*This article was updated on 19 May 2020.
Here is a quick run-down of the available home financing products being offered by banks to aspiring home buyers.
In Malaysia, home loans can be divided into 4 broad categories and most of the property loans are variable interest rate loans, where the interest rate is tied to the base rate (BR) of banks. You might think that the loan package offering the lowest interest rate might be your best bet, but that is not necessarily always be the case.
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.
Go through the list below to help you determine which loan product will suit your purchasing needs.
1. Basic term loan
This is the most basic and conventional type of home loan. 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 of time.
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. If you have extra money in a certain month and wish to pay extra, this additional sum will be considered only as a prepayment for future months and will not be treated as an advance payment to help reduce your loan interest. In short, this type of home loan offers no flexibility.
Do take note that most banks have a penalty clause, where approximately 3% will be charged if you were to settle the mortgage earlier, within the first 2-5 years.
2. Semi-flexi loan
A semi-flexi loan is more flexible as compared to a basic term loan, in terms of reducing loan interest. The difference here is that if you have extra cash and wish to dump it into your home loan’s downpayment portion, you are able to do so to reduce the loan interest, thus saving money in the long run. The borrower need not give notice for any extra payment, unlike the basic term loan.
However, there is one limitation – you will not be able to withdraw the advance money paid for emergency uses without any ramification. Doing so will incur penalty charges.
3. Full-Flexi Loan
A full-flexi loan bears the same characteristics with a semi-flexi loan but you will now be able to withdraw your advance payments with no extra charges or penalty. You will be provided with a cheque book and a linked current account so you can withdraw money anytime at your convenience, in case you need to use it for emergencies. Please be aware that upon withdrawal, the interest will be charged back.
Example of reducing loan interest under a full-flexi loan
Say your loan amount is RM800,000. Sometime in the future, you had accumulated some savings and wish to pay a sum of RM300,000 into your home loan account. If you are on either a semi-flexi or full-flexi loan, your loan interest will be reduced by the amount of advance payment paid.
Your new loan interest will be calculated upon RM800,000 – RM300,000 = RM500,000 and not the original RM800,000.
4. Islamic Loan
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 principles, where 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.
Another common option is the Bai Bithamin Ajil financing where the bank buys the property and sells back to you at an agreed price and agreed profit mark up.
5. Fixed rate loan
As the name suggests, the loan’s interest rate is fixed for the whole tenure; banks usually offer this package under Islamic loans. Do take note that the interest rate is much higher than conventional loans. Some insurance companies also offer a similar package at a lower interest rate, but not as an Islamic loan. Those who are concerned over fluctuating interest rates will opt for this product.
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Edited by Reena Kaur Bhatt