How to Choose a Housing Loan




It is very exciting when you have found your dream house. Next is to find the right mortgage for your property (if you are not paying it by cash). There is no best housing loan, but there will be one that is most suitable for you.

Interest Rate

The first thing that most people ask about the housing loan is the interest rate. Basically there are two types of commercial loan-

Based on BLR

The Bank Negara Malaysia  Base Lending Rate (BLR) is at 6.75%. Most banks are also using the same rate. However do not assume all banks are the same. Some are actually slightly higher, e.g. 6.8%. As of today, depending the loan amount and borrower profile, it is possible to get as low as BLR-2.3% throughout whole tenure.

Fixed Rate

The interest rate does not follow the BLR, it is fixed throughout the tenure. This is very good for investor as well as fixed income earner because they are free from the volatile interest rate. Normally it is offered by the insurance companies, such as AIA and ING. The current fixed rate is as low as 5.89%. Another type of fixed rate is offered by Islamic Loan. However the “interest rate” is relatively much higher. The “interest” is charged upfront. Hence it does not benefit borrowers to settle their loan earlier.

Rest Period

Daily Rest

The interest will be calculated based on previous day’s outstanding balance. With daily rest you maybe save more if you make lots of prepayments on top of regular installments.

Daily rest = Outstanding Balance x interest rate x 30/365

Monthly Rest

The interest for current month will be calculated based on previous month’s outstanding balance

Monthly Rest = Outstanding Balance x interest rate x 1/12

Lock-in period

Normally there is a bonding period- 3 to 5 years. Within the bonding period (or lock-in period), borrower will be penalized for settle the loan or refinance. Find out the penalty amount – most banks are requesting 3-3.5% of original loan amount (some banks calculate the penalty based on outstanding amount). E.g. You loan is amount is RM250,000, you want to sell your house 3 years later, you have to paid 3.5%, that is RM8750! Besides, you have to find out if there is any admin fee aside from the above charges. For your information, some banks charge as high as RM5,000!   If you might dispose your property in less than five years, it would be better to negotiate for a non-bonding period package. Yes, it is possible to have shorter bonding period or no lock in period at all. Start date of the lock-in period is also important (especially for properties under construction), is either from the first drawdown or full drawdown.

Margin of finance (MOF)

Margin of finance is based on the Open Market Value (OMV) or purchase price whichever is lower for new purchase. OMV is based on the valuation report prepared by the valuers. Depending the personal financial capacity, it is possible to get as high as 95%. For foreigner the MOF might be lower. In the same time it also depends on the type of property. For example, service apartment, normally is commercial title hence the MOF is lower (the highest is around 80-85%).

Bank Pay Cost or Borrower Pay Cost?

Some financial institutions call it zero moving cost -usually it covers the legal fees, stamp duty, valuation fees and disbursement fees of the loan agreement. Hence the interest rate is slightly higher than the non-zero moving cost. However some banks call their home loan as zero moving cost but in fact they finance the cost into loan. So eventually it increases the loan amount (so the bank can earn more interest from you).

Prepayment

Another thing that you must know before selecting the housing loan is the flexibility of prepayment. The best way to save the interest is through prepayment. Hence if the loan package restrict the possibility of prepayment it reduces yours saving in long terms. E.g. some banks require the prepayment to be done in the multiple of RM1,000. So if you bank in RM500 more in your loan account, the money is considered “Advance payment” or “Excess Payment” hence it does not reduce the interest and principal of the loan.   The initial years are the best time to do prepayment. For example, a prepayment of RM2,000 during the initial years of loan (interest rate is 6.75) will save you almost RM12,000 of interest or more.

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