WikiMortgage Product

home_save — Fri, 17 Dec 2010 17:43:07 +0800

Archive

Article 1W. Maybank – Understand the concept behind “Pay half, Pay Less, Pay Later” – The fundamental of Balloon Payment
Article 2W. AIA & ING – The No Lock Penalty - How does it differ from banks?

Effective from 21 Dec 2010, the post will be inactive. All the most recent sharing will be available at WikiMortgages

[addedon][/addedon]Article 1W. Maybank – Understand the concept behind “Pay half, Pay Less, Pay Later” – The fundamental of Balloon Payment & Longer Tenure

The Idea

The monthly installment of a traditional home loan is computed based on a total reducing principal basis, whereby each of the payment will consist of interest and principal. The interest portion will make up majority of piece in a repayment during the beginning of loan tenure and it will diminish when the time move on and a bigger portion of payment will turn to knock off the principal. This is the concept which we often known as amortization.

While, the idea of 3P of Maybank’s Maxihome special feature is based on the concept of balloon payment (or known as bullet payment). The concept itself is not new in the market. Historically, balloon payment mortgages were first introduced in 1934 in U.S. along with the loan programs by the Federal Housing Administration (FHA) in boosting the ownership of properties. In those day, balloon payment loans were usually to be short termed, ranged from 3 years ~ 5 years and people will convert (or, refinancing) their loan into traditional term loan. The popularity of balloon payment mortgages gained during 1980s and peaked at 1990s when interest rate crept high. The balloon payment option made the monthly repayment lower and more affordable in short term.

Fundamental Mechanism

The monthly installment of a balloon payment mortgage is being segmented into 2 portions, in which:

(i) a portion of the total loan has its monthly installment calculated based on a reducing principal, while:
(ii) the other portion has its monthly installment calculated based on definite and stagnant principal

By the end of the tenure, portion (i) will be reduced to zero balance while portion (ii) will remain the same balance as the beginning of tenure and has to be settled in a lump sum payment.

Visualization and Example

Consider Mr A plans to take up a home loan of RM 500k, tenure 30 yrs, interest is priced at BLR -2.3% (BLR = 6.3%, effective interest rate at 4%).

Traditional Home Loan

Monthly Installment: RM2,387.08

The home loan has its interest calculated based on the previous day outstanding balance. When the outstanding being reduced, the interest due will be reduced in proportion as well.

1st Month: Out of RM2,387, RM 1,666.67 is the interest due based on the outstanding amount of 500k while the remaining RM 720.41 will be used to knock off the principal.

Note: 500k X 4% X 30/360 days = 1666.67

Balloon Payment Mortgage:

Consider Mr A decided he is going to settle 50% of his total loan in a lump sum by the end of the tenure, thus loan amount will be:

Portion (i): 250k
Portion (ii): 250k
Total: 500k

The monthly repayment calculated based on balloon payment is RM 2,026.87, which is RM 360.21 lower than standard monthly installment
How does it work? Portion (i) will have its monthly installment calculated based on amortization method:

Thus, portion (i) will have a monthly installment of RM 1,193.54.

1st month: Monthly installment consists of RM833.33 interest due and RM 360.21 to knock off the principal.
Note: 250k x 4% x 30/360 Days = 833.33

While portion (ii) will have a definite non-reducing principal loan of 250k. Each of the months, only interest will be served. Interest due for each month:

250k x 4% x 30/360 Days = 833.33

Thus your total monthly payment is 1,193.54+833.33 = 2,026.87

It is clear that every payment will only serve interest incurred in portions (i) & (ii) and principal of portion (i) while principal in portion(ii) will not be served.

Outcome:

1. Month repayment of a balloon payment mortgage will be lower than traditional mortgage.
Based on rule of thumb, repayment will be lower by:

15% - if portion (ii) is 50% of total loan amount
12% - if portion (ii) is 40% of total loan amount
9% - if portion (ii) is 30% of total loan amount
6% - if portion (ii) is 20% of total loan amount
3% - if portion (ii) is 10% of total loan amount

2. Interest cost will be higher with balloon payment mortgage, (if no refinancing and no additional payment)
Based on rule of thumb, total interest cost will be higher by:

30% - if portion (ii) is 50% of total loan amount
24% - if portion (ii) is 40% of total loan amount
18% - if portion (ii) is 30% of total loan amount
12% - if portion (ii) is 20% of total loan amount
6% - if portion (ii) is 10% of total loan amount

Usage:
Balloon payment is used to be a short term arrangement as it lowers the monthly installment at the cost of increasing interest cost throughout the tenure. Normally, investors and those homebuyers who look for better cash flow position in short term will look for this option.

Calculator:
Available. Kindly look for the download at "Your essential links"

[addedon][/addedon]Article 2W. AIA & ING – The No Lock Penalty - How does it differ from banks?

There are significant differences between the fixed rate packages which offered by the banks and insurance institutions. One of the major concerns over the features which offered by the insurance companies, is there will be no penalty to be imposed if the loan is being settled by cash or sales of property within the lock-in period (except refinancing) and they offer for both under-con & completed properties as well. For banks, no-lock-in feature is subjected to their discretions (and normally they won't grant it unless you are willing to accept a higher-than-market interest rate) and common practice is that the fixed rate packages won't offer to any under-con properties (including Islamic fixed rate packages). Fixed rate packages from insurance companies are indeed a good choice if our clients are:
(i) high risk aversion, and plan to settle the loan without any intention to refinance the property in future; OR
(ii) investors, particularly for those who purchase under-con properties and intend to sell them off without any penalty to be imposed and certainty of profitability being insured.

AIA and ING offer fixed rate mortgages to the public, ING did provide a promotional rate which can goes to 4.85% p.a. while AIA can goes to 4.99% (however, ING with relatively more T&Cs) Whereby, both institutions do stated that getting a home insurance from them is compulsory if you intend to get a loan from them. And, one of the interesting facts is that, insurance companies prefer smaller amount of loan instead of greater loan size which is totally different from the banks. (Most of the time, banks prefer you to borrow more but they are not).

You can find out more from the links below:

AIA fixed rate packages - FAQs
AIA fixed rate packages - T&C
Hotline contact: 03-2056 3333

ING fixed rate packages - FAQs
ING fixed rate brochures
ING NZEC & ZEC packages
Hotline contact: 1800-88-0303

Please bear in mind that the lowest rate that stated or shown in any advertisement is only the lowest rate that ever being proposed. However, the effective rate that applicable to each individuals is subjected to requirements and conditions that must be fulfilled by applicants. If you do need help in getting a fixed rate loan in regardless of purpose, you can always go for our consultants for assistance and we would be please to help out.

Points to add for insurance companies's fixed rate packages:

(i) Only for PRIME residential areas, i.e. Klang Valley, Penang.
(ii) Margin of finance depends on kinds of property. Non-landed and without individual titles will put you in disadvantage.

[Home Save Consultancy] Property Valuation Support

Thu, 01 Jan 1970 07:30:00 +0800

[Home Save Consultancy] Mortgage Packages in One T

Thu, 01 Jan 1970 07:30:00 +0800

[Home Save Consultancy] Loan Application Support

Thu, 01 Jan 1970 07:30:00 +0800

Lowyat.NET: Latest topics by

WikiMortgage Product

[Home Save Consultancy] Property Valuation Support

[Home Save Consultancy] Mortgage Packages in One T

[Home Save Consultancy] Loan Application Support