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Should You Take a Personal Loan for Property Down Payment or Renovation?

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Personal loans offer immediate financial relief when it comes to property down payments and renovations. However, it also comes with downsides such as high interest rates, and the risk of overextending one’s finances. It’s important to carefully assess the pros and cons before committing to a personal loan for property-related expenses.

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When home buyers and property investors face the challenge of financing their down payments or renovation costs, where or who do they turn to seek funds? Some of the most common avenues include family and friends, credit cards, overdraft facility, renovation loan, and personal loans, which has become a popular option to bridge this financial gap.

Any financial decision (or most decisions for that matter!) comes with its share of pros and cons. Now, let’s delve into using personal loans for property-related expenses, such as down payment and/or renovations in Malaysia.

Why do Malaysians apply for personal loans?

In Malaysia, all major banks offer personal loans, albeit with different terms and conditions. It was reported in May 2023 that personal loans are the main cause of bankruptcy cases in Malaysia, with 49.22% compared with other types of financial loans.

This was shared by Minister in the Prime Minister’s Department (Law and Institutional Reform) Datuk Seri Azalina Othman Said, who also said that these personal loans include secured or unsecured loans from banking institutions, personal loans from money lenders other than banking institutions and friendly loans from individuals.

According to mortgage consultant from Smart Choice Solution Sdn Bhd, Rajan Renganathan, Malaysian borrowers apply for personal loans for these common reasons:

  • Debt consolidation
  • Home renovation
  • Medical expenses
  • Education fees
  • Wedding expenses

Regardless of the reasons, it’s crucial to always assess your financial capabilities before committing to a personal loan for property-related expenses.

© Rajan Renganathan – Mortgage Consultant from Smart Choice Solution

Personal loans offered by 12 banks in Malaysia

Financial institutionInterest rateMin. monthly incomeLoan amountBorrowing period
Al Rajhi Bank Personal Financing-iFrom 6.20% p.a.N/AUp to RM250,000Up to 8 years
Alliance Bank4.99% – 15.28% p.a.RM3,000 (Gross income)RM5,000 – RM200,0001 to 7 years
Bank Islam Personal Financing-i Non Package4.50% – 6.50% p.a. (with Takaful coverage)RM4,000RM10,000 – RM300,000Up to 10 years
Bank Rakyat Personal Financing-i Private SectorSBR + 4.91% to 7.47%RM2,000  (Permanent Employee) / RM8,000 (Contract Employee)Up to RM400,000Up to 10 years
CIMB Cash Plus6.88% – 14.88% p.a.RM2,000
(Gross income)
Up to RM100,0002 to 5 years
Hong Leong Bank9.00% – 12.50% p.a.RM2,000Up to RM250,000Up to 5 years
HSBC Amanah4.88% – 10.50% p.a.RM3,000 (existing customers) / RM5,000 (new customers)Up to RM250,0002 to 7 years
Maybank6.50% – 8.00% p.a.RM3,500
(Gross income)
RM5,000 – RM100,0002 to 6 years
MBSB Private Sector-i 6.44% p.a., flat rate at 3 years tenureRM3,500 (fixed income) / RM5,000 (variable income)Up to RM300,000Up to 10 years
RHBFrom 13.25% p.a. (equivalent to Flat Rate 7.19%)N/AUp to RM150,000Up to 7 years
Standard Chartered Cash OneFrom 7.50% p.a.RM3,000N/A1 to 7 years
UOB9.99% – 11.99% p.a.RM3,000RM5,000 – RM100,000Up to 5 years

The actual interest rates and loan terms for personal loans and mortgage loans vary among financial institutions in Malaysia. It depends on various factors such as the borrower’s credit score, income, loan amount, and market conditions.

Renganathan shared, “It’s advisable to shop around, compare offers from different lenders, and consider the specific terms and conditions before making a decision.”

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How to calculate monthly instalment for a RM50,000 personal loan?

Tenure3 years3 years5 years5 years
Interest rate7%8%7%8%
Estimated monthly instalmentRM1,681RM1,722RM1,125RM1,167
Estimated total payment with interestRM60,500RM62,000RM67,500RM70,000

It goes without saying that the higher interest rate, and over a longer period, the more it’ll cost you. Always bear in mind to factor in the total cost you will pay for the personal loan, and decide whether it’s worth taking on personal loans.

