Home loans are usually offered based on the current value of the house, on a fixed or a floating interest rate and with a longer repayment period compared to other loans. A home loan can distinguished as Conventional and Islamic on the basis of the principle on which the loan is provided.
Conventional Home Loans
Conventional Home Loans offer up to 90% financing on the value of the house. Some schemes may also provide 95% financing on the house value as in the case of Maybank’s MaxiHome scheme. You can pay the down payment from your savings and then manage the other expenses with the loan amount. The repayment period offered for home loans can go up to 35 years depending on your age at the time of application. In most cases, the maximum age of a person at which he/she has to pay off the home loan is 70 years.
Based on the variations in your financial status, some banks revise the monthly instalments. This relieves you from the burden as well as saves you from getting a bad credit score if you are unable to pay the huge monthly instalments. Also, you can opt to start paying your monthly instalments without waiting for the entire loan amount to be disbursed.
Residents and non-residents of Malaysia can apply for conventional home loan as individuals or as joint applicants. In addition to providing funds to invest in a new house, you can also get your current home loan from a different bank re-financed. Conventional home loan also offers funds for renovating your house. Home loan can also be used for mortgaging your house when you are in emergency and need funds.
Islamic Home Loans
Islamic banking basically operates on the principle of Shariah contract. Under Shariah, different banks follow different concepts like Musharakah Mutanaqisah, Murabahah, Tawarruq, etc. You can construct, purchase or renovate your home with the help of Islamic home loans. Though there is no interest applicable on loans under the Shariah concept, you will have to pay either fixed, tiered or floating rate of profit on your loan amount. If you want to clear the loan before the lock-in period, you may have to pay around 2% of the outstanding balance. However, some banks may not charge you for early settlement.
Islamic home loan can be borrowed on properties that are either fully constructed or on the mid-way of construction but the property must be residential. A residential property which is already financed by an institution can be transferred to another institution/bank at a lesser profit percentage. You can also get your conventional home loan transferred into Islamic home loan.
On similar lines as conventional home loans, Islamic home loans offer up to 100% financing on the house value. You will be paying lower monthly instalments as you get longer repayment period of 35 years or up to an age of 70 years, whichever is earlier. Some Islamic banks may offer reduction in stamp duty charges.
Benefits of Islamic Home Loan over Conventional Home Loan
Islamic home loan has the following benefits over conventional home loan:
- Islamic home loans require 3 to 4 legal documents to be prepared. Hence, Islamic home loans usually offer 20% reduction on stamp duty charges.
- If you transfer your conventional home loan into Islamic home loan, you get 100% waiver on stamp duty charges for the outstanding refinance loan balance.
- Islamic loan providers share the risks with you, such as in the case of natural disasters.
- Conventional home loans have variable interest rates and has no cap, whereas, Islamic home loans have a maximum cap on the variable interest rates.
Benefits of Conventional Home Loan over Islamic Home Loan
Conventional home loan has an edge over Islamic home loan in the following ways:
- Unlike Islamic home loan, conventional home loan does not alter the terms of finance or the legal costs when it comes to redrawing the financing amount.
- In case of any changes in the terms of finance, the Loan Facility Agreement will be up-stamped instead of getting an all new Sale and Buy-back Agreement as done in Islamic home loan.
- Refinancing an existing home loan is much convenient in Conventional home loans, specifically in the case of a default.
- Conventional home loans follow transparency when it comes to early termination, late payment, etc.
Which Home Loan Suits You The Best?
Both home loans have their own merits and demerits. The difference between these two ideologies have narrowed down lately. While conventional home loan has no discrimination among applicants, you can have a hassle-free processing of your Islamic home loan if your source of income falls in the bracket of ‘halal’. Compare the interest/profit rates offered by different banks and choose the one that suits your requirement