In 2022, Bank Negara Malaysia (BNM) increased the Overnight Policy Rate (OPR) four times, from 2.00% to its current 2.75%. Since an increase in the OPR will translate to higher borrowing costs for consumers, we spoke to Financial Faiz to obtain some tips on how prospective home buyers can negotiate a lower interest rate.
The OPR is the interest rate set by BNM for a bank when it lends to another bank. How does OPR affect your financial life? When it comes to home loan products, the OPR directly influences a bank’s Standardised Base Rate (SBR), where it rises or falls according to the latest OPR. A lower OPR encourages consumer spending and borrowing activities which, in turn, will stimulate the domestic economy. On the other hand, a higher OPR makes borrowing more expensive for home buyers and businesses.
With this in mind, being aware of your home loan’s interest rates is more important than ever. Since the maximum tenure of a home loan is 35 years, you must be prepared before signing the loan agreement. Therefore, knowing how to negotiate for lower home loan interest rates will bode well for your homeownership journey.
What is the best approach to home loan interest rate negotiations? iProperty.com.my spoke to Faiz Azmi, founder of Financial Faiz, for insightful tips on this crucial topic.
Why should consumers negotiate for lower home loan interest rates?
Buying a house is not the same as buying groceries at the supermarket. It’s a big purchase with a long-term commitment. Plus, few people can afford to pay in cash for a house. Therefore, aspiring homeowners should negotiate for the best interest rates that meet their capabilities and needs.
Negotiations with the banks can be intimidating, but knowing what to say will make the process less scary. It is essential that you initiate the negotiation with a loan officer in person. A physical meeting allows you to clarify with the officer in charge any questions you might have. For example, a financing product displayed on a bank’s website might differ from when you talk to the loan officer in person.
Walk us through the step-by-step guide on how to negotiate for lower interest rates
Step 1: Shop around for multiple home loan offers from different banks. Depending on your situation, one bank might give you a better rate than another. It’s always good to ask for several quotes so you can make an informed decision.
Step 2: Find out whether the bank offers Mortgage Reducing Term Assurance (MRTA) or Mortgage Reducing Term Takaful (MRTT). The bank will generally offer a lower interest rate if you take this mortgage insurance.
Step 3: Provide proof that other banks are willing to give you a better offer. This method will increase your chances of getting a better interest rate deal. In other words, show the banks that you have multiple options.
Negotiating for a lower interest rate can be time-consuming, but it will be worthwhile. Remember, buying a house is a long-term commitment. For example, say you have a 35-year home loan worth RM 500,000 at a 4% interest rate with a 10% down payment. The monthly payment would be RM 2,213.
In contrast, the monthly payment of the same loan with a 3.75% interest rate is RM2,139. So while a monthly saving of RM 74 may not sound much, you will save RM 31,080 in the long run.
How do you increase the chances of getting a lower home loan interest rate? Any mistakes homeowners should avoid?
I’d advise aspiring homeowners to get to know the three types of home loans:
- Basic term loan provides a fixed monthly instalment amount to be paid over the loan term. While there is a lack of flexibility, you can obtain a lower home loan interest rate when compared to the semi-Flexi loan or Flexi loan.
- Semi-Flexi loan may give you a lower housing loan interest, especially when you can settle a portion of your principal amount in the future. It is also the most common loan option offered among banks, giving you more opportunities to compare and decide.
- Flexi loan allows you to deposit additional funds or withdraw your advance payments at any time. The loan amount will automatically be withdrawn from the money parked in your current account as per the loan repayment schedule. Moreover, adding additional funds to the account will reduce your property loan interest.
Always do your research first to weigh which type of loan suits you best. You may be thinking that a flexi-loan has the best advantage, but sometimes that is simply not the case depending on your situation.
A semi-Flexi or Flexi loan is suitable for you if you have extra money to spare. But if you don’t, fixed loans can be the best option as they usually offer the same interest rate, so you won’t have to worry about an increase.
Similarly, you may want to consider paying a larger down payment so that you will be borrowing less. This means that you will pay less interest and your monthly repayments will be lower. On top of that, you will have the additional monthly cash flow to do more with your money.
For example, say you pay a 10% down payment on a 35-year home loan worth RM 750,000 at a 3.5% interest rate. The monthly payment would be RM 2,789. In contrast, if you pay a 20% down payment on the same loan, you would be paying RM 2,479. In 35 years, you would be saving RM 310 monthly with a total of RM 130,200.
