Credited with revolutionising the American transportation industry in the 20th century, Henry Ford once remarked that: “A business must be run at a profit, else it will die. But when anyone attempts to run a business solely for profit and thinks not at all about a service to the community, then also the business must die, for it no longer has a reason for existence”.
Nearly a hundred years since, these words of wisdom remain true. Perhaps, even more so now than ever, with Islamic sustainability taking center stage. Indeed, we have witnessed time and again, episodes of excessiveness, and the sole and unchecked pursuit of profits that have led to global financial crises.
ESG is a spirit beyond profit, and is therefore a fitting reminder of the role of ESG in helping build a more resilient and sustainable future.
Islamic Principles And The UN SDGs
The Islamic transaction (muamalat) principle aspires to build a shared sustainable future for employees, consumers, shareholders, and the community, in accordance with the requirements of Shariah, observing the guidance from the United Nations Agenda 2030 for Sustainable Development. The Sustainable Development Goals (SDGs) aim to bring the world’s countries together in order to eradicate all forms of poverty, reduce inequalities, promote human rights, combat climate change and promote good governance within organisations.
Overall, the correlation of the 17 SDGs and maqasid-al-Shariah (objectives of Shariah) aim to push the globe towards a more sustainable and resilient path, as well as building a better community and for society’s economic, social, and environmental consequences.
Maqasid-Al-Shariah
The call for maqasid-al-Shariah not only complies with Shariah requirements but also achieves the intended outcomes of Shariah. These focuses on the enhancement of well-being of people through the preservation of wealth (mal), faith (din), lives (nafs), lineage (nasl) and intellect (‘aql).
The word ‘maqasid’ means objectives, aspirations or aims, while Shariah is ‘the Divine law as revealed unto the Prophet Muhammad (Peace be upon him)’. Therefore, the term ‘maqasid-al-Shariah’ means the objectives and goals underlying the Law of Islam.
Islamic finance is developed to emphasise the attainment of positive value creation and prevention of negative impact. In a broader sense, maqasid-al-Shariah covers the accomplishment of well-being and the avoidance of harm: “Do good, do no evil – Amal Ma’ruf Nahi Munkar.”
An Islamic sustainability economic definition is that the current economic needs must be within the scope of not causing harm to future generations. In Islam, the rights of a person and the organisation are clearly defined by religion.
It is further strengthened by the application of the code of ethics in business dealing based on Islamic values. For that, ethical investments and social responsibilities of individuals also apply to business, which is the catalyst in promoting economic sustainability.
Islam does not prevent any form of trade and business, as the religion recognises that work and business are part of the worship of God. An individual or a company is entitled to a return from capital commitments and efforts in the context of an economic venture. The only concern is the context of the application of ESG elements to the profit-making process, as long as it is subject to the scope of ESG compliance.
In a business context, any business that claims to comply with the Shariah jurisdiction must be clear about their role in society in providing goods and services that serve public interest in addition to profit. The permissible range of choices of Islamic investment is wide, as long as it involves investment in companies and businesses that undertake the deployment of funding on Shariah-compliant businesses and operations.
“Developing a comprehensive and robust ESG response is becoming increasingly crucial to enhance business resilience and viewed as an important catalyst for long-term value creation,” said Tan Sri Abdul Wahid Omar, Chairman of Bursa Malaysia.
Businesses that aim to be relevant in the long-run sees the investment of adhering with ESG requirements paying off, regardless of conglomerate corporations or SMEs. Conglomerates will benefit from positive reputation building and branding apart from complying with regulatory requirements, while SMEs will be benefiting through access to better financing capacity from financial institutions who adopt ESG through respective Value-Based Intermediation (VBI) initiatives. Non-monetary aspects include wider market access to business opportunities.
Main component of Islam
Source: Certified Professional Shariah Auditor (CPSA) reference book
Islamic Sustainability: The Way Forward
ESG and Islamic sustainability is going to be a megatrend and the E(nvironmental), S(ocial), and G(overnance) concepts are key market and business drivers today and in the future. The holistic adoption of Islamic principles in Shariah-compliant businesses is in line with the spirit of ESG without affecting the whole business practice.
Fulfilling the ESG agenda will ensure the prosperity of businesses by focusing on profit, people and the planet; while ESG criteria will be used to guide businesses based on corporate policies and to encourage businesses to act responsibly within the ESG framework. Businesses have no other choice but to gear up their readiness to embrace the ESG agenda within their respective organisations.
With Islamic principles induced, it will smoothen the whole agenda of Islamic sustainability.
About the Author
Haji Mohamad Faisal is a Managing Partner of Faisal Malik & Co (CA), a member of Islamic Finance Committee (IFC) of Malaysian Institute of Accountants (MIA), a Director of Islamic Shariah Audit Malaysia (ISAM). He is also a Certified Professional Syariah Audit Malaysia (CPSA). He can be contacted at admin@faisalmalikco.com.
If you have some extra cash lying around, we tend to use it to pay off house loan early so that we won’t be bogged down with loans well into our retirement. This is because housing loan can now go until 40 years or until we are aged 70.
Isn’t it a good thing then to settle our debts earlier?
