Basic term VS semi flexi VS full flexi loan: Know the difference

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Want to learn more about the different housing loans available in Malaysia? Here is a quick run-down of the different home financing products — basic term, semi flexi and full flexi loan — being offered by banks to aspiring home buyers. 

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© 123rf

Congratulations future homeowner on your next big life decision. Buying a new home can be daunting, especially if you’re unsure about the different types of home loans available.

In Malaysia, housing loans can be divided into three main categories: Basic Term Loan, Semi Flexi Loan, and Full-Flexi Loan. There is also another option, which is the Islamic housing loan. Most of the property loans in the market are variable interest rate loans, whereby the interest rate is tied to the base rate (BR) of banks.

You may think that the loan package with the lowest home loan interest rate might be your best bet, but that may not necessarily be the case. We’ve listed the pros and cons of all four different home loans to help you select the best home loan that suits your purchasing needs. 

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What is basic term loan?

This is the most no-frills, conventional type of home loan in Malaysia. Most people go for this type of loan due to its simplicity. A basic term loan generally means that you will pay a fixed amount of instalment throughout your loan term, without having the flexibility to reduce the loan interest at any point in time.

Pros of basic term loan

With a basic term loan, you have a fixed monthly instalment amount to be paid over the loan term. For example, let’s say your monthly loan instalment is RM1,000 for a 30-year loan tenure. This is the exact amount that you will pay over the next 30 years – so you’ll be certain on whether you can afford the loan repayment and not having to worry about your financial commitment increasing.

Cons of basic term loan

In short, this type of home loan offers no flexibility. Let’s say you have the extra money in a certain month and wish to pay more. Either the bank will reject you, or the additional sum will be considered as a prepayment for future months and will not be treated as an advance payment to help reduce your loan interest. On top of that, you may not be able to withdraw additional funds that you paid above the set amount either.

Most banks also include a penalty clause, where approximately 3% will be charged if you were to settle the mortgage earlier, within the first 2-5 years. In any case, you could make a request to the bank for special considerations, but the final decision is up to their discretion.

What is semi-flexi loan?

The semi-flexi loan is the most common loan type offered by most banks in Malaysia, and it offers more flexibility as compared to basic term loan as it allows you to make advance payments on your home loan amount.

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© 123rf

Pros of semi-flexi loan

By allowing you to make advance payments on your home loan amount, the semi-flexi loan will reduce your loan interest because the principal amount has been lowered. As a result, you’ll save money in the long run. Plus, going for a semi-flexi loan allows you to withdraw additional sums that you have paid above the set payment schedule.

Cons of semi-flexi loan

Depending on the terms and conditions, you may or may not need to make a request to your bank to pay the additional amounts. In addition, when you choose to withdraw additional sums you may be charged with a processing fee, penalty, and/or go through an approval process. The home loan interest rate may also be higher when compared to a basic term loan, but this isn’t always the case so it’s best to “shop around” for several options so you can make an informed decision.

What is full-flexi loan?

A full-flexi loan bears the same characteristics as a semi-flexi loan, but you will now be able to withdraw your advance payments with no extra charges, no penalty fees, and no approval process. You will also be provided with a chequebook and a linked current account so you can withdraw money anytime at your convenience.

Pros of full-flexi loan

With a full-flexi loan, you have the benefits of depositing additional funds or withdraw your advance payments at any time. The loan amount will be automatically be withdrawn from the money parked in your current account as per the loan repayment schedule set out by your bank. Moreover, when you add additional funds into this current account, this will reduce your property loan interest

Example of reducing loan interest under a full-flexi loan

Let’s say your loan amount is RM800,000. Sometime in the future, you have accumulated some savings and wish to pay a sum of RM300,000 into your home loan account. Your loan interest will be reduced by the amount of advance payment paid, calculated upon the outstanding balance of:

RM800,000 – RM300,000 = RM500,000.

Cons of full-flexi loan

Please take note that in the event that you withdraw the additional amount paid previously, the interest that you saved on will be chargeable. Flexi loan borrowers are also subjected to a fixed monthly fee of around RM5 to RM10. While the cost is negligible, it’s still an extra cost on top of your monthly home loan payment. Flexi loans aren’t available at most banks in Malaysia either, so it can be hard to shop around for the best flexi loan rates. Additionally, the interest rates for full-flexi loans can be comparatively higher than the ones offered by term loans. 

How to withdraw money from flexi loan

You may be given a cheque book and/or an ATM card to withdraw the money whenever you need it.

FIND OUT: How to utilize EPF withdrawal money to purchase a house?

What is an Islamic housing loan?

