For first time home buyers, there is nothing more confusing than to sign up for your first housing loan

After your housing loan application has been approved by the bank of your choice and before proceeding to the signing of the Loan Agreement, the bank will issue a letter of offer. This, as a basic principle in the law of contracts, simply means that the bank is offering you, the customer, the property purchaser, a housing loan.

The letter of offer will spell out all the main terms and conditions pertaining to your housing loan e.g. the amount of the loan, the interest rate, the tenure of the loan etc. These will eventually be the main terms and conditions to your loan agreement whereby the letter of offer will be attached to the loan agreement as an appendix. Often, borrowers end up signing without really reading and understanding what is there for them to be aware of and to abide by. Here is a list of items which you should take notice of.

The type of loan

There are a few types of loan offered by banks in Malaysia – Term Loan Housing Loan or Flexible Housing Loan. A Term Loan Housing Loan or also called Fixed Rate Housing Loan is a type of loan where the interest rate does not change during the whole tenure of the housing loan. The interest rate and the instalments are set at a specific amount during the whole tenure. Meanwhile, Flexible Housing Loan is usually linked with a current account maintained with the bank whereby an amount deposited in the current account will be set off against the interest rate. The bank will also deduct the monthly instalment from the current account. There is really no ideal type of loan but depending on your need, you will need to decide a suitable type of loan that match your needs.

The interest rates

For the bank to make a profit out of lending money to you, the bank charges interest rates usually stated as a percentage of the principal amount for a period of one year. Interest rates will normally fluctuate throughout the period of the tenure, except that of the Fixed Rate Housing Loan, for certain reasons. The main reason is the Base Lending Rate (BLR) which is set by the Bank Negara Malaysia as a benchmark to monitor all bank’s activity. The Base Lending Rate will fluctuate depending on the Bank Negara’s policy.

Bear in mind that the interest rate offered by the bank will be a significant factor to be considered before taking up a housing loan. Thus, it is wiser to compare with different banks before signing a letter of offer. Lets’ say a bank offers you -2.4%p.a. and the current BLR is 6.6%, the effective interest rate that you will be charged is 4.2% p.a. Of course, you may also end up paying more or less of the interest rate when the BLR changes.

Early Settlement

Somewhere along the line, you may want to settle your housing loan early and terminate your agreement with the bank. An instance of an early settlement might be when you have sold your property and used the money you received from the purchaser to settle your loan. In this case, the agreement does allow you to settle the loan before the agreed tenure. However, you would need to bear in mind the penalties that might be imposed for early settlement within a short period of time – such as the first three to five years, also known as the “lock-in period”.

The penalty varies between banks and will be stated in the letter of offer. The penalty can either be a percentage, such as 3.5% of the loan amount, or a certain amount set for early settlement within the lock-in period. It also matters when the commencement period of the loan is computed. Some offers start from the date of the full disbursement of the loan while some may start from the date of the first drawdown of the loan. The latter will be more favourable.

Legal Fees and Stamp Duty

After you have signed the letter of offer, the Bank will instruct their panel of lawyers to proceed with the preparation of the loan documentation. This will involve legal fees payable to the lawyer and stamp duty applicable for the principal security document (e.g. Facility Agreement). The stamp duty rate as stipulated in the Stamp Act 1949 is approximately 0.5% of the loan amount. Thus, this can easily go up to thousands.

Certain banks may offer packages with “zero moving costs” or “free moving costs”. This simply means that the bank will absorb part of the costs like the legal fees and disbursements charged by the lawyer. This may sound promising but bear in mind that some banks may offer higher interest rates than the usual interest rate for these types of packages. Alternatively, you may also opt to finance your legal fees, to include the legal fees into your loan amount and to pay by instalment accordingly.

In all, it is crucial to ascertain a few of the key factors to consider as well as well the significant terms and conditions before you take up a housing loan. Make sure that you do the math and weigh in on the pros and cons before you commit.