PERSONAL FINANCIAL PLANNING

TOPIC 6
Investment in Property, REITS and other Banking
Products
 Learning Objectives

• Discuss investments in Real Estate Investment Trusts

• Discuss the benefits of investment in property.
• Discuss factors to consider before buying property
• Discuss investments in other banking products
Benefits of Investing in Listed REITs:
1. Affordability

2. Liquidity

3. Stable income stream

4. Exposure to large-scale real estate

5. Professional Management
Source: http://www.myreit.info/index.php/financial-position
Factors to consider before investing in REITS:
• Dividend payout
• Is the yield able to cover the rising cost of living?
• Typical yields are between 6% to 8%
• Future growth in payouts

• Diversification of portfolio
• Professional management by the managing company should include properties across different
industries (e.g. industrial, commercial, residential and healthcare)
• Potential to stabilize returns.

• Gearing of the management company

• High debt levels of the management company can affect its profitability to generate income for
investors.
Reasons for investing in properties
• Could be a hedge against inflation

• Passive income from rental

• Potential capital appreciation

• Could benefit from responsible leveraging

Considerations before buying a house in Malaysia
Location Type of property Ownership Type
- Basic amenities  Landed versus High Rise  Freehold – Indefinite
- Surrounding area shops, banks,  Leasehold – Usually up to 99
schools, hospitals etc years from State Authourity
- Public Transportation
- Distance to work
- Traffic condition
- Security

Title Developer’s Reputation

o Individual – Landed  Reputation  Past customer’s satisfaction
o Strata – Condominiums/Apartments  On time delivery  Adherence to promise in
 Quality of work advertisements

5-9
 Considerations buying a house in Malaysia (cont/…)

 Down-payment
 Loan instalments
 Property Investment yield
 EPF – Account 2 withdrawals
 Debt to income ratio (< 40%)
 Loan to Value ratio
 Margin of financing
 Lenders can lend up to 90% of purchase
price

Should only buy a property that is within your means/that you

can afford.
5-10
Example – House Purchase

5-11
 BUYING VERSUS RENTING
The benefits of owning a house compared to renting:
• Can increase your net worth as the mortgage loan is being paid down.
• Brings a sense of pride and accomplishment

However, owning a house is not for everyone :

• It involves an investment of one’s time and location – for the garden, repairs and
maintenance. If you are a tenant in a rented home/apartment, you have the freedom to
move if you are not satisfied with the conditions.
• Many small home improvements can add up to the landlord’s expenses.
• If the house owner is not satisfied with his/her property and wants to sell it, he/she has to
wait till the value of the house to appreciate to sell it. Property investments lack liquidity
• There are many unexpected factors that can bring down the value of a house. For example,
the house may be built in an area that is prone to floods during the rainy season or a
highway may be built close To by be
several later . in the tutorials
years further
discussed
 Types of Loans
• Fixed rate loans
• Interest is fixed and the loan tenure can be up to 35 years
• Installments remain the same over the tenure of the loan

• Variable/Floating rate loans

• Interest rate varies according to the prevailing Base Lending Rate (BLR) = (x + BLR)%
• BLR changes will (AKPK):
• Increase or decrease the amount of the repayment
• Extend or shorten the tenure
• All else equal:
• If BLR is increasing  loan installments will increase and banks will normally increase the tenure on new
loans.
• If BLR is decreasing  loan installments will decrease and banks will normally decrease the tenure on new
loans

• If the floating rate loan has fixed monthly payments  Any changes in BLR will increase or decrease the loan
tenure.
Types of Loans (continued…)
• Variable rate flexi loan
• Mortgage loan is linked to the current account (with cheque book facility)
• This flexible “current account” will earn an interest equal to the home loan
interest being charged.
• The amount in the current account “off-sets” the principal amount of the loan
used to calculate interest
• Lowers the interest payable and frees up funds to settle the principal sum 
Home loan could be settled earlier.
• Beware of any “lock in periods” and penalty
Types of loans (continued…)
• Graduated payment
• Allows for lower installments at the beginning of the loan and increment of loan
installments over time.
• Useful scheme as individual income increases over the years in one’s vocation.
• Risk of not being able to adjust to higher installments at a later stage

• Partial repayment of outstanding loan

• Allows for pre-payments of loans with surplus savings/bonus subject to certain
restrictions.
• May be able to shorten the loan tenure.
Types of Loans (continued…)
• Daily versus monthly rest
• Daily rest – Any payments that a customer makes will reduce the interest accruals
almost immediately  Greater potential interest savings.

