economic but your monthly installment to bank is remain RM200. Can you see the profit margin you will gain from this package.

Perhaps after 30 years, your house rent increase to RM300 and you are gaining RM1,200 per annual without paying a single cent to the bank.

However, there is a risk where your property is vacant or no tenant then you need to pay the RM200 to bank. To avoid this problem, advertise your property when there is no tenant. Maintain the property well is vital to get higher rate of rent.

My conclusion is house loan package need to suit your demand. If you buy property to stay then use BLR package and settle as earlier as possible.

While if you buy a property for investment tool then you should consider my comment. Do not pay off because you are able to invest more properties rather that depend on one property.

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