Acquiring a home loan can be exciting once you get the basics down because it means that you are one step closer to becoming a property owner! Whether it's your first home or another investment opportunity, home loans make owning a property more accessible.
First, it’s important to understand the basics and ask yourself a few questions. Before you sit down with your loan officer, familiarize yourself with these key deciding factors;
- Am I financially ready to commit to 35 years of repayments?
- What other costs must I factor in as a homeowner? I.e. renovation, maintenance, insurance and other fees.
- How much downpayment am I ready to put down on the house?
Note: While paying off the loan, the bank uses the property as collateral and is technically owned by the bank until you pay the loan off.
At a glance: Understanding the basics
Your total monthly repayments will consist of the interest rate plus the principal amount (how much is left to pay after the down payment. After each monthly payment, the principal amount will decrease).
There are two types of interest rates:
- Fixed interest rate: This refers to a set percentage that will not change throughout the duration of your loan.
- Variable interest rate: which refers to a percentage that's determined by the Base Rate (BR) so make sure you know the current BR that is determined by Bank Negara Malaysia. Banks will then decide the interest rate that they offer you depending on this and will assign either a positive (+) or negative (-) value against the BR.
Know that Base Rate was recently replaced by Standardized Base Rate. Read more about it here.
The housing loan interest rates also differ depending on many factors, including:
- The type of home loan (Term, Semi-Flexi, Flexi)
- The loan tenure (how long you will take to pay off the loan)
- The margin of finance (how much deposit you will put down and therefore how much principal you will have left to pay)
- The type of property
- Your credit score
With that in mind, here are the 3 types of home loans you will find in Malaysia...
This is the simplest form of loan in Malaysia whereby the monthly instalment you repay will remain the same throughout the term.
For example, if your loan repayment is set at RM1500, it will be fixed at this rate for the rest of the loan tenure. This means you will not have to worry about your monthly expenses getting increased over the years, however, there is a downside to having a more rigid agreement.
One way to refinance and lower your monthly payment is to pay extra when you can to reduce your remaining principal amount but with a basic term loan, you do not have this option. You can check to see what the exact terms are in your agreed basic term but generally, you will be opting for a more certain term at the cost of flexibility.
This is the default term offered by most banks in Malaysia which offers more freedom than the basic term loan.
That is to say, you can pay off larger sums of your outstanding loan amount in advance to reduce the monthly commitments and interest rate on your loan, as well as withdraw additional sums paid over and above the defined payment schedule.
Keep in mind you will have to request permission from the bank and there may be fees included to do so, depending on the terms and conditions. The rates for semi-flexi loans are also often higher than basic term loans.
Like semi-flexi loans, full-flexi terms allow you to make additional payments and make withdraw only WITHOUT the lengthy approval process.
The loan will be tied directly to your current bank account so payments and withdrawals will occur there. The more additional money is in your current account, the more your interest rate will reduce.
The downside to this freedom is that banks will often charge a monthly fee to maintain the current account. Interest rates may also be higher and not all financial institutions offer this type of loan.
Whichever type of loan you decide to go with, make sure you shop around for different loans to get the best rates and be sure to fully understand the terms and conditions. Sometimes getting the lowest rate isn’t the best option if you’re not financially stable enough to commit to a less flexible term.
Your monthly loan repayments will not be the only expense you have as a homeowner. Read "The Financial Responsibilities of Owning A Home" to prepare yourself before applying for a loan.
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