Some banks would advise applicants to take on MRTA to obtain a lower interest rate, where the mortgage insurance is bundled into monthly loan repayment. Is this a smart move, and who might benefit the most?
MRTA or MRTT is a type of insurance covering your outstanding home loan in the event of your death or total permanent disability. Your dependents can settle your home loan if anything happens to you. Think of it as paying for your and your family’s peace of mind.
In addition, MRTA/MRTT has a lower premium than its counterpart, Mortgage Life Term Assurance (MLTA) or Mortgage Life Term Takaful (MLTT). Therefore, MRTA/MRTT is a better option if you have no financial dependents, are on a budget, and have your own life or medical insurance.
If you have financial dependents, MRTA/MRTT’s benefits are minimal. This is because the bank is the beneficiary of an MRTA policy. Therefore, your family members will not receive any cash benefit from it.
MORE: How to calculate Debt Service Ratio (DSR)and how does it affect home loan approval?
What factors do banks consider when looking at a consumer’s request for lower interest rates?
There are at least four major factors that you need to be aware of:
Credit score
Having a good credit rating is crucial for your home loan approval. A good credit score can also give you a better interest rate, which helps you save in the long run. So make sure you have a good credit profile and a consistent source of income.
Loan terms
For this, banks will mainly look at three things:
- Home Loan Amount: The more you borrow, the more willing the bank will offer you a lower interest rate.
- Home Loan Period: A long-term loan (35 years) will have a lower interest rate compared to a short-term one.
- Mortgage Insurance (MRTA/MRTT): Some banks will consider offering a lower interest rate if you take an MRTA/MRTT from them.
Location
You might pay a different interest rate depending on where your property is located. The bank believes that mature and established areas like Petaling Jaya and Subang Jaya in Selangor, offer less risk. The type of land title also plays a role — homes loan involving freehold properties may be given lower interest rates compared to leasehold properties.
Brand loyalty
Banks often offer more favourable loan terms to customers with existing financing products from them, such as hire purchase, ASB financing, and other home loans.
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What can homeowners with existing housing loans do to reduce their current interest rates?
Consider refinancing your mortgages. Switch to a new loan from the same bank or a different one with better terms, such as lower interest rates or a shorter repayment period. But be mindful of the moving cost of the original home loan.
Moving cost is the expenditure that will incur when you refinance your home loan, like disbursements, legal fees, and MRTA/MRTT. But some banks do offer free moving costs. So check with your bank first before you choose this option.
Suppose you have a semi-Flexi or a Flexi loan. You can lower the interest rate by making advance payments to offset the principal amount. This will allow you to save money in the long term.
What key terms should consumers know before they start the negotiation?
A solid basic knowledge of the most important key terms to kick off your negotiation. Consumers should at least know these terms and what they mean:
- Lock-in period: The duration you must maintain the loan with the bank. On average, it’s between 5-7 years. If you decide to pay off the debt in full early, a penalty will be incurred for up to 5% of your loan.
- Arrears: Arrears refers to either overdue payments or payments to be made during a given time.
- Valuation: An estimation of the property’s worth, on which the Stamp Duty of the property is based. There are two types of valuation – one is based on the transactional value of the houses within the same area, which may not be representative of the property’s actual value. The second is a valuation by a licensed valuer. The banks will usually rely on the figures provided by these professional valuers.
- Early Settlement: Borrowers may benefit from finishing the full loan payment earlier than the agreed date or get a penalty due to the lock-in period. Whether you get benefits or receive a penalty depends on your agreement.
- Standardised Base Rate (SBR): The SBR was introduced by BNM as a common reference for new retail floating-rate loans effective 1 August 2022. This will be the new framework for pricing floating-rate loans, such as housing and personal loans. The SBR will be pegged solely to the OPR. Hence, there will only be changes in your loan’s interest rate if the central bank increases or lowers the OPR.
Remember, the best negotiation happens when both parties win and achieve a mutual agreement. Take your time to learn the ins and outs of how home loans work and everything it entails. The more informed you are, the more confident you will be. Finally, arm yourself with an excellent credit score, and you might increase your chances of getting your home loans with your desired interest rate.
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