Home loans are a big commitment in life, and buying your first property can be a very tedious and lengthy process. There are tonnes of new info that one might not have known or heard of. Many first-time home buyers end up signing on the dotted line without fully understanding the terms of their home loans.Thus here is a rough break down of what you need to know.
Choosing Your Type of Home Loan
There are two kinds of home loan generally offered in Malaysia, and that is a Term loan or a Flexi Loan. A Term loan involves you paying a monthly installment that is the same throughout the entire loan period, the repayment schedule is fixed.
Generally, a term loan does not allow you to reduce your loan interest with advance payment. Any additional payment is merely treated as prepayment for future instalments and does not affect the total interest you’re paying on the loan itself.
On the other hand, a Flexi-Loan gives you the option of reducing your interest whenever you wish. This is done so by saving your extra money into a linked current account. The more you save, the less interest you pay.
As any rationale home buyer, you’ll want a loan interest that is low. The tricky part here is that many loan officers tell you all loan rates are the same. However, a small difference of 0.05% in interest could cost you thousands more in ringgit savings. Thus, it would be best that you inquire around for the best and lowest rate possible when taking up a loan.
Fun fact, you can actually apply for multiple numbers of home loans, as long as you don’t sign on the letters of offer.
When the letters of offer arrive, use them as bargaining chips to negotiate for better rates with all the banks you’re interested to sign up with.
Fixed or Variable Rates
In Malaysia, interest rates of home loans are calculated on Base Lending Rate (BLR). For example,
if the current BLR is 6.6% p.a and the bank offers you -2.4% p.a, that means your home loan is charged at an interest rate of 6.6% - 2.4% = 4.2% p.a
This means that you have to pay more interest if the BLR goes up, and less interest when the BLR goes down. This is known as the Variable Rate.
On the other hand, there are banks that may offer you a Fixed Rate. This rate remains unchanged throughout the loan period. For example, if the fixed rate is 4.2% p.a. You’ll be paying 4.2% for the rest of your loan period, no matter how the BLR changes.
What If I Wanted to Settle My Home Loan Early?
The keywords are “lock-in period”. If you decide to refinance your home loan, shorten the loan period, or pay it off entirely. You will require to cancel your loan agreement before the loan period in the form of early settlement.
The fact is, if you decide to do this during the “lock-in period”, there is a penalty you have to pay. In Malaysia, the lock-in period is either 3 to 5 years but some loans do not have lock-in periods at all. The costs of the penalty charges can range from 2% to 3% of the full loan amount.
Besides that, do take note that some banks start the count for the lock-in period from full release of your loan while others start from the first time the bank releases the payment to the seller. It’s usually better to go with the second option.
Loan Legal Charges
When taking a home loan in Malaysia, it involves legal and stamp duty charges. These charges include loan agreement fees, stamp duty, legal disbursement charges and government tax on legal fees. For a home loan of moderate value, this can cost you a few thousand Ringgit.
If you are aiming to avoid these legal costs, try looking for a home loan package that comes with “zero moving costs”. This is where the bank absorbs either part or all of the costs and charges mentioned. Usually, banks practice this in return of a less competitive interest rate on your home loan. Thus make sure to look into the detail and be thorough when it comes to making the “commitment”!
Still not sure about buying that dream house of yours yet? Try consulting a financial planner, someone who is an expert in managing finances and advising you on financial choices. SmartFinance.my has a big roster of licensed financial planners from all fields of expertise. Sign up now and get the first consultation for free!