Fixed Rate Or BLR-based Rate?

Dear Azizi Ali,

The current market seems to be positive as prices of houses are soaring high especially in the Klang Valley area. Banks too had started to readjust the loan rates. BLR began to increase. This means that the sum that we are paying now may not be the sum that we will continue to pay in the next few years. I heard that in year 1997, the loan rate is as high as 11%. I am not sure how true that is, as I was still in secondary school at that time.

My question here is, as I’m buying a house for investment purposes (for renting), my payback period will definitely be 30 years and will not shorter than that. Do you think that it is better to go for fixed rate loan or BLR-based loan?

If the monthly rental I collect, let’s say RM900 and monthly loan instalment is RM600, I will still get RM300 monthly from the house. I worry that if BLR changes, my monthly loan instalment will be higher than my rental, which means that I need to dig from my own pocket to pay the difference.
Please advice based on your experience as millionaire property investor.

Thank you.

Regards,
Kevin


Dear Kevin,

I’m not sure about the exact height the interest rate climbed to in 1997 as I was also in school at that time! (Actually, I was visiting my daughter at her school.) But yes, you are right, the interest rate climbed to double digits during that time. This increase meant that the monthly repayments of all the variable interest rate mortgages climbed up as well, which torpedoed the budget of many a borrower. A lot of them saw their monthly payments rising by 10 or 20 percent. Not surprisingly, this hefty increase led to much problems, heartaches and even arguments between couples.

Fortunately though, the situation did not last for too long as the then Prime Minister, Tun Mahathir, decided to take matters into his own hands. He fired the Finance Minister, took over the post himself and promptly reduced the interest rate back to single digits.

After that very brief history lesson, let me now get back to your question. I must say that you are a very smart young man as you are already concerned about the long-term interest rate, Kevin. (When I was your age, I was more concerned about my sports car!) No one knows what the interest rate will be in 5 years’ time, let alone thirty years. A lot of things can and will happen in that time. Some will be good; some will not be so good. The one sure thing is that things will be different in the coming decade. In fact, there will be some major upheavals that will turn everything upside down, and then some. As to what these upheavals may be, it could be hyper inflation, explosion of derivatives, collapse of paper currency or God forbid, another World War.

One of the negative effects of all the upheavals is that the interest rate could rise to double digits again. And when that happens, the same monster will reappear – the monthly repayments of all the variable interest rate mortgages will shoot up, hammering the innocent, the unwary and the greedy borrowers like a freight train. And unlike in 1997, there may not be a saviour to save the day this time. You may be on your own.

So the answer to your question is this – take a fixed interest rate mortgage. While the interest rate charged for a fixed interest rate mortgage may be slightly higher than the interest charged for a variable interest rate mortgage today, you should be paying a lower total repayment in the long run. Next, the fixed repayments mean that you can plan your cashflow better, reduce your workload and also your problems. Most important of all, you will be protected from interest rate rises throughout the period. And oh ya, it will help you sleep better at night.

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