Well I’m sure you have heard of the term, bad debt and good debt. Bad debt refers to debt that has a high interest rate, such as credit card and personal loan. It can reach double figures, with credit card interest in the range of 15% to 18% per annum, while personal loan is around the 10% range.
The interest rates are kind of fixed, so if you have extra cash – it is better to clear off your credit card and personal loan. Unless you can find an investment that can give a return which is higher than 18%. And consistently giving out that kind of high returns.
Whereas a good debt is having an interest rate that is low, but appreciates in value. Just like a house is. The current interest rate for loans in Malaysia is 4% to 6%, but your house value could go up by 10%.
If you have bought a house in the 1990’s or 2000’s, the house price have increased several times over.
So here’s a few reasons why you shouldn’t pay off house loan early.
1. Low Interest Rates
Yes, the primary reason is that the interest rate for housing loan is one of the lowest, if not the lowest. Compare that with the double digits that a credit card or personal loan, and you know that you are using loans for a good thing.
You should just enjoy the facility that the banks have given you, and take full advantage of it.
2. Invest For Higher Returns
Let’s say you have extra cash around RM100,000 and are considering to dump it all in your housing loan. But there’s a potential to make 8% return on the investment, which gives you an extra RM8,000.
In this case, you should go for that investment instead and let it compound annually. Using Rule of 72, the RM100,000 would have doubled to RM200,000 after nine years, provided that the 8% return is consistent throughout the years.
You shouldn’t pay off house loan early, if you can find a good investment.
3. Higher Return On Equity
For example, a property worth RM1 million which gets a rental income of RM50,000 a year, is fetching a 5% yield. If you buy the property without a loan, your return rate is 5%. When you get 90% financing from banks, your equity is RM100,000. So your return on equity is 50% (RM50,000/RM100,000).
If your rental yield of 5% plus all future capital appreciation is higher than the mortgage interest, the leverage effect allows you to get a higher return.
As you slowly pay down your outstanding principal, you build up the equity of the property. With a higher stake, your return rate comes down. That’s the reason that the more you pay down your mortgage, the return comes down too due to lower leverage.
4. Extra Payment Not Liquid
The equity value or extra funds that you put in your property is not liquid. You can’t take it out straight away, like you normally would when putting in your savings account. You might need to wait few days or weeks to cash out.
Another way to unlock your property is by refinancing. But this would involve a new loan agreement, legal fees, admin fees etc. And by the time you get the money, it will be a few months later.
That’s why you shouldn’t pay off house loan early, since you can’t take it out easily.
5. Tax Benefit
When you have rental income on a property that still has a loan, you can write off the mortgage interest when filing taxes. So the more you pay off the principal, the less interest you can deduct. Therefore, you might end up with more tax liability.
That’s Why You Should Not Pay Off House Loan Early
Now you understand why you should not pay off house loan early?
In the midst of recovery, many sectors that were battered by the COVID-19 lockdowns, are looking to the government for further aid to strengthen and iron out obstacles in their path – more specifically for some help to be included in the pre-budget 2023 wishlists.
Small and medium-sized enterprises (SMEs), which had been the backbone of the economy but suffered greatly in the last two years, are looking for a stronger future in the new, digitalised economy.
The high incidence of death and loss of jobs during the earlier phase of the pandemic had also highlighted the importance of financial protection and planning. The current economic recovery had been boosted by, among other things, pent-up demand and a severely impacted base in the last two years of COVID-19 lockdowns.
Industries are now finding ways to sustain that recovery, with a much-needed assistance from the government.
Pre-Budget 2023 Wishlist: The SME Sector
In gauging the sentiment of SMEs, a survey was carried out by the Small & Medium Enterprises Association Malaysia (SAMENTA) with Affin Bank. Of the 613 SMEs responses received from the SAMENTA-AFFIN Survey on Business Conditions and Economic Outlook for SMEs 2022-2023, it showed that about 63% have cash reserves of less than four months, and 26% reported a revenue decline of 11%-30%.
The survey which was published in July 2022 noted that about 50% had expected a turnaround to pre-COVID 19 performance from 2023 onwards, around 4% have recovered and achieved pre-COVID 19 results and 2% do not expect to recover.
Almost 50% have moved part of their processes online, while 21% are performing better, while around 10% are fully digitalised.
The re-introduction of the Goods and Services Tax (GST) was favoured by 47% of respondents, while 25% are uncertain. Of those favouring the GST, 85% supported the initial rate of 4% and below, to be implemented beyond the second half of 2023.
In their digital transformation, SMEs subscribing to Software as a Service, which is a service infrastructure platform, are unhappy that they have to bear the costs instead of the foreign providers.
In this regard, they also want the digital tax to be suspended until a solution is found, said SME Association of Malaysia president, H.S. Ding.
SME Association of Malaysia president, H.S. Ding
To expedite the process of digitalisation, the Industry4WRD Intervention Fund should be extended to 2023. The current allocation of RM45 million is insufficient, as there are more than 500,000 SME manufacturing companies and related services sectors looking for a simpler and shorter approval process, informed Ding.
To promote and nurture the 5,000 start-ups and five Malaysian unicorns under the Malaysian Digital Blueprint, a RM10 million funding should be allocated for 2023, said Ding.
A ten-year tax exemption is sought for local manufacturers with a majority share of 70% and planning business expansion. A waiver or discount of 50% is also sought for business permits, licenses and assessments in 2023, as the COVID-19 lockdowns had caused Malaysian businesses to face losses and disruptions.
