The overnight policy rate (OPR) or the key lending rate has been revised twice since the start of the year. From record-low rate of 2%, it has now risen to 2.50%.In tandem with the rise, the base lending rate(BLR) has been increased by 50bps to 6.05%, up from 5.55%. Economists have predicted that the OPR would rise to 2.75% by year-end. How do you deal with the effects of a rising mortgage rate, which translates into higher monthly loan instalments?
One strategy is to look at your home loan. According to Liew Swee Lin, head of consumer banking at Alliance Bank, consumer may ask their lenders to reschedule and lower their monthly commitments, although this would result in a longer loan tenure. “Consumers should opt for lower instalment schedules with longer tenure on new loans, even though they can afford to pay more. This buffer would minimize the risk of straining their cash flow in the event of upward adjustments on instalment that go with rising interest rates,” she says. Liew believes that this strategy is ideal, as the consumer has the option to pre-pay more to save on interest, and re-draw on excess funds free of charge.
So, should you pare down your mortgage debt before next rate hike? Financial coach Milan Doshi says it all depends on whether the loan is for your residence or an investment property.You can consider the strategy if it is the former, he says “ This is provided you have excess cash, and you don’t see any opportunities to make more than twice of what you can save in six months or less with minimal risks.”
On the other hand, Milan reckons that it will not be necessary to pare down the debt on your investment property as long as the rental is higher than your monthly instalment.
Adrian Un, sales director at Mortgage Broker Sdn Bhd, suggests that consumers may also refinance with another bank that offers a fixed-rate of three to five years. However, James Tan, property consultant from Raine & Horne International Zaki + Partners, reckons that consumers should go for fixed-rate loans offered by insurance companies. While commercial banks offer short-term fixed-rate home loans, insurance companies tend to offer fixed –for-life interest rates. As at writing, some of the major insurance companies were offering rates that stood at 4.99% (non Zero moving package) or 5.25% (zero moving package) a year.
Alternatively, if you are holding multiple properties, this will be a good year to sell off one or two units for capital gains as the demand is still high, say Un. “ Selling your properties allows you to pare down your debt and keep the cash for future investment.”
However, Tan believes that investors should hang on to what they have as prices are still inching upwards.”If you sell, you will not get back a similarly cheap property.”
Industry players, however, do not recommend increasing the rental of investment properties. ”Increasing rental is not the way to go as tenants are also spoilt for choice for new propertiers,” says Un, adding that this may encourage tenants to buy their own property instead, which may result in loss of rental income.
Dr Yeah Kim Leng, group chief economist of RAM Holdings, agrees, adding that rental adjustments is generally a more difficult approach. “Rental is being determined largely by supply and demand. In an oversupply situation, it will be a buyer’s market as well as a tenant’s market as both property prices and rentals will be depressed.”
Source: Personal Money , July 2010.