So you’re finally taking the plunge – you’re buying a house! If you are like most young folk in Malaysia, you’ll need a home loan to make that purchase.
But in a sea of home loans offers, packages and advertising, it’s easy for a first-time potential homeowner to become overwhelmed. Don’t worry, keep calm and read our comprehensive guide on home loans to narrow your focus to the questions you should be asking.
What is a Home Loan?
You probably already know the answer to this, but what is it really? It is money lent to you, the borrower, by a lender, possibly a bank or other financial intermediary (such as credit institutions) allowed by Bank Negara Malaysia to make loans. For the sake of simplicity, we’ll use the word ‘bank’ to refer to an authorised lender.
The principal is the amount you are borrowing which must be paid back, plus interest (the bank’s profit for loaning out funds to you) to the lender within the promised loan tenure (the amount of time specified for the loan to be settled).
What is the Loan Tenure on Average in Malaysia?
Bank loan tenures are maxed out at 30 years (sometime 35 years) or when the borrower reaches 65 years of age, whichever is lesser. In general, longer loan tenures result in lower monthly loan repayments that eventually results in higher total interest costs. Shorter loan tenures usually mean a lower interest in total but a higher monthly repayment.
How are Interest Rates Calculated?
Interest rates are calculated with respect to how much it costs the bank to loan you the funds you need. Additionally, the risk of borrowers defaulting on their loans and the rate of inflation over the loan tenure is also worked into the total rate of interest.
What Do Terms Like ‘BR’, ‘ELR’ and ‘Spread’ Mean?
The cost to loan out funds incorporates a Base Rate (BR) set by the banks themselves plus a spread that represents the bank’s borrower credit risk, liquidity risk premium, operating costs and a profit margin. The BR system is new and aims to create greater transparency; in addition, it should help to keep interest rates competitive.
When you see the words ‘Effective Lending Rate’ or ELR, note that it is the sum of the BR and bank’s spread. For example, assume that the bank’s BR is at 3.20%, and the spread is at 1.25%, this would mean that the ELR on your home loan is 4.45%. The ELR is the rate of interest you are paying on top of the borrowed amount.
The BR, spread and ELR are important benchmarks you need to focus on as this helps you compare between banks and obtain the best competitive rate for your loan.
How to Decide on Loan Tenure and if an Interest Rate is Reasonable for You?
You should assess affordability, for instance, if you have more disposable income, you might opt to pay more in monthly instalments and pay off the loan faster.
On the other hand, if you’re balancing your income between various loans and commitments, you could choose a longer tenure and pay less on a monthly basis.
Interest rates and loan tenure are interconnected as the longer your loan tenure, the more total interest costs are incurred.
How Much Can I Borrow?
Based on its margin of finance, a bank will usually loan out 80% to 90% (some even up to 95%) of the home's purchase price to a borrower. This means that you would have to pay a down payment of 10% to 20% of the market value or purchase price of the home. It’s great if you have the funds, but if you don’t, there are still options, such as the My First Home Scheme, a government-based assistance program aimed at helping young Malaysians buy their very first home.
Under the scheme, participating banks would provide 100% financing so that the buyer would not have to come up with a down payment. There are some quarters who say that this type of loan is difficult to obtain but why not try anyway? As the saying goes, ‘you miss 100% of the shots you don’t take.’
These are not the only discussion points when it comes to home loans as there are various loan packages out there to suit almost every budget and financial goal, so you might also be asking:
What are the Types of Loans Available?
The majority of loans packages fall into 3 primary categories: term, flexible and semi-flexible loans.
A term loan is a type of loan that uses a fixed interest rate to be calculated over the loan tenure. This means you would make the same payment amount every month to pay off the principal (and other fees) plus interest. The good part about these loans are that there should be no surprises as interest rates are locked and you pretty much know what to expect. However, it is inflexible due the fact that over-payments will sit without helping you earn reduced interest rates on the balance.
A fully flexible loan is as its name suggests, wonderfully flexible. It allows you the freedom to make additional payments as and when you’re able. The general idea behind the concept is that interest rates are calculated daily against the reducing balance of your loan. In other words, the larger your payment or balance in the account, the lesser total interest incurred over the tenure of your loan. You may also withdraw you over-payments without hassle as the loan is usually linked to a current account.
Semi-flexible loans combine the best of both worlds – it has some features of the term loan in that you still have to pay the monthly instalment usually for a period of time, but you may also make over-payments that help you pay off your loan sooner. In addition, you can still make withdrawals on your overpayment, but it’s not as tempting as the fully flexible loan due certain restrictions, possible penalty fees and the added hassle.
Which Loan Would Best Suit Me?
It depends greatly on your type of income and what you can afford every month. For instance, if your income is predictable and stable at the end of each month, you could consider the term or semi-flexible loan as it might be easier for you to manage and plan your monthly expenditures.
If however, you work in sales, and could earn extra cash from commissions frequently, then you might want to think about fully flexible or semi-flexible loans.
What Else do I Need to Know about Homes Loans?
The Lock-in Period: The Lock-in period is the minimum number of years the borrower is expected to follow the terms of the loan agreement. This means that if you wanted to change something about the contract, such as, paying off the loan sooner than the specified number of years or cancelling the loan altogether, you could incur penalties.
Late charges: These are additional fees tacked on when instalment payments are made after the due date.
Terms and Conditions: Your duties as a borrower are to fully understand all the terms and conditions of the loan, respect and follow the agreed terms, as well as clarify any doubts you may have about the conditions. Last but not least, make prompt payment.
Duties of the bank: The bank has duties to you too and these are; to answer to all your enquiries, state clearly your obligations as a borrower and to notify you if there are any changes to your agreement.