To assist SMEs and companies with reduced profits, corporate tax should be lowered. Higher tariffs for electricity lead to higher costs of doing business, SMEs are seeking to maintain the status quo in electricity surcharge or reduction in electricity and fuel tariffs in 2023.
The tenor for the SME Recapitalisation Fund of five years, or a repayment of 20% per year, should be lengthened to 10-15 years, as most SMEs do not have the cash flow to support that repayment period.
SAMENTA also proposes double capital allowance for companies that invest in research & development of orchards, as well as food or fruit related downstream activities.
For SMEs involved in domestic tourism, the tourism tax exemption should be extended to 2023. Under sustainable development, the Low Carbon Transition Facility for capital expenditure or working capital is proposed to be increased to a maximum of RM20 million from RM10 million.
The Business Recapitalisation Facility should also be increased to RM2 billion from RM1 billion, to cater for the 1.3 million SMEs in Malaysia. There should be more automation loans, and 120% loans are sought for SMEs to update the standard of factories to Industry 4.0.
For SMEs with profits of up to RM1 million, corporate tax should be lowered to 15%, suggested SAMENTA honorary secretary general, Yeoh Seng Hooi.
SAMENTA honorary secretary general, Yeoh Seng Hooi
Other budget recommendations by SAMENTA to help the SMEs to thrive include grants and workshops on ESG compliance, and double deduction on remuneration for the hiring of skilled workers and professionals (to enable SMEs to pay higher salary to attract talents), reintroduction of pre-shipment funding as per the Export Credit Refinancing and reduction in statutory fees by 50% for the first half of 2023, as post-recovery incentive to alleviate SME cost of doing business.
Pre-Budget 2023 Wishlist: Property Sector
Various measures have been taken to increase home ownership among Malaysians, but more needs to be done to address the problems of the housing and construction industries.
“We must ensure a smooth recovery from the pandemic lockdowns, and that all cylinders of the economy are firing. “It is tempting for stakeholders such as state and local authorities, as well as utility companies, to impose additional requirements on these industries. “But these temptations must be resisted,’’ said Real Estate and Housing Developers Association (REHDA) president Datuk N.K. Tong.
From right to left: Real Estate and Housing Developers Association (REHDA) president Datuk N.K. Tong, REHDA deputy president Datuk Ho Hon Sang
To mitigate the rising prices of building materials, REHDA proposes a waiver or reduction of duties on certain construction materials until prices normalise or become more manageable. Lifting of taxes and levies imposed on import materials as well as review and/or reduction of unnecessary charges will also help the industries.
To assist first-time homebuyers on properties priced up to RM500,000, REHDA proposes among others, a tax deduction on interest incurred during construction, personal tax relief (of RM20,000) and a one-off grant (of RM30,000) as well as a rent-to-own scheme to be considered.
The cooling measure since 2010, under Loan-to-Value, which compares the amount of the mortgage to the appraised value of the property, should be removed. REHDA also urged the government to review or relax the new and stricter conditions for participants of Malaysia My Second Home.
“A strong secondary market is crucial, as there will be more interest to invest in the primary market when buyers see property prices or rentals going up,” said Malaysian Institute of Real Estate Agents (MIEA) president, Chan Ai Cheng.
Malaysian Institute of Real Estate Agents (MIEA) president, Chan Ai Cheng
Stamp duty exemption for buyers in the secondary market and Real Property Gains Tax (RPGT) relief for sellers are proposed. Under a Home Ownership Campaign for Secondary Properties, MIEA proposes that buyers service the interest portion of the loan instalment for a certain period, instead of principal plus interest.
Pre-Budget 2023 Wishlist: Hotel, Tourism And Retail Sectors
As long as international leisure tourism is still restricted, the hotel industry will suffer a direct loss in revenue. Based on the Tourism Malaysia annual report 2019, receipts for accommodation from international arrivals had hit RM20 billion but currently, many are still on the road to recovery.
With the re-opening of interstate travel and domestic tourism, the Malaysian Association of Hotels (MAH) is asking for a lower wage subsidy, than previously requested, of 30% for employees with wages up to RM4,000, and 15% for those with wages up to RM8,000.
A minimum wage mechanism across the board does not encourage productivity or efficiency, instead, MAH proposes for an industry-based wage mechanism that is based on productivity, skills and tasks performed.
For reliable supply and demand of tourism-related data, a live on-demand, centralised tourism platform should be set up, to plan for the sustainable growth of the hotel and tourism industry.
In terms of tourism industry support as well as integrity and delivery of tourism data, the data should be released in a timely manner, in consultation with the industry.
In view of the massive upgrading and reinvestment required, the investment and reinvestment tax incentives for tourism and hotels should be extended for all categories up to 2025.
After suffering losses for two years, MAH is also seeking tourism recovery funding via soft loans that are interest-free or with low interest for reinvestment, upgrading, repair and maintenance of hotel properties as well as for operating expenses.
To drive domestic tourism, individual tax relief for travel and hotel expenditure within the country is proposed at RM5,000 per year. Exemption of the sales and service tax for hotels are to be extended till December 2022. The counter-productive tourism tax should be abolished to encourage high yield and long stay international arrivals.