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Pros and cons of using a personal loan for property down payment and renovations

Here are some key points, shared by Renganathan.

ProsCons
Accessibility

Personal loans are relatively easier to obtain compared to housing loans.   The application process is often quicker, and the requirements may be less stringent, making it more accessible for borrowers who may not qualify for a housing loan.
Higher interest rates

Personal loans typically carry higher interest rates compared to housing loans. As a result, it can be more expensive in the long run, as you will be paying more in interest charges.    
Flexibility

Borrowers can utilise the funds for both property down payment and renovations, giving them the freedom to address multiple financial needs with a single loan.
Shorter repayment period

Personal loans usually come with shorter repayment periods compared to housing loans. This means that the monthly instalments may be higher, potentially putting a strain on your monthly budget.
Quick disbursement

If you need funds urgently for a property down payment or time-sensitive renovations, a personal loan can provide quicker access to the required funds.
Limited loan amount

Personal loans generally have lower loan limits compared to housing loans. Thus, a personal loan may not provide sufficient funds to meet your needs.
 Impact on debt-to-income ratio

Taking on a personal loan for property down payment and renovations increases your overall debt burden.   This will affect your debt-to-income ratio and potentially impact your eligibility for other loans or credit in the future.

A good approach in using a personal loan to finance your home renovation is to first decide on the amount you need, and then make the necessary comparison to find a bank that offers you the lowest interest rate for that specific amount.

Just like housing loans, you can refinance your personal loans for a new one with better terms or change to a different lender. This is also known as balance transfer.

Should you use EPF savings to apply for a personal loan?

The move to allow EPF savings as collateral would help those who would normally not qualify for personal loans. They could also be for those who lost their jobs, but are sitting on a reasonable amount of EPF savings. It could also help those with poor credit scores to secure funding.

MBSB Bank and BSN have supported the FSA2, and in April 2023, EPF announced that 34,643 applicants have been found to be eligible for RM722 million in personal financing. This number is nearly half of the 74,392 applications received under MBSB Bank’s Ihsan-i Account 2 support facility (FSA2).

The eligibility amount for the personal financing is based on the amount in Account 2 — with a minimum financing amount of RM3,000 and a maximum of RM50,000.

What is monthly instalment for a RM50,000 personal loan using EPF savings?

For loan amount of RM50,000 with profit rate of 4.75%

Tenure3 years5 years7 years9 years
Estimated monthly instalmentRM1,492.94RM937.85RM700.84RM569.85
Note: Based on BSN calculator

Benefits using EPF savings as support for a personal loan

In April 2023, Deputy Finance Minister, Datuk Seri Ahmad Maslan, said that a bank cannot use a borrower’s EPF savings if the EPF member or borrower fails to pay his loan instalments.

Now, let’s discover the benefits of using EPF savings as support for a personal loan.

Lower interest rates

Borrowers may be able to secure personal loans at lower interest rates compared to unsecured personal loans. The EPF acts as security for the lender, reducing the risk, which can result in more favourable interest rates.
Easier approval  The EPF provides added security for the lender, increasing the chances of loan approval, even if you have a lower credit score or limited credit history.
Higher loan amounts  Borrowers are eligible for higher loan amounts compared to unsecured personal loans.
Longer repayment period  This can help borrowers manage their monthly repayments more comfortably, as longer loan tenures typically result in lower monthly instalments.
Source: Smart Choice Solution Sdn Bhd

On the downside, borrowers may miss out on potential growth and benefits compared to if the savings is left untouched.

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Is taking a personal loan for property down payment and renovations considered a smart financial move?

According to Renganathan, there are some scenarios where taking a personal loan can be considered a smart financial move, such as the following.

1. Favorable market conditions

If you come across a property that is significantly undervalued or has the potential for high appreciation, taking a personal loan for the down payment can be a smart move. By securing the property with a down payment, you can potentially benefit from future price appreciation and build equity in the property.

