Buying a new house can be a wonderful experience. Whether you’re a first time home-buyer or investing for your family’s future, purchasing a property is an achievement we should all be proud of. If you’re reading this it’s assumed that you are planning to take a home loan. Before you start your research it’s important to assess your financial situation and future plans before even deciding on the type of home loan.
Are you financially able to take on a 35 year loan? Or are you planning to renovate your new home and need additional funds? Knowing just a few key factors will help you considerably when it’s time to sit down with your loan officer to choose the right type of home loan.
As with any loan, one of the most important things to look out for is the interest rate on the loan levied by the bank. The amount of interest that banks charge will be determined by the current Base Lending Rate (BLR) which is determined by Bank Negara Malaysia. Banks will assign either a positive (+) or negative (-) value against the BLR and that will be the offered interest rate. For example Bank Z is advertising their interest rates as BLR -2.20%. Let’s say the current BLR is 6.53% hence the interest rate for your home loan will be 4.33%. Some banks use a separate system to calculate interest rates such as OCBC’s Mortgage Lending Rate (MLR) which will replace the BLR when you take a home loan from them. If you are applying for a Syariah-compliant home loan you will instead be using a Base Finance Rate (BFR) to determine Profit Rates (more of this later in the Islamic Home Loan section).
The next step is to look at your current financial standing and decided how much down-payment you are willing and able to put down on your dream house. Though many banks now offer 80-90% of the value of the property; keep in mind that the higher the principal amount borrowed the longer your tenure will have to be for you to afford it. Depending on whether you plan on making excess payments might mean paying more interest in the long run.
Common Types of Home Loans
If you do a quick search on bank websites you will tally up a list of home loans peppered with marketing terms that may confuse you but the concepts are basically the same. Here’s a quick rundown of what Malaysian banks are offering:
Standard Home Loans – This conventional type of home loan is calculated based on either a fixed or variable (floating) interest rate on the principal amount borrowed which you then pay back through monthly instalments within an agreed period. If you opt for a home loan with variable interest rates you may benefit from lower interest rates in the future and vice versa while with a fixed interest rate, you won’t have to worry so much about fluctuating payments each year.
Flexi Home Loans – Flexi loans operate almost like normal home loans with the added option of making payments in advance. In addition to shorter tenures and savings on interest, one of the benefits of flexi home loans is the option for account holders to withdraw from any excess payments they may have made.
A current account is usually linked to your loan account so you can keep track of how much advance payment you have set aside. This is usually the go-to package for home-owners who would like to pay off their loan earlier and still have emergency funds to fall back on.
Flexi home loan packages go by many names and vary from bank to bank but in essence they offer very similar features. Some examples that are out there in the market are Savelink Home Loan (Alliance Bank), HomeFlexi (CIMB) and Flexi Mortgage (UOB).
Home/Personal Loan Package – Sometimes you may not have funds left after paying a hefty downpayment for renovation and even buying furniture. These loans come with a ‘top-up’ loan with the same attractive interest rate as your home loan despite being a kind of personal loan. Some people use this for renovation, education, or even to pay off existing debt.
Islamic Home Loans – The Islamic finance system has a different approach to money lending. As mentioned before instead of BLR, Islamic home loans employ the use of a Base Finance Rate (BFR) to determine the Profit Rate at which the bank is entitled to earn for loaning you money.
Let’s say a bank is promoting with BFR – 2.40% and the current BFR is 6.60% which means the profit rate that will be asked of your loan will be 4.20%. In principle, the rates are fairly competitive with conventional home loans except when it comes to advance payments. Because Islamic loans do not charge interest a new system of rebate called Ibra has been implemented to compensate borrowers who wish to settle their loan earlier.
If you are buying property it’s advisable to plan out your financial goals for the next 20 or 30 years. Would it save you more in the long run to pay in advance or would you feel more secure investing that extra money elsewhere? Do you have other commitments and need a little help to get through the rough years? How much downpayment are you planning to pay? Once you’ve evaluated your financial status it’ll make it clearer which type of home loan is for you.