To help address Malaysia’s weakness in international business events, a special budget should be allocated to the Malaysia Convention & Exhibition Bureau and Tourism Malaysia to pitch for international events. As the tourism industry invests heavily into international promotions, a special marketing grant for domestic and international marketing activities is proposed for business-to-business and business-to-consumer trade shows.
With the tourism industry just recovering from the lockdowns, there are very few group tours that hire 40-seater buses, many of which have not even had their road tax renewed. A conversion incentive should be given for normal tour buses to be converted into recreation or luxury vehicles, said Malaysian Inbound Tourists Association (MITA) president, Uzaidi Udanis.
A tourism bank can be set up to help expand the industry which does not just involve the provision of hotels and chalets for tourists, as there is also potential in medical, agriculture, youth and education tourism.
Retail Group Malaysia (RGM) hopes there will not be another movement restriction at the end of 2022, or early 2023.
“Malaysian retailers do not have the resources to deal with this crisis again,’’ said RGM managing director, Tan Hai Hsin.
RGM managing director, Tan Hai Hsin
The government has to resolve the problem of rising prices and its impact especially on the B40 and M40, and not allow these price shocks to linger until 2023.
Shortage of staff along the entire retail chain, and especially in Johor which faces competition from Singapore employers, also needs to be addressed soon, as this problem will slow down the economic recovery.
Against the threat of a looming recession, the government needs to take swift action to cushion the negative impact of a possible reduction in take-home pay and consumer spending.
Malaysia needs to attract more foreign tourists for the next one year, as foreign tourist arrivals of more than two million as of June, 2022 (with a target of 4.5 million by year-end, set by the Ministry of Tourism, Arts & Culture), is way below that of 26.1 million in 2019.
Pre-Budget 2023 Wishlist: Insurance And Financial Planning Sectors
The COVID-19 pandemic is a wake-up call, reminding us of how uncertain life can be. To encourage take-up of life insurance, the personal tax relief for life insurance premium should be increased from RM3,000 to RM5,000, said Life Insurance Association of Malaysia (LIAM) president, Loh Guat Lan.
Life Insurance Association of Malaysia (LIAM) president, Loh Guat Lan
Currently, there is a RM3,000 tax relief on insurance premium paid for medical and education insurance policies combined.
The tax relief for education, medical and health insurance (MHI) as well as MHI plans with co-share benefits should be raised from RM3,000 to RM6,000.
In Budget 2021, the tax relief limit on medical expenses for self, spouse and children for serious diseases, was increased from RM6,000 to RM8,000. This tax relief should be extended to include medical insurance premiums for self, spouse and children, said Loh.
LIAM informed that in 2021, RM11.9 billion in benefit payouts were made in the life insurance industry while RM4.6 billion were paid out for medical insurance.
The RM50 Perlindungan Tenang Voucher program for the B40 Bantuan Prihatin Rakyat group, which received encouraging responses but will end in December 2022, should continue for at least another year.
Many in this category do not have any form of insurance or takaful coverage. Having a second premium that is subsidised will be necessary in the midst of an uncertain recovery from COVID-19.
Data shows that less than half of employees, especially B40 workers, are being covered by some form of group insurance which is a cheaper form of insurance. LIAM therefore seeks a waiver of the 6% service tax for group insurance schemes.
The COVID-19 pandemic had caused many people to lose their jobs and also eroded their savings. Thus, to help Malaysians better manage their personal finances, Financial Planning Association of Malaysia (FPAM) proposed that a new tax relief of RM3,000 be given to Malaysians who engage licensed financial planners, said FPAM vice president, Rafiq Hidayat.
FPAM vice president, Rafiq Hidayat
As many Malaysians no longer have enough savings when they reach retirement age, tax relief on the private retirement scheme should be increased from RM3,000 to RM10,000 to attract more people to put aside their money for retirement.
With medical insurance premiums rising regularly due to the high inflation of medical expenses, FPAM also agrees with LIAM that this tax relief should be raised from RM3,000 to RM5,000.
Now that we’ve seen the Pre-Budget 2023 wishlist by the industries, let’s hope that their voices are heard.
A story of a typical Malaysian walking a path less travelled. Ian approach me to help resolve his debt problem.
“Where do I go? Who can I turn to?”
I met Ian (not his real name) when I went back to serve as a coach in one of the property investment courses I previously attended in 2013. He was introduced to me by a friend, who said that I needed to help him.
During our first meeting at Old Town Coffee at Kuchai Lama over lunch, Ian shared with me that he was working as a Graphic Designer and has been working for more than 10 years but finds it very hard to have any savings. I see him as someone who has a dream, and ambition because he told me “People around me, my colleagues, friends and even relatives have already had their own families and even owned a few properties”.
Yet he is still single and haven’t bought his first property nor started any investment.
This was his situation:
Credit card debts, personal loans & Car Loan close to RM66,000
Negative cash flow of RM 1,767 (Outflow more than monthly salary)
Earns RM5000/month salary
His CCRIS has been badly affected, as he wasn’t prompt in paying his debts
Total commitments and loans of RM4,870/month(97% of his salary)
To be honest, I thought he was in a worse-off situation. But after reviewing his situation, I share with him two strategies to resolve his situation. The first strategy is called Debt Consolidation Strategy, as he had multiple loans which needed to manage.