2. Urgent renovations

For example, if there are structural issues or safety concerns that need immediate attention, using a personal loan for renovations can help preserve the value and safety of the property.

3. Return on investment

If the renovations you plan to undertake have a high likelihood of increasing the property’s value significantly, taking a personal loan can be a strategic move. The increased value can potentially outweigh the cost of the loan.

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4. Rental property investment

If you plan to use the property for rental income, taking a personal loan for the down payment or renovations can be a smart financial move if the expected rental income covers the loan repayment and provides a positive cash flow. It can allow you to start generating rental income and potentially build a real estate investment portfolio.

5. Personal financial circumstances

If you have stable income and a manageable debt-to-income ratio, taking a personal loan for property-related expenses can be a viable option. It allows you to preserve your savings or investments for other financial goals or emergencies while spreading the cost of the property down payment or renovations over a longer period.

When should you NOT use a personal loan for property-related expenses?

Here are some scenarios to consider, as advised by Renganathan.

1. Insufficient repayment capacity

Taking on a personal loan for property-related expenses requires careful consideration of your repayment capacity. If your income and financial stability are not sufficient to comfortably manage the loan repayments along with other financial obligations, it may put you at risk of defaulting on the loan and negatively impact your creditworthiness.

Do note that personal loans generally come with higher interest rates compared to mortgage loans. If you have the option to secure a lower interest rate through a housing loan or other property-specific financing options, it may be more financially prudent to explore those avenues rather than opting for a personal loan.

2. Debt overload

If you already have a significant amount of debt, adding a personal loan for property-related expenses can further strain your financial situation. It’s important to assess your overall debt-to-income ratio and consider the impact of additional loan repayments on your financial stability.

3. Lack of return on investment

If the property you are purchasing or renovating is unlikely to appreciate significantly in value or generate sufficient rental income, taking a personal loan is not financially advisable.

Is there an alternative to personal loans for financing property-related expenses?

Yes, Renganathan suggested refinancing your housing loan, or reviewing your savings and budgeting before taking on additional debt.

“Building a solid savings plan and disciplined budgeting can help reduce the need for external financing,” Renganathan said.

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8 considerations before taking a personal loan

1. Assess the need

Evaluate whether taking a personal loan is a necessity for your property-related expenses. Consider alternative options available, such as using your savings or exploring financing options specifically designed for property purposes like housing loans or renovation loans.

2. Determine loan amount

Calculate the exact amount you need for the down payment or renovations. Avoid borrowing more than necessary to minimise interest costs and repayment burden.

3. Shop around for the best rates

Compare interest rates, loan terms, and conditions offered by different financial institutions. Don’t settle for the first loan offer you receive. Look for competitive rates and favourable repayment terms that suit your financial capabilities.

4. Consider your repayment capacity

Calculate the monthly instalments based on different loan amounts and repayment periods to find a repayment plan that fits within your budget.

5. Understand the loan agreement

Carefully review the terms and conditions of the loan agreement, to understand the interest rates, repayment schedule, any applicable fees, and penalties for early repayment or late payments. Seek clarification for any unclear terms before signing the agreement.

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6. Maintain good creditworthiness

Ensure you have a good credit score by paying your bills and existing loans on time. A good credit score can help you secure a lower interest rate and better loan terms. Review your credit report regularly to identify and rectify any errors that could negatively impact your creditworthiness.

7. Plan for contingencies

Set aside additional funds for unexpected expenses that may arise during renovations or property-related activities. Having a contingency fund will help you avoid relying solely on the personal loan in case of unforeseen circumstances.

8. Seek professional advice

Consult with financial advisors or renovation experts to get expert opinion and guidance. They can provide insights specific to your situation and help you make informed decisions about the personal loan and property-related expenses.

Personal loans can be a convenient solution for financing property down payments or renovations. However, it’s important to weigh the advantages against the drawbacks.

Careful consideration of interest rates, debt obligations, and overall financial capacity is crucial. By conducting thorough calculations and assessments, you can make better informed decisions and ensure that personal loans for property expenses align with your financial goals.

Disclaimer: The information is provided for general information only. iProperty.com Malaysia Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.

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