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tuahlensa | 123rf

As opposed to the three conventional loans above, Islamic loans work on the basis of interest-free transactions. It uses the Murabahah concept under Sharia principleswhere the most famous rule is the ban on charging interest or riba

Hence, where a conventional loan charges interest and imposes compounding interests on late payments, Islamic loans do not. Islamic loans work on a Buy and Sell or Joint Partnership agreement where the bank buys the house and leases it back to you on instalment over a period of time. The ‘resale’ price is, of course, higher than the property’s initial current market value. 

As an example of this joint partnership, the bank will initially have a holding of 90% over the property. But as time progresses and your payment increases, it will decrease its shareholding, going down to 80%, 70% and so on until the point where the total loan is paid off. This is known as the Musyarakah Mutanaqisah type of Islamic loan.

You don’t have to be a Muslim to apply for an Islamic home loan.

What’s the difference between a basic term loan, semi-flexi loan and full-flexi loan?

With the basic term loan you have certainty knowing how much exactly you have to pay for your home loan on a monthly basis. While there is lack of flexibility to a basic term loan, you may be able to obtain a lower home loan interest rate when compared to the semi-flexi loan or flexi loan.

Applying for a semi-flexi loan gives you the benefit of a potentially lower housing loan interest, especially when you have the means to settle a chunk of your principal amount in the future. It is also the most common loan option offered among banks so you have more opportunities to compare and decide.

A full-flexi loan gives you complete flexibility. Your loan payments get paid automatically through a linked bank account, you can withdraw your money at any time, and you get the added benefit of a lower home loan interest if you save more money in the account to offset your principal amount.

Types of housing loan Pros Cons
Basic term loan
  • Fixed monthly home loan
  • Possible lower home loan interest rate
  • Best when planning your financial commitments
  • No flexibility – you cannot pay extra
  • Cannot withdraw additional funds you paid above the fixed monthly home loan
  • Cannot settle mortgage earlier, or you will be charged a penalty clause
Semi-flexi loan
  • Most common loan option, you can compare between banks
  • Lower housing loan interest if you can make advance payments, saving money in the long run
  • Able to withdraw additional sums that you have paid above the set payment schedule.
  • May need to make a request to the bank to pay the additional amounts.
  • May need to pay processing fee, penalty charges, and / or go through an approval process for withdrawal
Full flexi loan
  • Loan payments automatically paid
  • Able to withdraw money at any time – cheque book and current account provided
  • Reduce your home loan interest if you deposit advance payments to offset principle amount
  • If you withdraw the additional amount paid previously, the interest that you saved on will be chargeable.
  • Subject to a fixed monthly fee of around RM5 to RM10.
  • Unavailable at most banks in Malaysia, hard to compare

How does OPR affect your home loan?

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© Andriy Popov | 123rf

The OPR, or overnight policy rate, is an interest rate set by Bank Negara Malaysia which determines the rate of interest financial institutions must pay for lending each other funds overnight. That’s relevant to your mortgage decision because an increase or decrease in OPR would have a direct impact on your home loan interest.

Malaysia’s OPR has been changed several times in recent years, with the last change on 7th July 2020. This cut the OPR rate to 1.75%, the lowest rate on record.

A lower OPR means you get a reduction in the effective lending rate (ELR) of your current home loans, which are using a variable or floating rate. In other words, existing borrowers will benefit from either:

  • A shorter loan tenure(if the old monthly instalment sum is maintained). Even though by default, banks are required to lower the monthly instalment of variable home loans accordingly, they will provide consumers with the option to shorten their loan tenure instead.

* Take note that this does not benefit homeowners who have taken up a basic term loan.

For more information about OPR, read our detailed guide here.

How to choose the right home loan? 

Everyone’s needs and circumstances are different, so it’s important to choose a home loan that best suit your needs, and not just hop on the bandwagon with everyone else.

For homebuyers with a tight budget, a basic term loan might be the better deal as you could obtain a better loan interest rate and certainty with your monthly repayments when compared to the semi-flexi loan or full-flexi loan options. However, aspiring homeowners who foresee better job prospects in the future or extra cash in the bank might be better off choosing a semi-flexi loan or full-flexi loan as you could save on your home loan interest in the long run.

Lastly, it helps to do a cost-benefit analysis before making your call – for example, would paying the monthly cost of RM5 to RM10 for a full-flexi loan be worth it in the long run when comparing against the potential interest savings in the future? Only you yourself can do the math and make an informed decision.

Ultimately, it depends on the borrower’s objective. Before you apply for a home loan, however, make sure to find out what is your maximum home loan eligibility across 17 banks in Malaysia using the debt-to-service ratio (DSR) method. You can do this easily via LoanCare, iProperty’s Home Loan Eligibility Tool. Or speak to a professional before making your decision.

Now that you’re all clear about the different housing loans available in Malaysia, find out is it smart to buy a house during a recession?

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