Ian’s situation before applying the Debt Consolidation Strategy
Ian’s situation after applying the Debt Consolidation Strategy
” If there’s the slightest chance for you to make a change in your life, don’t let go of it. Keep moving and going and you will find a way.”
After applying the strategy, he managed to:
Reduce RM3,152/month after restructuring his debts from RM 4,870 to RM 1,718 per month
Ian could now save RM1,650/month as a result (Monthly salary having surplus)
Save on interest of 7-9% on average for his credit card debts & personal loans
Bought his first property for RM200K & subsequently another RM900K with his property investor team
Avoid being ‘EARMARKED’ by not going to AKPK else he wouldn’t be able to buy property. (I don’t have anything against AKPK, as they genuinely help people restructure their debts, but they need you to pay off your debts fully before taking on new debts)
Ian Was A Mr Nice Guy To Others, But Is He Nice To Himself?
So with these two financial strategies, Ian can free himself from his debt problem and pursue his dream of owning his own property. What I notice about Ian was, that he was an easy-going and easy to ‘trust people kind of guy’ which led him to this problematic situation.
This same trait led him to trust his friend, his friend’s MLM products because he didn’t know how to say NO. And as a result, he doesn’t know how much he has spent over the years. After this experience, he is much more aware of his financial situation.
How Do You Restructure Your Loans When Your CCRIS Is Not Great?
“How do you qualify for more loans since Ian’s CCRIS is koyak?” If this is the same question you are wondering about, congratulations!
It means two things. Firstly you are very aware of what you are reading and you probably have a high Financial IQ. Secondly, you could be in the same situation and you need help. Regardless, the solution to your problem is simple but not easy if you are not equipped with proper financial education.
*DISCLAIMER – All strategies listed here are not a recommendation or advice. The article is written purely for the purpose of education and journaling only. The content of this article is an expression of my opinion and should not be taken as professional advice. If you are seeking professional advice, please consult me personally. You should do your own research and/or seek expert advice when overcoming your debt circumstances.
Malaysia property might not be as hot as previous years, but the interest is still there. With the recent hike in interest rates and more hikes expected later this year, the instalment for properties will go up.
This then begs the question as to whether Malaysia property is still a good investment?
House prices in Malaysia went up by almost 100% from 2010 to 2022 with the average price went up from RM220,154 to RM433,430.
But there has been a steady decline in recent years caused by the pandemic where demand went down and supply going up. The concept of supply and demand has influenced Malaysia property price to a certain extent.
Malaysia have been enjoying a very low interest rate since the pandemic begin. But with the recent OPR hike by Bank Negara Malaysia, this would have caused interest rate to rise, and subsequently the monthly instalment for houses to increase as well.
Analysts are predicting a few more rounds of OPR increase to curb the rising inflation by end of this year, which could cause house purchases to cool off.
Malaysia’s inflation increased 3.4%to 127.4 in June 2022 as against 123.2 in the same month of the preceding year. The Food index increased 6.1% and remained as the main contributor to the rise in the inflation during the month of June 2022.
When faced with high inflation, there will be lesser disposable income as everyone will be tightening their budget. Only those who have made the necessary preparation and is prioritizing in buying a house over other needs, will buy it.
The others will then have to rent, so more renters are expected to be on the market.
Ultimately only you can answer whether Malaysia property is worth investing in. Do you have the holding power? Are you able to find below market value and irresistible deals from the property market?
As the saying goes, it is about ‘buying low and selling high’. Do your homework and remember the mantra, ‘location, location, location’.
Home loans and home loan applications may be complicated, with changing interest rates, bank policies, and government regulations. These and other factors lead to constant movement in what a lender can and can’t accept. As a result, countless Australians reach a point where they must shift lenders to take advantage of a better mortgage available elsewhere.
“Refinancing is tricky and time-consuming. Thus, it’s important to determine whether or not this choice is viable for you. Refinancing your mortgage is a big financial choice you’ll have to make. If done correctly, it can save you a fortune in the long haul.” says Shane Perry of Max funding—Australia’s leading second mortgage loan provider.
If you’re trapped in the same situation, take a closer look at these five tell-tale indicators that you need to refinance your home mortgage loan:
1. Low Rates On Offer
People refinance their mortgages for various factors, one of which is the availability of low-interest rates. Interest rates fluctuate a lot, so don’t pay too much attention to everyday fluctuations. When considering refinancing, it’s a good idea to keep an eye on the trends. Similarly, it’s critical to compare your current mortgage interest rate to the rates offered by mortgage lenders.
2. Your House Is Now Worth More Money
Secondly, you may choose to refinance if you’ve made significant renovations or improvements or the value of the homes in your neighbourhood has increased. Also, you may consider refinancing, particularly when you have a massive personal debt such as credit card, personal loans, etc., that you’d want to combine to payout or consolidate.
However, note that if your house’s assessed value improves, your home equity will likely rise, giving you greater borrowing capacity.
3. Your Income Or Credit Has Improved
Your income and credit score mainly determine the interest rate on your mortgage. Refinancing can help you get a better rate if you’ve earned additional income or your credit score increased after closing your mortgage.
