Not everyone is able to fully finance their first home out of their own pocket.
In most situations, the majority of us will turn to housing loans to acquire our first property. For first-timers, applying for a housing loan can be quite an intimidating process.
In this article, we’ll cover what are the key things to look out for when you’re applying for a housing loan in Malaysia. Let’s start from the basics!
1) What’s An Interest Rate?
This is the first thing you’ll want to consider.
An interest rate determines how much the bank charges you for the use of its money. It’s based on a percentage of the loan amount you borrow, which is also known as the principal.
Naturally, you’ll want the lowest possible interest rate – a small difference in percentage can mean thousands of Ringgit saved when you’re working with a large loan amount.
So, do take some time to compare various loan packages from different banks and go for the one that offers you the best rates.
There’s also a second question you’ll want to ask yourself: Should you go for a loan package with a fixed interest rate, or the one with a variable interest rate?
1(a) Fixed Interest Rate
Fixed interest rate, as the name suggests, is an interest rate that doesn’t change throughout the duration of your loan.
If your interest rate is 4.2% per annum, then that’s the rate you’ll pay for the rest of the loan period.
1(b) Variable Interest Rate
Variable interest rate, on the other hand, is based on something known as the Base Lending Rate (BLR), which is regulated by Bank Negara Malaysia (BNM).
For example, if the current BLR is 6.5% per annum, the bank might offer you 2.2% per annum.
This means your housing loan is charged at an interest of 4.3% (6.5% – 2.2%). So, you’ll pay more interest if the BLR goes up, and less when it goes down!
BLR varies across all financial institutions in Malaysia.
While there’s no surefire way to determine which type of interest rate is better, variable interest loans tend to have lower rates compared to fixed interest loans.
However, fixed rate loans are more advisable if you don’t want to deal with the uncertainty of changing interest rates.
Since the monthly instalment amounts won’t change under a fixed rate, long-term financial planning is easier when it comes to servicing your housing loan.
Are you trying to figure out your monthly housing loan payments now? It’s much easier with our home loan calculators!
2) The Type Of Loan You’re Getting
Banks in Malaysia offer different housing loan packages, but they generally fall into three categories: term, semi-flexi, and flexi loan.
2(a) Term loan
A term loan is a type of loan that has a fixed repayment schedule. With this kind of loan, the amount you pay per monthly instalment is the same for the duration of the loan.
In most circumstances, this type of loan doesn’t allow you to reduce your loan interest with advance payments. Additional payments are treated as pre-payments for future instalments.
You may write to the bank to make a special request, but the bank will grant it at their discretion and there’s no way to guarantee it’ll work.
If you make additional payments without having made prior arrangements with the bank, the money will simply sit in the account, and you won’t be able to withdraw them.
It neither earns you interest as a deposit, nor does it help you save on loan interest.
2(b) Semi-Flexi loan
Under a semi-flexi loan, any extra amount you pay on top of your monthly instalments is automatically used to lower the principal, which lowers the amount of interest charged.
Unlike a basic term loan, you don’t need to make special arrangements with your bank.
You can also withdraw the additional amount you’ve paid, but the bank will charge a processing fee. Some banks may also require you to write in, before allowing you to make a withdrawal.
2(c) Flexi loan
Under a flexi loan, your housing loan account will be linked to a current account. The instalment amount is automatically deducted every month from the current account.
Any extra funds placed in the current account is used to lower the principal loan amount, which in turn, lowers the interest payable. You can also withdraw the extra funds whenever you like!
Most banks will collect monthly fees for the maintenance of the current account. These fees are usually between RM5 to RM10. However, not every bank will offer a flexi-loan option.
3) Lock-in Period
A lock-in period is the period of time during which you’ll incur a penalty fee IF you pay off the loan in full, which may happen when there’s a sudden need for either of the following:
The objective behind such restriction is for banks to obtain a certain minimum return on the advance payment that covers the amount of loan and administration expenses.
In general, this period ranges from 2 to 5 years, and the penalty is 2% to 5% of the loan amount.
A lock-in period is usually counted starting from the day that the bank issues the first payment to the property developer.
For example, let’s say you’ve decided to pay a full settlement for a RM400,000 housing loan within its lock-in period of 5 years, with an exit penalty fee of 3%. You’ll be forced to bear a penalty of:
RM400,000 x 3% = RM12,000
Now, you may be wondering, “How would this affect me? I couldn’t pay off the entire loan during that time anyway.”
Suppose a situation arises where you want to sell off the property you took out the loan for, or you want to refinance your home because you’ve found a better interest rate elsewhere.
If either of these happened during the lock-in period, you’ll have to pay for the penalty. With that in mind, you’d want to keep an eye out for housing loan packages that have shorter lock-in periods.
Do check for the interest rates too – if the lock-in period is short but the interest rate is really high, you’ll probably want to give that package a pass – more so if your loan tenure is long.
4) Your Margin Of Finance
A Margin of Finance (MOF) is the amount of money that a bank allows you to borrow for your loan, which in turn, decides how much cash you need to pay upfront for the property.
It’s usually expressed as a percentage of the total cost of your property.
For example, you want to buy a property worth RM750,000, and the bank offers to cover 90% of your purchase price. So, the amount of loan you’ll get is:
(90% x 750,000) = RM675,000
Your MOF is assessed based on the following factors:
- The type of property you’re purchasing
- The location of that property
- Your age
- Your income
If you’re a first-time homebuyer in Malaysia, you’re usually able to obtain a loan that’s up to 90% of the property purchase price.
Back to the example above, let’s say the bank grants you a loan at 90% of the purchase price which is equal to RM675,000.
This means you’ll need a minimum of RM75,000 in cash to pay for the down payment, which is the remaining 10% of the purchase price.
In Malaysia, the minimum down payment for a property is 10% of the transaction price.
5) Legal Fees And Stamp Duty Charges
When you take out a housing loan in Malaysia, there will be legal fees and stamp duty charges you’ll need to account for. These fees and charges include:
- Legal fees for the loan agreement: 1% for first RM500,000 of the loan, 0.8% for the next RM500,000, and 0.5% – 0.7% for subsequent amounts.
- Stamp duty for the loan agreement: 0.5% of the loan amount.
- Legal disbursement fee for the Facilities Agreement (FA): Typically a few hundred Ringgit.
The bank’s processing fee for the loan: RM50 to RM200
For an average housing loan, all legal fees and stamp duties can add up to a few thousand Ringgit!
If this sounds a little too much to afford, try looking for housing loan packages where the bank will absorb some, or all of the fees and charges.
There’s a catch, though – they’ll usually do it in return for a higher interest rate on your loan.
6) The Bank You’re Getting A Loan From
Last but not least – you’re going to be dealing with the bank quite regularly for the duration of your loan, which can easily be up to 20 or 30 years.
It only makes sense to choose a bank you’re comfortable working with. Consider the following factors when choosing a bank:
- Do you already have an existing savings or current account with the bank? If you do, it makes money transferring easier.
- Does the bank have a good reputation?
- Is the bank’s overall service satisfactory?
- Do you consider the bank reliable and trustworthy?
- Is there a branch of this bank located near your home or office?
- Does the bank have good online banking facilities?
- Does the bank offer any additional value-added services to make things easier for you?
This list isn’t exhaustive, but should give you an idea of what to consider!
Hopefully, this article did provide some useful insights and considerations before you sign on the dotted line for your housing loan.
Before you start looking into a loan, you should also think about whether you’re financially ready for your first property!
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