We take a contrasting look at the new kid on the block in the home financing sphere, rent-to-own as well as crowd-favourite, the full-flexi home loan.
Culturally, owning a house is one of the signs of having “made it” in life as having a roof over your head is a symbol of stability. Once you have secured a nest egg for your first property’s down payment, the next step is the home loan application. You might opt for the go-to loan product, a full flexi-loan which is popular among many Malaysians for its repayment flexibility.
However, with the housing affordability issue plaguing the property market these past few years, some consumers are now considering other financing alternatives, in particular, the rent-to-own scheme (RTO).
RTO was thrust in the spotlight last year when it was offered to aspiring homebuyers at a small scale. Recently, Malaysia’s new government, Pakatan Harapan has promised to widen RTO offerings nationwide in parallel to Pakatan’s vision in making housing more affordable. This will be made possible via through cooperation with local banks, covering primary and secondary market and involving the low and middle-income earners.
DID YOU KNOW: The country’s first bank-initiated RTO scheme, Maybank’s HouzKEY which was launched for certain primary properties in January 2018 has now extended to the residential sub-sale market as well.
If you are a purchaser who is caught in between these two loan products, read on as we shed some light on the differences to help you decide on a loan that fits your requirement.
What is a rent-to-own scheme?
The somewhat new concept in Malaysia operates based on a lease – purchase contract between a potential buyer and developer. The buyers will first rent the home that they are interested in purchasing for a set amount of time (usually 20-30 years) before exercising the option to purchase the property at the end of the contract period.
Typically, although the monthly rent rate is slightly higher than the current market rate, a certain percentage of it will be credited to the property’s future purchase, so it reduces the amount of money the buyer has to pay when it is time to purchase the house. A few developers in Malaysia have offered variants of the RTO scheme in the past including TAHPS Group and UEM Sunrise with IOI Properties and Eco World Development Group Berhad joining the bandwagon recently.
Who is it for?
The RTO scheme is suitable for young working professionals who do not have the earning power and have limited funds to pay the initial deposit as well as for those who are still building their credit score. While on the scheme, the potential buyer can work on making their credit score healthier so that they can be eligible to apply for a loan and as the same time be saving for the deposit once they are ready to exercise their right to purchase the house.
It is also for savvy home buyers who wish to lock in the purchase price based on the current property value so that when they decide to finally make the purchase, the sale price remains the same even though the property’s current market value is higher due to capital appreciation over the years.
RTO is also for buyers who want to ‘test drive’ a certain property first before purchasing it for good. Only by living in the house for a while will they get to:
1) Learn about any issues with the house and the neighbourhood.
2) Ascertain that the house is a perfect fit for them (and their family).
Aspiring homeowners would want to keep a look-out for latest news and updates on RTO and the residential projects being offered as the scheme picks up momentum.
What is a full-flexi loan?
In a typical flexi loan package, there will be 2 accounts that are linked together; the property loan account and a current account. Each month, the loan instalments are automatically deducted from the current account and paid to the property loan account.
The best feature of the full-flexi loan is that borrowers can also offset their principal loan amount and reduce the interest payable by making “bullet” payments or depositing an additional sum of the money into their current account at any point of time and without going through complicated procedures or incurring additional charges.
For example, say you have taken a property flexi loan of RM400,000. One month, you decide to deposit RM100,000 into the linked current account, your loan repayment calculations moving forwards will be based on the difference of the two, which is RM300,000, saving you interest charges down the road.
You can even withdraw any excess monies any time, without informing the bank. Every withdrawal is done either via the ATM or cheque deposit machine. This is far different from the semi-flexi loan where you have to provide an early notice to the bank before you make the withdrawal and you will also be charged a minimum of RM50 for every transaction.
However, depending on which bank the full-flexi loan is taken, borrowers will be charged a set-up fee of roughly RM200 as well as RM5 – RM10 monthly to serve as maintenance charges of said current account.
Who is it for?
A full-flexi loan is suitable for those who have a decent amount of spare cash and would want to save on interest payments. Also, young working professionals who wish to upgrade to a bigger home in the next 10 years or so (after selling off their current property), will benefit from this product – they will pay less in terms of interest compared with those who took a shorter loan tenure. If you are someone who is often in need of liquid funds, this is also the right loan.
But the reality is that a full-flexi loan is only suitable for those who have the financial capability and discipline to pump in a “pre-payment” or extra cash each month on top of the minimum repayment amount to ensure that there is always a contribution towards reducing the monthly interest and principle. Only then, can borrowers enjoy a longer loan tenure without incurring the higher interest charges.
Buying a property might trigger unwanted anxiety due to home financing issues. Genuine homebuyers would want to find out what are the available options in the market, given the new government’s housing initiatives. Take the time to weigh your options and make the necessary calculations before choosing what is best for you.
*Article was written by Alief Esmail and edited by Reena Kaur Bhatt.