4. Your Arm (Adjustable Rate Mortgage) And Mortgage Interest Rates Are Increasing
The combination of an ARM with rising mortgage interest rates is not a desirable match since it may substantially raise the total cost of your house when rates increase. If you find yourself in this situation, you should consider refinancing and switching to a fixed-rate mortgage.
5. You Want To Remodel Your Home
People who consider refinancing and get cash out often do so for various reasons. Home equity loans let homeowners borrow money against the value of their houses. You can spend the money to remodel your property and make changes to enhance its long-term worth.
Is Home Mortgage Refinancing Right For You?
Mortgage refinancing, along with many other financial transactions, is complicated and needs careful analysis by homeowners seriously considering it. Consider the signs listed above and connect with a trustworthy lender to get immediate answers to your questions. This will assist you in deciding whether or not refinancing is suitable for you.
Debt seems to give a negative impression. Sometimes it even gives people the chills just by hearing the word. But what is debt? Both layman and business dictionaries define debt as something that someone has given permission to borrow but with conditions to repay.
Now when it comes to organisations around the world, debt is used as an engine that creates financial leverage and multiplies yield on investment; provided returns generated by debt exceed its cost because the interest paid on debt can be written off as expenses.
Looking at this, is debt a good thing? Does debt put you in a better position or worse? Does debt make you RICHER or POORER? The answer is: “It depends!”
Poor Debt
We have seen tremendous growth in lifestyle expenditure. The unfortunate part of this culture is the increase of debts which makes people poorer. Let’s take the credit card as an example; 40% of credit card holders’ debt revolve around their credit, which means they only pay the minimum or part of the due amount after spending in full every month.
This trend has been rising for some time now. When you spend beyond your means and revolve unnecessarily, especially on lifestyle lavishness, you are paying a high price for your indulgences as the payback for your expenditure is compounded by a whopping 18% per annum.
To make matters worse, most of these lifestyle extravagances depreciate in value.
Responding to this trend, the personal loan product emerged as another form of new age credit. It gives easy cash access as it requires no asset pledged or charged as security. Many people are attracted to this sudden access to large volumes of cash that can be used for anything desired.
What’s more, its fixed low monthly payback instalment makes borrowers believe they have more control of their finances this way. The personal loan is another lending facility that gives the after effect of one week of pure enjoyment and five to seven years of dreadful commitment.
Running a debt on a credit card and personal loan is EXPENSIVE. It will cost you three to four times MORE than a home loan / mortgage.
In a nutshell, a poor debt is basically spending your future money for current or past expenditure and it does not generate anything for your future.
Rich Debt
Please see the situation below on how a debt that can make you richer.
John buys the same asset worth RM1M, and after three years, he also sold it at RM1.2M and made a handsome profit of 20%. He paid the entire asset of RM1M in cash. This was his capital outlay.
Amanda buys an asset worth RM1M, and after three years, she sells it for RM1.2M, making a handsome profit of 20%. She had the cash to buy the asset but she took a loan to finance 90% of the asset. Her capital outlay was only RM100,000.
Who is a smarter investor? Who made more money? Who is financially more resilient?
Amanda only used RM100,000 to make RM200,000 in three years.
While on the other hand John used RM1,000,000 to make RM200,000 over three years.
Amanda applied the power of SMART Leveraging. Amanda leveraged using debt, which she intentionally created, and a debt that is clearly controllable both in paying down and its desired outcome to increase her ROI (return of investment) percentage from 20% to 200%.
On top of that, she had funds for emergencies and additional money to invest on other opportunities that give better ROI than a savings plan. Doesn’t that make more financial sense? Amanda successfully leveraged her way for higher gains.
So, What is the Power of SMART Leveraging?
To simplify it, let’s say you have an objective to achieve, you know how to achieve it but all you need is something to leverage on to make it happen. A mortgage is a cost-effective way of borrowing. Interest rates on mortgage is no doubt the cheapest form of borrowing available in the market because it is secured with property.
What this is creating is that you are now boosting your wealth with effective returns. Just like the example of Amanda and John − Amanda has successfully increased her wealth by using only 10% of the asset value to give her a return of 200% after three years.
We borrow to buy our homes. We borrow to buy cars, which is a depreciating asset but at times, a necessity. We also borrow to buy lifestyle indulgence goods.
Most of the time we borrow to do things that are not financially productive. SMART Leveraging can be incredibly productive when it is understood and used properly.
Therefore, equip yourself with the right financial knowledge and start using mortgages as a wealth creation tool. It can be used as arbitrage to leverage what you don’t have and yet benefit based on the total current value of the property when it appreciates over time.
The key here is;
A mortgage allows us to leverage and leverage allows us to do more with less.
Property investment is a lucrative business even when market sentiments are not exactly encouraging. Many investors will tell you that they still make money and this is the best time to find the ‘hidden gems’ of properties, especially those below market price by understanding the market trend.
For those with a deep pocket, investing in property might be easy for them initially, but the challenge later on will be on how efficient they can strike a balance between monitoring their investment profitability at the same time invest in more properties.
Here are some rules that have helped property investors achieve their property investment objectives and may help you in your property investing journey as well.
Rule of 72
Dubbed as the eighth wonders of the world by renowned math genius Albert Einstein, who formulated the famous formula E=MC2, the rule of 72 is really worth understanding, especially in doing property investment as real estate is a business where you practically “double-up” your money invested.
