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Are Flexi-loan(s) Really Work The Ways Lenders Told Us ?

 
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marxdean



Joined: 06 Nov 2006
Posts: 477

PostPosted: Mon Mar 26, 2007 10:07 am    Post subject: Are Flexi-loan(s) Really Work The Ways Lenders Told Us ? Reply with quote

Disclaimer: The following article does not constitute the author’s (me Embarassed Laughing ) intention to promote amongst the member of public to boycott any available flexi-loan mortgage packages in the market. To its maximum extent, this article merely reflects my personal enquiries and ambiguities regarding flexi-loan mortgage, and hopefully there are experts willing to shred some light onto these matters for the overall benefits of the public. Wink

First thing first before you read on, I would require you to agree with me that “housing loan” is a form of business run by the lenders (i.e., banks, insurance companies, etc). Since it is a form of business, its one and only objective is to bring profits to the business owners, i.e., the lenders. (And we knew the fact that these lenders have made huge profits from their mortgage businesses since the availability of mortgage businesses in the market!)

Based on this comprehension, it is really to my amusement and curiosity Question Question Question that if the flexi-loan is to be operated truthfully in the manners of what those lenders told us (deposit any surplus of monies anytime to save mortgage interest and withdraw them whenever necessary!!), how is it possible for them to profit so much and why do they want to introduce this kind of the mortgage packages at all (flexi-loan mortgage becomes popular only since 2-3 years ago)? To me, the flexi-loan packages offered just seem NOT making any senses at all based on the nature of such “flexibilities” as told!

Let’s analyze the operational aspects of flexi-loan packages from the lender’s view point:

1.) From the moment the lender disbursed the loan to the developers, he bears (at least) the following costs (which might be tangible or intangible):
a. Cost of inflation (the value of money is discounted over time. The actual value of the same amount of money the borrowers repaid in a few years later is always lesser compared to the moment when this amount of money is borrowed)
b. Cost of opportunity (as the lender had disbursed this amount of money to the developers, he losses the chances to invest this money elsewhere for even better return of investment (ROI), if there exits better investment opportunities in any point of time before the loan is repaid, either partially or fully)
c. Cost of debt risks (the borrowers may default in the repayment of the loan amount, either intentionally or due to other personal inabilities, i.e., Lost of Life or Total Permanent Disablement)
d. Cost of other miscellaneous aspects (which I could not yet discovered with my limited knowledge in banking)

2.) The lender could only make profits if he is able to cover the above costs. The only way to achieve that is by charging interest on the amount borrowed to his clients. In reality, the amount of interest earned would normally be “much more” than all the above mentioned costs. The lender should have charged the borrower an interest greater than the anticipated annual inflation rate for every year the entire tenure of loan. He would also charge the borrower an interest amount which is not likely to be lesser than the average ROI from any other possible forms of investment vehicles in the same loan tenure. Also, he will always protect his interests by creating securities (a so-called first party first legal charge for the loan amount created over the property) and require the borrower to undertake MRTA from his selected insurer (which is normally his sister company, and the borrower has no say on this aspect) as well as having the discretion to lodge a private caveat on the master/individual title of the corresponding property should anything goes wrong at the developer’s side.

3.) However for flexi-loan packages, the borrower is allowed to put a certain amount of money in a current account linked to the housing loan account and thereby off-setting a fraction of the outstanding principal balance. In this context, the total amount of interest chargeable (earned by the lenders) will certainly be lower. Worse still, if the borrower put an amount of money which is equivalent to the outstanding principal balance, the interest chargeable will be ZERO Exclamation Exclamation Question Question Rolling Eyes Rolling Eyes

4.) Also, as the borrower is allowed to withdraw this amount of money in the current account anytime (and normally without any charges, too!), the lender cannot (logically speaking) invests this money (in the borrower’s current account) elsewhere (in order to generate incomes of other forms). This amount of money must be made ready for the account holder to withdraw anytime 24/7. On top of this, the lenders (sometimes) even pay interests for the monies deposited in the current account Exclamation Exclamation Question Question Rolling Eyes Rolling Eyes

All these just seem ridiculous from the lenders’ perspective! Certainly, these lenders are NOT from any charitable nor non-profitable organizations. Should we be so naïve to believe fully in what they are about to tell us: We will always by your side, provides you with ALL the flexibilities you would ever require and ultimately to flourish your wealth? I firmly believe that there MUST be something “hidden behind the scene” and NOT being told to us as general public. What and where are the missing pieces, which are the keys to their successes in “sucking” so much of profits?

I think I have some clues (not formally verified, but just based on logical reasoning) on this matter. However, I would prefer if there are any experts (perhaps actuaries) willing to share their professional inputs here (hopefully this does not form part of their business confidential!).

