Financial products and services are comprehensively tailored for the customers’ and the economy’s needs. If you are an interested buyer of a property and you wish to secure funds to aid expenses arising from home acquisition, a hunt for the best home loan product extended by a reputable bank or another financial institution is one huge step forward to that goal.
Bank-hopping is the easiest way to procure information about prevailing home loan programs and interest rates that come along with them. By doing so, you will also find out your home loan eligibility through debt-to-service ratio (DSR) metric calculated by these financing institutions.
However, do take note that lower interest rates are not a guarantee of a friendly amount of monthly amortization and lump sums. In Malaysia, most mortgage products have variable interest rates, which means that they fluctuate and are affected by the market’s movement via base lending rates.
Once your loan application bears a lower transaction risk from the banks’ perspective, you will now proceed to identify the most suitable home loan type for you. Here is the list of selections to guide you through:
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1. Basic Term Loan
A basic term loan is one of the most common home loan products in the Malaysian mortgage industry. Monthly amortization will increase depending on the market’s weather which will reduce the applied interest rate on your home loan. The longest repayment term for this type of loan is 35 years. Bulk-paying in advance on top of your calculated monthly repayment will not benefit your overall repayment amount. In fact, if you were to settle your loan in a matter of 3-5 years, you will be charged 3% of the whole loan amount as a pre-termination penalty.
2. Fixed-Rate Loan
As the name suggests, this type of loan caters to those who want to stick with a fixed monthly repayment amount throughout the loan’s tenure. This package is usually offered under Islamic loans. Comparably, its interest rate is significantly higher than the basic term loan.
3. Overdraft
Giving you an idea of its nature, this type of loan has peculiar arrangements wherein the borrower will only pay the interest while the repayment amount is drawn to his/her current account. Note that the frequency of periodical payments vary for this loan class and that the ability of the homeowner to pay more than the prevailing interest rate will qualify him/her for the lower principal amount. On top of it all, interest rates for this loan are always leveled higher than base lending rates.
4. Flexi Loan
If you have bountiful income inflows, this kind of loan is the best for you. The gist looks much alike with that of an overdraft, however, interest rates will step lower over time as homeowner deposits amount to his/her current account. It's like you’re saving money – you can withdraw some amount, but doing so will spike your interest rates while avoiding withdrawals will lower the interest rates in contrast.
To bring light as to how it works, say you have originally loaned RM500,000 and you’ve managed to earn RM200,000 which you now wish to bank in as repayment. Your interest rate will now be computed from RM300,000 (from RM500,000-RM200,000) instead of basing it off from the original principal that is RM500,000.
There are two types of flexi loans known as semi-flexi loans and full-flexi loans. The former will charge you penalties for withdrawing your advanced repayments while the latter will not.
5. Islamic Loan
This loan is compliant to the Murabah concept under Shariah principles where monthly interest rates cease to exist unlike the mentioned conventional loans above. What happens is the bank will purchase the property on your behalf and leases it to you with your promise of staggered payments. Until you exhaust the reselling price, the bank will remain as the major shareholder of the property. There are three kinds of Islamic loans known as Musharakah Mutanaqisah, Al-Ijarah / Ijarah Muntahiyah Bittamlik, and Murabahah.
Musharakah Mutanaqisah and Al-Ijarah/Ijarah Muntahiyah Bittamlik are very much alike in terms of the bank's lien on the property until loan maturity. The difference is that Musharakah Mutanaqisah allows joint purchase of the bank and the borrower while Al-Ijarah/Ijarah Muntahiyah Bittamlik is restricted to banks as the only purchasing party.
Murabahah has quite a different venture because the property will be vested to the borrower. The borrower will then utilize the property for rentals and other income-generating means to make the repayment to the lender possible. This type of Islamic loan may come with fixed or variable interest rates.
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6. Refinancing
If you are in need of funds for personal or home improvement purposes, this type of loan is the best for you. This loan would only work for those who already have an existing mortgage loan. For you to be granted this loan, your property will be appraised. If it appears that your property has increased in value, you will be qualified for a refinancing loan.
Once everything’s wrapped up, you will receive the loaned amount and use it for any purpose you intended.
7. Government Housing Loan
This program is only available for government workers. Since this is a loan extended by the government, there are strict rules:
• Borrower can only file for loan application from one office regardless if s/he reports to two or more offices
• If the borrower wishes for a second property loan, the first one must be fully settled beforehand
• Borrower must be an official employee of the Malaysian government
• Borrower is only allowed to apply for the government housing loan twice
• Borrower must have sufficient disposable income after repayment instalment is deducted
• Borrower must not be a judgement debtor
• Borrower should not bear a bankrupt status
• Borrower must not be under disciplinary action
Here are some scenarios for which a government employee can apply for government housing loan:
• Purchase of lot
• Purchase of house and lot
• House improvement
• House construction
• Road construction leading to house
• Settlement of existing debts in order to finance any of the above
Do note that a lawyer is required to represent the government employee during the processing of this loan.
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(Written by G. Zizan, 7th May 2020)