The rule of 72 indicates how fast the money you invested can grow by 100%. It shows you the number of years to double up the original money invested into your property. For instance, if you have invested RM50,000 into a property promising an 8% return annually, you would double-up the money in just 9 years.
Say you get lucky and purchase a similar property at RM50,000 but with a 15% return annually, you would have doubled-up the money invested in less than 5 years.
The rule of 72 works because of inflation. Can you still remember how much a pack of nasi lemak costs 20 years ago and compare it to now? Moreover, your home mortgage should decrease over time, but at the same time, your rent increases.
Take the same example and you will know the amount of money according to your age. For instance, if you invested in a property with RM50,000 with an 8% return at age 31, the value will increase to RM800,000 by the time you reach 67 years old.
The rule of 72 essentially summarises one of the most powerful forces in the history of human’s economy – the power of compound interest.
If you know how to apply the rule of 72 in your property investment journey based on the annual rate of return, you can then plan your retirement almost more accurately; therefore the notion that people can retire before the retirement age of 60 by investing in the right property is one that is practical and possible to achieve.
Rule of 78
Did you know that making payments before they are due does not necessarily reduce the total interest owed to the lender? This is a misconception that sometimes makes investors confused.
The Rule of 78 is also known as the sum of digit. This rule will guide you to understand how the annual interest is calculated, as well as help in differentiating how much of your monthly instalment is actually going into paying the capital and interest respectively.
This rule is applicable based on an assumption that investors are looking to take a fixed interest rate with a fixed period loan.
Apply this rule when it comes to investing in property. Take the balance of your mortgage loan and multiply the balance of your annual interest rate. Then divide by 365. From the total amount multiply number of days per month. Quite a tricky calculation this is!
These days, a number of mortgage consultants are offering services where they can help you save on interest by splitting your repayments and paying them at different times.
Rule of 1%
This is the fastest method an experienced property investor will use before deciding to invest in a property.
Basically the rule of 1% states that any property you invest should be able to be rented out at 1% of the purchase price of the property.
So for a RM600,000 home, the rental at 1% will be RM6,000. Some investors will increase this percentage from 1% to 1.5% and even 2% for greater cash flow.
The rule actually helps investors do a quick estimation if the monthly rent recovered will be sufficient enough to cover or exceed the monthly mortgage payment.
Let’s say you put 20% down payment for a property worth RM600,000, you would have a mortgage of RM480,000; so according to the rule, the monthly rental cannot be less than 4,800.
Rule of 50%
Besides the rule of 1%, investors will also consider the rule of 50%. This rule basically states that 50% of your rental income will be used or allocated for the expenses incurred on your property.
For instance, let’s assume you have a property renting at RM1200. Thus, you should plan to pay RM600 (0.5 x RM1,200 =RM600) on your expenses not including the mortgage. Essentially, this indicates that you have RM600 left to pay mortgage before getting the profit.
The Cap Rate
Capitalisation rate or Cap Rate is a good method to calculate the rate of return if you buy or invest in a property because it measures the property’s value relative to your cash flow.
This is done by having the total amount of net income divided by the cost of the property or asset.
For instance, let’s say you buy a home at RM300,000 and your expenses such as property taxes, repairs, maintenance and insurance averages out to RM500 per month. If your rental is fetching you RM1,500 per month, then your net operating income is RM1,000 per month or RM12,000 per year.
So using the formula provided, you will get a return of 4%. But is 4% a good rate of return? It depends on many other factors such as location, security, opportunities for growth and so on.
There are many more rules that experienced investors will use other than those stated above. Share your thoughts and feedbacks by sending me an email at aicheng@skbrothers.com
Property investment can be classified as a high risk investment category. High risk, high return. Indeed, that statement is true but do not forget the other side of it which the possibility of higher losses also increases.
Knowledge and strategy are matter the most in investment. It is applicable to all types of investment including property. They are important so that investor can manage their investment properly; control their losses.
It’s not whether you’re right or wrong but how much money you make when you’re right and how much you lose when you’re wrong.
George Soros
Property Investment
Property investment involved a huge amount of capital as compared to the others. Remember, it is not easy to liquidate your property especially when you are in the lost.
It involved quite a long process before the deal is done. You will need an agent to market your property, then will have to wait for a buyer. Then, if your property is leasehold, you will have to wait for consent from the land office. Normally it will take 3-6 months for a deal to be completed after you have a buyer.
Anyway, that is not our discussion in this article. There are whole lot of things can be done to get the best property investment as your investment portfolio.
How can investors make money via property investment?
Capital Gain of a Property
Capital gain also known as capital appreciation can be defined as the increase of the property value from time to time. It can be measured by the difference from original value with current market value.
You can easily calculate it using this simple calculation,
Capital gain = ((Current market value – Original value) / Original value) x 100
For example, you bought an investment property in Setia Alam for RM600,000 in July 2015. As of July 2022, the current market value is RM800,000.
Your property value has increased as much as RM200,000 in just 7 years. The capital gain from formula given is 33% over the 7 years of ownership. Easily calculated, your property value increased around 4% to 5% a year.