• Islamic Property Financing

• Bai’ Bithaman Ajil - Deferred Payment Sale concept
• Musyarakah Mutanaqisah - Profit sharing concept
Beware : Predatory Mortgage Lending Practices
 BANK NEGARA MORTGAGE LOAN POLICY TIGHTENING HIGHLIGHTS
Source : Oon, Yeah and Tan (2016)
 Margin of financing
• For residential properties
• First and second properties  Maximum 90% financing
• Third property onwards  Maximum 70% financing
• For commercial properties
• Maximum 85% financing
• For joint ownership by husband and wife (especially if one of them alone is not eligible) 
both of them are deemed to have used up one of their entitlement for 90% financing for
residential properties.
• If both the husband and wife are eligible parties they can each borrow for two residential
properties each (90%)  In total for 4 properties at 90% financing .
• Potential borrower will be subject to credit rating assessment based on CCRIS
• If a property has been fully paid up, it will not be caught under this policy
• Based on Net property price = Property price – Developer’s discounts (e.g. part of property
price, legal fees, furniture and fittings etc)
BNM Guidelines (cont/..)
 Tenure
• Maximum tenure has is now 35 years.
• May have adverse impact on previous loan packages that offer “generational” features
e.g. 40 Years + 40 Years (=80 years) where loan is transferred to the children after the
first 40 years. Intended purpose was to reduce the monthly mortgage payments. 
Not allowed under new rules and existing loans had to be cancelled by the banks.

 Personal mortgage/home loan refinancing maximum tenure is limited to 10 years.

• May impact the borrower’s credit rating and increase the monthly repayments

 Home loan approval is now based on net income (i.e. gross income less deductions for EPF,
SOCSO, income tax and other deductions).

 Developer Interest Bearing Schemes (DIBS) has been discontinued.

• Rule enforced to curb speculation in the property market.
 MORTGAGE LOAN REFINANCING

• Home loan financing is the act of replacing your existing home loan with
another loan with different terms and conditions. This enables investors to
find a more suitable mortgage loan that suits their needs.

• Personal mortgage loan refinancing maximum tenure is limited to 10

years.
 Common reasons for mortgage loan refinancing
• To reduce one’s monthly installment payment
• To consolidate one’s debt e.g. to combine a first and second mortgage
• To leverage the existing equity in the home free up cash flow
• To change the term of your home loan
• To reduce the interest that you have to over the life of the loan
• Switch from conventional housing loan with variable rate to a fixed rate
loan or Islamic financing
 Things to do before undertaking home loan refinancing
• Determine your objective/goal

• Check the terms and conditions properly

• Lock in period – Minimum period for the refinancing loan
• Early exit penalty - Penalty up to 5% of the refinanced amount could
be charged for exits within the lock-in period.

• Get information on the current mortgage

• Outstanding balance of the loan, remaining tenure and interest rate

 Things to do before undertaking home loan refinancing (cont/…)
• Compare and select the home loan refinancing package in the market that best suits
you.
• Margin of financing, available tenures and how interest rate is levied.
• Associated fees charged : Processing/application fee, credit check fee, legal
fees, stamp duties, disbursement fees, valuation fees and redemption fees.
• Islamic versus conventional loans

• Negotiate with the banks for better terms and conditions

• Moving cost – Includes associated fees mentioned above. Can add up to 1% to
2% of the refinanced amount.
• Some banks may offer zero moving cost but at the expense of higher interest
rates – Need to do your calculations.
 Things to do before undertaking home loan refinancing (cont/…)

Calculate this:

Net potential savings on home loan refinancing:

= Interest savings over term loan - Early termination fees/exit fees/ lock in
penalty – Cost of establishing the new mortgage (Legal fees, stamp
duties, valuation fees and other charges)

Make sure it is NOT negative

Common pitfalls of mortgage/home loan refinancing:
• Not doing adequate research for the best terms and rates.
• Not calculating the actual net savings (see above)
• Falling victim to the lure of promotional rates that revert back to current
variable rate (or even higher rates) at the end of the introductory period.
• Not evaluating the current amount outstanding that is owed to lender 
Risk of refinancing at a lower amount than the actual amount owed
especially when there is a drop in the property value.
• Taking refinancing monies to pay credit card bills without changing
spending behaviour  Draw on home equity to finance additional debt 
Don’t turn a short term debt into a longer term problem.
https://www.imoney.my/articles/a-guide-to-home-loan-refinancing-infographic
WAYS TO BE MORTGAGE FREE

• Make extra or more frequent payments

• The more payments towards reducing the principal  Less
interest and faster settlement of loans
• If possible, pay all mortgage costs upfront to avoid them being
added to the loan and incur interest (e.g. legal fees, stamp duty,
disbursement, valuation fees and MRTA)

• Use home refinancing (see above) wisely to consolidate your debts.

 WAYS TO BE MORTGAGE FREE

• Use a flexi-mortgage
• Combination between a term loan and overdraft
• Daily rest interest calculation - With extra payments being
applied to the reduction of principal  interest savings and
reduction of loan tenure can be achieved
• Banks will charge a fee for the unused portion of the flexi loan
 So beneficial if your intention is to make additional
payments otherwise conventional loan with lower interest may
be better.
• Requires discipline and proper financial planning.
• Opt to maintain monthly installments even if the Base Lending Rate
(BLR) reduces
• Use EPF Withdrawals from Account No. 2 prudently (subject to terms
and conditions)