How to Choose a Home Loan

One of the goals most people have is to own a place of their own someday. When you are in a stable job and are thinking of making that big property purchase, you would think of choosing a housing loan/financing. With so many financial institutions offeringhousing loans at attractive rates, you could be confused as to which option is the best suited to your requirements. You can take the help of the following guide to help you choose a home loan.

Conventional Loan or Islamic Financing?

In Malaysia, there are two types of financing options – Conventional and Islamic. In conventional loans, banks charge a certain rate of interest against the loan amount, which you are required to pay in instalments.

As far as Islamic financing is concerned, the rules are all Shariah-based, which means the bank doesn’t take interest as per the law. The bank will first purchase the financing product for the borrower and then sell it to them. Instead of charging interest, profit is charged.

The rates of interest are different for both types of financing. Also, not just Islamic banks but other banks also offer financing products. However, in Islamic financing, the rate is usually lower than that of conventional financing.

Term Loan or Flexi Loan?

The two most common types of loan/financing Malaysians prefer are term loans and flexi loans. While terms loans have a fixed rate of interest for a fixed number of years, flexi loans offer the flexibility to make advance payments and cash withdrawals anytime you need during the tenure of the loan.

Term loans usually come with longer tenures, so the interest rate is also higher. As far as flexi loans are concerned, when you make cash payments in advance, the interest rate lowers and the tenure shortens. If you are someone who has the ability to save, then you can opt for a flexi loan instead of a term loan. But if you want to make a fixed instalment throughout the tenure, you can choose a term loan.

There are two types of flexi loan – Fully-flexi and Semi-flexi loans. A fully flexi loan offers both advance payment and cash withdrawal facility within the tenure. A semi-flexi, on the other hand, offers only an advance repayment option. You need the bank’s permission if you need to make a withdrawal from your current account.

Fixed Rate Loans or Variable Rate Loans?

In Malaysia, the rate of interest paid is the sum of the Base Rate (BR) plus spread, which is the Effective Lending Rate (ELR). Each bank has its own BR and the rate changes with the changes in the Overnight Policy Rate (OPR), which is determined by the central bank, Bank Negara.

A fixed rate loan is one, which as the name suggests, has a fixed rate of interest throughout the tenure of the loan. Unlike a fixed rate loan, a variable or a floating rate loan is one which has the rate of interest as per the changing BR. If there are any changes in the global economy, the BR can either increase or decrease. All variable rate loans also increase and decrease with the changes in the BR.

Since variable rate loans come with a lower interest rate, many Malaysians opt for them. However, it could be risky as the BR could increase with any global economic changes. If you don’t want to take a risk, you can opt for a fixed rate loan.

Interest Rate

Now that you know the types of loans offered, you need to check the loan/financing option which gives you the lowest interest rates. Go through the financing schemes offered by various banks and choose the one that comes with the lower BR and ELR. Even if the ELR offered by Bank A is at 4.65% p.a. and the one offered by Bank B is 4.35% p.a., a difference of 0.3% can make a lot of difference, helping you save a lot of money. However, you need to go through the fine print and terms and conditions of the loan facility before making a choice.

Margin of Financing

The margin of financing is the amount you can borrow from the bank. Various banks offer different margin of financing for different loan products. There are many factors banks consider before giving an individual margin of financing. Some of the factors include the type of property, the value of the property, where the property is located, how old the borrower is, and how much the borrower can afford. When you opt for a higher margin of financing, the total monthly instalment will increase.

You need to consider your eligibility and your individual requirements before opting for the finance margin. For instance, foreigners who hold the MM2H visa can opt for 80% finance margin and those who don't have the visa can hold up to 70% finance margin.

Loan Tenure

In Malaysia, you have loan schemes up to 30 to 35 years or 65 years of age to 70 years of age, whichever is earlier. You need to choose the loan tenure to plan your financial goals better. If you want to make lower monthly instalments, you can opt for a loan with a longer tenure. If you want to finish off your loan, opt for a loan with a shorter tenure. For a loan with a longer tenure, you will have to pay a higher rate of interest. As far as a loan with a shorter tenure is concerned, you will have to pay a higher monthly payment.

Fees and Charges

When you opt for any loan financing, there are certain charges levied that you might have to pay. Some of the common fees are stamp duty, late charges, and early settlement charges. The stamp duty charged by most banks are as per the Stamp Duty Act 1949 (Revised 1989). However, there are financing schemes which offer a stamp duty waiver.

If you don’t make your monthly instalments on time, you will be charged late payment charges, which is generally 1% of the total outstanding amount. Early settlement charges are the penalties you pay when you pay off the loan within the lock-in period.

Before signing up for any loan facility, go through the loan terms in detail to ensure there are no hidden fees and charges. You can always check with the bank representative for more details if you are unsure about the hidden charges.

Which Bank to Choose?

With so many different banks in the country, it can be pretty confusing as to which bank to choose while considering a loan. Do your research and shortlist banks that have good financing plans in place. For instance, foreigners can opt for the convenient MM2H (Malaysia My Second Home) plan. There are quite a fewIslamic banks offering property financing at attractive interest rates.

Conclusion

Finding an ideal loan facility that suits your bespoke requirements is not difficult when you do a proper research. Once you compare the different housing loans in Malaysia and finalise the type of loan, margin of finance, interest rate, and the bank, you can safely apply for the loan. Once your application is approved, you are only an arm away in owning your dream house!

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