Your property value appreciation can not be reflected literally by 4% to 5% per year as the appreciation value is pretty volatile over the years. It could have appreciated by 15% in the first year and stagnated until the fifth year and appreciated again.
So, what can be considered as good capital gain for our investment?
Average capital gain of residential properties in Malaysia reached 13.9% in 2012 when the economy was great according to National Property Information Center (NAPIC).
Capital gain of 5% to 7% can be considered ideal during typical market situations. It is good to remember that mostly, the capital gain is impacted by the economy.
After all, the capital gain can be seen as decent when it is above the inflation rate. Most investors who aim for capital gain will flip or sell their property unit after they reach their goals at certain times.
Property Rental Yield
Rental yield can be described as the amount of rental income for a property as compared to the total investment value. This can help property investor to evaluate potential income of the said property.
Rental Yield = ((total rental income – total maintenance cost)/(property purchase price))x 100
For example, you purchased a property at RM600,000 while the maintenance cost per year amounting RM5,000 and the rental income per month is RM3,000.
Then, your rental yield is around 5.2%. What does it mean?
Rental yield also impacted from the economy. When the demand for rental market is good, the rental yield would likely be good too.
During the pandemic outbreak, many people lost their job. The demand for the properties especially surrounding business area depleted.
Normally, the average rental yield for residential properties is about 3.7%. A good rental rate should be at least 7%. As an investor, there are things that need to consider; property furnishing, property repairs, maintenance fees and any other cost involved.
You have to consider taxes that actually may reduce your rental income.
Location and type of the property play big role in determining the rental yields. For instance, a high rise property with limited units that located near to the access of public transport and offices are usually get a higher rental yields.
This rental yield strategy is suitable for those who have a property in a high demand rental area where you can rent it out easily with higher price.
With prices of landed properties being way beyond what an average home buyer can afford in city areas like Kuala Lumpur and Penang, living in apartments or strata homes will be the norm for the future generation of urban homeowners.
‘Pay thy maintenance bills’. This is mentioned in one of the ‘sacred text’ better known as “Strata Management Act”, where it decrees that all strata home owners have to pay their maintenance fee.
So, what’s a maintenance fee, you ask? It is the fee that would be collected from the owners within the strata development to be used for repair, maintenances, security and upkeep work of the common property.
Consider this scenario: You have not paid your maintenance fees for the past six months and the management has been calling you day and night but they have not taken any action against you. You would think that you are invincible since all they can do is to annoy you with phone calls or email reminders.
You thought that the Joint Management Body (JMB) or Management Corporation (MC) (collectively known as the Management) is toothless and unable to do anything to you or your property.
Think again! Let me shed some lights on what can happen to you if you continue to ignore the payment of your maintenance bills.
1. Block Your Access to Shared Facilities
The Management is legally able to restrict your rights to using the shared facilities such as gyms, swimming pools and clubhouses. Not only that, they are also allowed to evict you from said facilities if you’re ever caught using them.
But for some, this may not be a problem as you don’t use these facilities anyway. So what else can they do to you?
2. Send You Legal Letter of Demand
There is no minimum amount of outstanding fees needed to send a lawyer’s letter of demand. As long as the legal notice remains unpaid after 14 days, the Management can proceed to bring the matter to court which may cost you even more money or may even land you in jail.
3. Disable Your Access Pass Card
While they may not be able to chase you out of your dwelling in the interim of any court order, they do however have the right to disable your access pass. This may compel you to enter the compound as a visitor and the inconvenience of registering as a visitor each time you come home.
4. Blacklist Your Name on the CCRIS and CTOS
Although you can bear some of the inconveniences, it may hurt you financially when your name appeared as a defaulter in your CCRIS and CTOS credit reports.
Both CCRIS and CTOS show your credit payment ability and all of your financial commitments, which are used by financial institutions to determine your credit worthiness. This would affect your opportunity of getting better financial deals in terms of the quantum and interest rates when applying for a loan or a credit card.
5. Having Guards Following You to Your Doorstep
Still not convinced? If you still have not paid for your maintenance fee, the Management has the right to have a security guard follow you around, that is, to your doorstep when you arrive and to your designated car park when you leave the place. This is to prevent you from using any of the shared facilities when you are in the compound.
6. Auction Your Personal Belongings
I bet you weren’t expecting this. You haven’t paid your maintenance fee in the past 10 months, and they cannot force you out of your house, and despite making matters difficult for you, you were able to live with the hassle.
Now what if I tell you that by law, they are able to get a warrant to go into your house to take your personal belongings such as your laptop, computer, furniture and even clothes to be auctioned off to pay off your maintenance debt!
In a bid to get defaulters to pay their maintenance fees, the Management can get a warrant to raid and seize the moveable items from their properties with the help from the Commissioner of Building (COB) and the government.
The message is clear – pay your maintenance bills. While some JMB/MC may be quite forgiving and take a more passive approach on delinquent tenants, there are the more aggressive ones who would not hesitate to take such actions.
Living in a community requires each one to play their role to ensure that the whole community benefits. Remember, maintenance fee will always be part of the deal when buying into a stratified development to take care of the development’s common property and services.
Delays in paying your maintenance bills in timely manner will cost you more with interest charges and late payment fee. Therefore, as part of your financial plan, take into consideration this monthly obligation once you have committed to purchasing a strata title home.
