20th April 2015 - 7 min read
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.
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).
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.
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.
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.
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.
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:
The majority of loans packages fall into 3 primary categories: term, flexible and semi-flexible loans.
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.
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