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- Home loans have become more sophisticated and better attuned to borrowers’ needs. Besides a slight varying degree in interest rates, banks are coming up with different mortgage plans containing different terms to cater to different loan requirements.
Unless you’ve just won the jackpot, it’s rare to buy a home in cash. So, you turn to loans from banks, but like shopping for a pair of shoes, there are quite a few options out there. To help you pin down the best fit, EdgeProp.my has compiled a list of basic mortgage plans in Malaysia here.
But before that, let’s understand some fundamentals first.
The interest rates for housing loans in Malaysia are made up of two parts – the standardised base rate (SBR) and the spread. The former is determined by the overnight policy rate (OPR) set by Bank Negara Malaysia (BNM), which is the interest rate financial institutions must pay for borrowing each other's funds overnight. An increase or decrease in OPR would have a corresponding impact on the SBR.
The OPR is currently 3%, following a 0.25 basis point rise in May, to the dismay of many a borrower, who had been enjoying a reprieve of lower instalment sums during the pandemic-affected period. However, this was followed by a sigh of relief when BNM decided not to increase the rate further early this month.
Meanwhile, the spread is the interest rate a bank charges you as its profit in lending you money. This may differ slightly from bank to bank, or even for different loan plans within the same bank. The SBR plus the spread is what gives you the final lending rate.
Though the OPR is beyond your control, you are still given the power of choice when it comes to which type of loan you want.
1. Term/conventional/fixed-rate home loan
Best for: Those who earn a fixed monthly income over a long period, who want predictability and don’t plan to make advance payments anytime during the loan tenure.
What: A term loan follows a fixed repayment schedule in monthly regular instalments that remain the same throughout the loan period. The maximum loan duration is 35 years and the interest rate depends on the prevailing market conditions when you first sign the loan agreement.
Advantages: You know exactly how much to pay throughout the tenure and don’t have to worry about an increase in your monthly financial commitment. The predictability helps with budgeting and financial planning. It’s sometimes possible for you to enjoy lower interest rates as banks transfer the certainty of returns to better rates for consumers.
To note: If you happen to have extra cash and you make additional payments, they are brought over to future months as prepayment but it does not reduce your loan interest or principal. In fact, you also have to get the approval from the bank to make any extra remittance beyond the scheduled amount. And once you have put in the money, whether it's the required or extra amount, you are not allowed to withdraw any of it. Additionally, some banks may include a penalty clause of about 2-3% if you pay off your loan earlier than the agreed term.
2. Flexi home loan
Best for: Those who are likely to have extra cash every now and then, such as business owners, and want the flexibility to be able to bank in and withdraw it anytime.
What: A flexi loan is tied to a current account, which allows borrowers to make advance payments to reduce the loan principal. These additional payments help lower the interests charged and shorten the loan tenure, potentially saving on interest costs. It works like a combination of the term loan and overdraft facility, so you get to enjoy the benefits of lower interests on your home loan when you put more money into your current account.
Advantages: You have the flexibility to make advance loan payments or withdraw additional funds as long as you keep enough funds in the current account to pay the monthly instalments. You don’t have to worry about processing fees or notifying the bank to do either. Whenever you make advance payments into the loan account, you can also reduce your loan interest. The bank systems will compute your transactions automatically, and in the end, if you have regularly banked in substantial extra sums to your loan account with minimal withdrawals, you may find your tenure shortened. In other words, it’s a cost-effective way to complete your home loan faster.
To note: Flexi loans are subjected to a fixed monthly fee of around RM5 to RM10. Also, they aren’t available at most banks in Malaysia, so it can be hard to shop around for the best flexi loan rates. Additionally, the interest rates for full-flexi loans can be comparatively higher than the ones offered by term loans.
3. Semi-flexi home loan
Best for: Those who foresee obtaining a substantial sum that can reduce the principal amount of the loan, but who also want to be able to withdraw the additional payment for emergencies.
What: A semi-flexi home loan is similar to flexi loans, except it is not tied to a current account. It also allows you to deposit and withdraw additional funds made into the loan account, but you will need to notify the bank beforehand and get the required permission to do both.
Advantages: The additional amounts you bank in will reduce your principal and interests on your home loan, thereby allowing you to complete the repayment earlier. It also lets you withdraw the additional funds when required for a rainy day. This type of loan is more widely available than the flexi loan.
To note: Although there is no cost to making advance payments except for some correspondence works, there is likely a processing fee if you want to withdraw any excess cash. The interest rates may also be potentially higher than basic term loans, but since it is widely offered, you can always shop around to find the right deal for you.
4. Islamic home financing:
Best for: Those who prefer a certain stability to their monthly repayments and do not want to worry about the potential increase of standardised base rates (SBR).
What: Islamic loans work on a buy-and-sell or joint partnership agreement where the bank buys the house and leases it back to you in instalments over a period of time. The “resale” price is, of course, higher than the property’s initial market value. The bank will initially have a holding of 90% over the property, and as your payment increases, it will decrease its shareholding until the total loan is paid off. This is known as the Musyarakah Mutanaqisah. In the Bai Bithaman Ajil loan, the bank (lender) buys the asset (house) for you as the borrower, and sells it to you for the original purchase price plus a profit.
Advantages: While it targets Mulism borrowers, many non-Muslims are also drawn to the fixed rates, which translate to fixed monthly repayments that will help you better predict your monthly expenses. The Islamic-based SBRs are also adjusted to the OPR that is affected by prevailing market conditions, but unlike conventional loans, it is capped at a ceiling rate, which is the maximum profit an Islamic finance provider can earn.
On top of that, most banks offering Islamic loans do not impose a lock-in period, which means, even if you sell your property and fully settle your repayment anytime before the agreed loan tenure, there is no penalty charge. In fact, some banks may even give you a rebate for early settlement.
To note: The calculation method adopted by each bank differs, so take your time to shop for the one that suits you best.
Innovative features in new mortgage plans
The four types of loans listed above are the core, but as the field of finance evolves, home loans have become more sophisticated and better attuned to borrowers’ needs. Besides a slight varying degree in interest rates, banks are coming up with different mortgage plans containing different terms to cater to different loan requirements for, let’s say, a gig worker or newlywed couple.
For example, AFFIN Bank is offering a new mortgage term loan with variable rates for residential properties valued at RM200,000 and above. Named AFFIN Home Step Fast/i, only the interest portion will be repaid in the first five years, offering lower repayment amounts at the beginning. Thereafter, full monthly instalments based on the outstanding amount will commence after the five-year period. This product is applicable for new purchases, sub-sales and refinancing.
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Explore more exclusive rewards and vouchers for your dream home when you sign in to EdgeProp START.