By the way, have anyone ever feel curious and think similarly as me here Question Question
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b00n



Joined: 22 Jan 2007
Posts: 70

PostPosted: Mon Mar 26, 2007 1:30 pm    Post subject: Reply with quote

when we're in the consumer market, we'll be looking at general consumer.
Like in your previous post; how many would be able to do that?!...
5% of their total loan base?
Don't forget, they do charge monthly RM10 for account maintenance for fully flexi loans.

Take this for instance, currently credit card offers 0% interest rate installment payment. Why?....they're hoping ppl would spend and didn't do thei financials. Generally if you spend on retail purchases i.e. swapping of cards; bank only requires you to 5% as the minimum payment. But if you convereted into installment, than your're required to pay the full installment amount as the minimum instead of the 5% out of the installment amount.
And when financial planning is not there, ppl would trend to delay their payment thus interest kicks in.

Like the above flexi loan; how many in general can afford to pay in full or clear of their loans in 1-2 years time? That's the way they attract consumer to use their facility. Even if there's 5% of the loan customer can pay in short term; the finance company still earn from the rest 95% population which still comes in as profit to them.

In business, we sometimes have to give and take to earn more. Like when opening a store, we might throw a few items out below profit margins; but the reason behind that is to attract ppl to come in to buy other things which is well within the profit margin we're looking for.

Quote:

4.) Also, as the borrower is allowed to withdraw this amount of money in the current account anytime (and normally without any charges, too!), the lender cannot (logically speaking) invests this money (in the borrower’s current account) elsewhere (in order to generate incomes of other forms). This amount of money must be made ready for the account holder to withdraw anytime 24/7. On top of this, the lenders (sometimes) even pay interests for the monies deposited in the current account Exclamation Exclamation Question Question Rolling Eyes Rolling Eyes

Remember also, even with flexi loan; there's still a period of lock in time. So even after the customer had clear off everything; he can't redeem the property yet. It might also benefit the bank as the money they lended out had came back and even with lower ineterst earning they could re-invest the money. The bank can still use that money. Bank's total asset doesn't only came from FD. Savings by consumers are also taken as an asset for them to re-invest. Thus they need to manage their risk well.
Than again, they don't give you interest on the extra money u've deposited. The only interest earning is from the amount that you minus of the loan principal.

I personally don't think there's any hidden plot by the finance company. It's only an added feature whereby mortgage competition is to ferocious in the market. They have to give out extra benefits and flexibility in order to attract consumers. At least it attracted me.
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marxdean



Joined: 06 Nov 2006
Posts: 477

PostPosted: Mon Mar 26, 2007 2:11 pm    Post subject: Reply with quote

b00n wrote:
when we're in the consumer market, we'll be looking at general consumer.
Like in your previous post; how many would be able to do that?!...
5% of their total loan base?
Don't forget, they do charge monthly RM10 for account maintenance for fully flexi loans.

Like the above flexi loan; how many in general can afford to pay in full or clear of their loans in 1-2 years time? That's the way they attract consumer to use their facility. Even if there's 5% of the loan customer can pay in short term; the finance company still earn from the rest 95% population which still comes in as profit to them.

In business, we sometimes have to give and take to earn more. Like when opening a store, we might throw a few items out below profit margins; but the reason behind that is to attract ppl to come in to buy other things which is well within the profit margin we're looking for.

I personally don't think there's any hidden plot by the finance company. It's only an added feature whereby mortgage competition is to ferocious in the market. They have to give out extra benefits and flexibility in order to attract consumers. At least it attracted me.


Laughing Laughing Hi b00n,
I am glad that you agree with me for what I have stated in our previous discussions at ..realestate.net.my/forum/viewtopic.php?t=6445 . Actually my thoughts in this post rooted from that previous discussion as well.

Well, it is with my sincere hopes that you have found the flexi-loan package you signed up useful to its maximum extend, and what you have paid (for extra) is really worth it, compared to the case if you have first sign up another housing loan, not of flexi-loan nature, less those "flexibilities" you might never truely enjoy indeed, but with much lower interest rate ... Wink More importantly, are you one of those made up the "5%" of the clients (of what you have said) who actually exploit every single advantages out of flexi-loan packages Question If not, I am afraid you have became part of the "95%" who have actually paid more mortgage interest than they suppose to, in order for the lenders to recover the amount they might have "loss" to the much clever "5%" Wink
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Kruel



Joined: 19 Oct 2007
Posts: 2

PostPosted: Fri Oct 19, 2007 4:03 pm    Post subject: Reply with quote

Base on your point 3

Lets say :

The bank lend you RM100k
then you put back RM100k into the account

indirectly can be said that the bank is not lending you anything
so you no need to pay any interest , fair enuf

But ... they still charge you RM10 monthly !
What can be better than receive payments for doing nothing ?
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